Labourers roll tobacco at their work terminals, separated by plastic covers as part of measures amid the Covid-19 coronavirus pandemic, at a Gudang Baru cigarette factory in Malang, East Java, in July last year. AFP
Along with its health impacts, the Covid-19 pandemic has so far weakened consumer and business confidence, diminishing Indonesia’s economic growth. For the first time in more than 20 years, the country’s gross domestic product (GDP) shrank by 2.07 per cent in 2020.
Given the prolonged negative outlook amid adverse domestic and global conditions, significant consequences on labour market outcomes are anticipated. The negative consequences are associated mainly with the effect of the shock on labour demand. Unemployment is estimated to hit its highest level in more than a decade, rising to 9.2 per cent – or nearly between 12.7 million people – in 2021.
Detrimental employment effects emerge as vulnerable businesses with limited liquid assets adjust their staffing temporarily or permanently in response to shocks to demand for their goods or services. Furthermore, during the Covid-19 pandemic, those working in the informal sector are heavily affected as lockdowns severely downscale economic activities, leading to an immediate loss of revenue – likely without savings or other financial cushions.
Similarly, most informal business owners may have no choice but to use their business capital to cover their daily needs. These adjustments may lead to job losses, lower incomes and increased poverty, which affect workers in the short and medium term and bring lasting consequences in the longer run.
According to the human capital theory, economic inactivity has long been seen to lead to the deterioration of future labour market prospects, often termed as “scarring”. It could occur due to human capital reduction as workers miss out on the potential job-specific training and suffer from the depreciation of general work skills. Besides, a longer duration of inactivity may depreciate the previously acquired skills as they are not used and brought up to date through training and/or working.
This reduction of human capital results in lower productivity and, therefore, lower earnings, which can conceivably continue throughout the rest of an individual’s working lifetime.
From the labour demand’s perspective, this consequence is that employers may use one’s unemployment history as a screening device. In this regard, previous unemployment may be translated by employers as proxies for unobservable worker productivity, which could have detrimental effects on the likelihood of finding jobs.
Moreover, firms may open fewer vacancies following a demand contraction in the economy due to the reduction in the perceived average quality of the unemployed. Another alternative explaining the mechanism behind this is that unemployed workers are more inclined to accept low-quality jobs characterised by high job destruction rates.
The challenges of labour market conditions during and after a crisis are without a doubt very complex. Due to the limited data available, previous crisis experiences, such as the Asian financial crisis in 1997-1998, may help us understand the situation better. Although the two crises are different, understanding the mechanism of lasting unemployment effects from the past economic crisis could help create better policy responses during the Covid-19 pandemic.
Using data from the Indonesian Family Life Survey (IFLS), my study found that workers who were unemployed in 1997-1998 had smaller chances of getting new employment 17 years later, especially among those with low education.
However, there is no apparent difference in the probability of employment among workers with tertiary education. The long-term effect on employment was also experienced across all five expenditure quantiles, particularly among workers in the 20 to 40 per cent income distribution.
Compared to male workers, female workers are more severely affected by previous unemployment. To be more specific, the scarring effect is more apparent among workers in the middle cohort groups (ages 29 to 38 in 1997-1998 and ages 46 to 55 in 2014). This can occur because companies are more likely to flatten out hierarchy by cutting out middle management; thus, a disproportionate number of experienced workers are likely to be displaced.
Moreover, mid-level workers may experience difficulties reintegrating back to employment as their accumulated job-specific skills are not easily transferred to new jobs, and their general transferable skills may have been outdated.
The limited opportunity for human capital accumulation during unemployment may trap people in low-quality jobs, making it harder to improve their chances to progress to better employment. This issue demands active labour market policies that provide continuous learning opportunities for better skills to these vulnerable workers. A comprehensive approach through empowerment and capacity-building strategy could be adopted based on lifelong investment in education and training.
Amid the Covid-19 pandemic, comprehensive social protection measures should be in place to compensate for economic activity loss, particularly targeted to the most vulnerable groups, including poor and near-poor households, women and young workers.
In the case where income replacement is absent, these vulnerable workers could be pushed into the trap of long-term economic inactivity and in many cases, total exclusion from the labor market.
Dyah Pritadrajati is a PhD student at the Australian National University. She holds a master of science in economics for development from the University of Oxford and a master of philosophy in economics from the University of Cambridge.
THE JAKARTA POST/ASIA NEWS NETWORK
