The country braces for unprecedented wave of unemployment
IO – The Covid-19 pandemic which has been unleashed for the past three months has not only ferociously infected millions of citizens around the world and claimed hundreds of thousands of lives, it has also rattlef the global economy, hitting businesses and jobs. Covid-19 has forced citizens to remain at home, either because of the implementation of lockdown or social distancing. In fact, according to the International Labor Organization (ILO)’s monitoring results, the implementation of either a full lockdown or partial lockdown has exerted an impact on nearly 2.7 billion workers, representing about 81 percent of the world’s workforce. This situation is being described by the ILO as the worst global crisis since World War II.
World economic activities are currently paralyzed, causing many companies to suffer losses as they can no longer operate. The implication is that one by one companies are forced to close down and terminate their employees. Now the wave of layoffs is a new global threat, and Indonesia is no exception to this. According to ILO projections, the increase in the number of unemployed globally due to the Covid-19 pandemic will reach 24.7 million people, from last year’s total unemployment of 188 million. ILO’s current estimation even exceeds the rate of unemployment following the 2008 economic crisis which at the time triggered a staggering increase in unemployment of 22 million people.
The ILO report also mentions that the Covid-19 pandemic has the potential to reduce 6.7 percent of work hours globally in Quarter II – 2020, equivalent to 195 million full-time workers (assuming a 48-hour work week). The loss of working hours will occur in different income groups, especially in middle- to upper-income countries (7 percent, 100 million full-time workers). The overall global unemployment boom in 2020 will largely depend on the speed of economic recovery and each country’s anticipatory policies.
The ILO forecast that the unemployment tsunami will hit almost all countries in the world seems to have become a reality. This painful fact is confirmed from the number of payrolls in the US which, as of April 3 2020, has shrunk by more than 700,000 people. Other data show that over the past two weeks the number of people in the US applying for unemployment benefits has continued to rise, to a record of 9.96 million people: it’s the equivalent to the total number of unemployment benefit filings in the first 6.5 months during the 2007-2009 economic recession. Similar conditions also occur in the UK, where residents who filed for welfare benefit payments in the last two weeks were 10 times higher than usual. A worse situation occurred in China where, according to analysts quoted by Reuters, nearly 30 million people will lose their jobs, a far greater number than the layoffs that occurred in the 2008-2009 crisis, which impaired the livelihoods of 20 million.
Waves of layoffs in Indonesia
The first wave of impact due to Covid-19, on the fate of the Indonesian workers has already been felt, and very strong indeed. According to combined data from the Ministry of Manpower and BP Jamsostek (Manpower Social Security Agency “BPJS”) as of April 13, 2020, the number of layoffs and suspended workers has reached 2.8 million. This data obtained from the Ministry of Manpower, which reported layoffs in the formal sector totaling 212,394 people, while as many as 1,205,191 formal workers are experiencing a suspension. From the informal sector, the Ministry of Manpower notes that there are around 282 thousand people who do not have any source of income, while data from BP Jamsostek reported that the number of laid off and suspended workers had reached 454 thousand from the formal sector and 537 thousand from the informal sector.
Meanwhile, the Confederation of Indonesian Trade Unions (KSPI) actually questions the data of layoff released by the government. Even KSPI believes the real number of workers laid off is greater than what is being reported. The difference in opinion is based on the KSPI argument which sees a high potential of layoff emergencies actually occurring in the Micro Small and Medium Enterprises-MSME sector, which absorbs approximately 96 percent of the national workforce. In addition, according to KSPI, sectors being hit hard by Covid-19 included the transportation sector (mainly aviation), travel agents, digital economy, hotels, large and small restaurants, culinary, and online transportation. All of these sectors were categorized by KSPI as the first group immediately affected by Covid-19, much earlier than anything else, whereas the second category is the labor-intensive and capital-intensive manufacturing industry groups, of which KSPI considers as not yet reporting massive layoffs.
Whatever the disagreement occuring between the Trade Unions and the Government related to the data of workers that have been laid off or suspended, it is certain that an explosion of layoffs in the near future will be difficult to avoid. Furthermore, every year there are 2 to 3 million additional job seekers entering the workforce that must be absorbed into the labor market. As an illustration, in August 2019 the national workforce reached 133.56 million people, an increase of 2.55 million (1.95%), compared to the total workforce in August 2018, which numbered 131 million. On the other hand, the ability of the formal sector to absorb workers was only 56 million in August 2019, or 44.3 percent of the total workforce. This means that there are still 70.5 million people who will have to seek a living from the informal sector.
The government’s target to reduce the level of open unemployment (Tingkat pengangguran terbuka – “TPT”) to 4.8 percent in 2020 more than likely cannot be achieved. Even to maintain the TPT at a level of 5.3 percent, just like the achievements in 2019, will be very difficult to reach, judging by the economic turmoil that is currently engulfing the country.
Ironically, in the midst of the declining TPT, it turns out that the Workers group with 1-7 hours per week actually increased to 76.67 percent, from 1.31 million people (August 2014) to 2.14 million people (August 2018). Likewise, the Workers group with working hours of 8-14 hours per week also increased by 24.28 percent, from 4.53 million people (August 2014) to 5.2 million people (August 2018). In fact, overall, the number of ‘working people’ (1 ≥ 35 hours per week) experienced a growth of 8.18 percent, from 114.63 million people (August 2014) to 124 million people (August 2018).
In addition to the surge in the number of people working in the 1-24-hour range per week, their proportion of the total working people also increased from 5.84 percent (August 2018) to 7.34 percent (August 2018). This data reflects that the decline in TPT in Indonesia is driven by people who work less than 14 hours per week, or what is called here as the ‘Half Unemployed’. The question is, with such minimal working hours how can this person earn enough to make a decent living?
The second veil that needs to be lifted is the higher Open Unemployment Rate (TPT) of people with a University degree, from 5.65 percent (August 2014) to 5.89 percent (August 2018); TPT with a Diploma (level I / II / III), despite experiencing a decline from 6.14 percent (August 2014) to 6.02 percent (August 2018), is still considered quite a high level. The phenomenon of the booming of educated unemployment is confirmed by the high enthusiasm of prospective civil servant registrants in 2018, which recorded more than 4 million people registering for the test.
The problem of employment absorption turns out not only to be hitting the Labor Force with a University education, but what’s even more alarming is the unemployment of high school graduates (general high school and vocational school) are also finding it difficult to seek employment. In August 2018, there were still 19.19 percent of High School graduates unemployed. This portrait shows that in reality there is a mismatch between the labor market and educated and skilled graduates.
By sector, the largest source of unemployment will be contributed by the manufacturing sector, which absorbs 15 percent of the total national workforce or 18.93 million people. The first blow to the manufacturing sector came from the input side, when it becomes increasingly difficult for industries to obtain raw materials due to limited supply of imports from countries of origin, and the increasingly high costs due to a depreciating Indonesian Rupiah (IDR). The next blow from the production side is that non-essential manufacturing industries (pharmaceuticals, health and food) are required to conduct Large- Scale Social Restrictions (PSBB); doing so forces a reduction in production capacity or even a temporary cessation of production. Another similarly painful blow is the large drop in consumer demand in the midst of a period of social distancing, that results in the manufacturing industry being battered and bruised by a lack of demand.
The nightmare in the manufacturing industry turned into reality when looking at the Purchasing Managers Index (PMI) in March 2020, which suffered a deep contraction at 45.3, far lower than in February 2020, when it was still at 51.9. The PMI in March was the lowest record since April 2011, the first time the PMI survey was conducted in Indonesia. When the PMI dips below 50, it means the manufacturing industry is entering a contraction phase, meaning there is no visible expansion in manufacturing.
Aside from the weakening of domestic purchasing power, the manufacturing industry will also suffer pressure from a decline in manufacturing exports. Overall, the government predicts that Indonesia’s export growth will contract by 14 percent this year (in a worst-case scenario), whereas the manufacturing industry contributed the most to Indonesia’s non-oil and gas exports, reaching 75.55 percent with an export value of USD 126 billion in 2019. Looking at the growth of manufacturing industry exports in the past year which dropped -2.73 percent, it is probable that the exports of processing industries will suffer as well this year.
The next sector that will see a wave of unemployment comes from the wholesale and retail trade sectors, the second-largest, able to accommodate 18.8 percent of the national workforce or approximately 23.8 million workers. The Covid-19 pandemic has caused many malls and shops to shut down. As a result, trade transactions have also shrunk after the implementation of work from home recommended by the Government. This concern was reinforced by the results of the retail sales survey conducted by BI (Central Bank) in February 2020 (before the release of the first Covid-19 case in Indonesia) where the Real Sales Index (IPR) in February 2020 decreased by 0.8 percent (YoY), deeper than the 0.3 percent decline (YoY) in January 2020. The decline in retail sales will deepen after March 2020, when BI predicts a drop of 5.4 percent .
The third sector which contributed as the wave of layoffs is the transportation and warehousing sector. This sector contributes 4.4 percent of the total national workforce or absorbs approximately 5.56 million workers. The heavy burden experienced by the transportation sector mainly occuring with air transportation which has felt the impact of the cancellation of cross-country flights. According to the BPS (Central Agency on Statistics) release, the number of international passengers as of February 2020 has decreased dramatically by 33 percent, or as many as 1.13 million people. A drop in the number of domestic passengers also occurred in February 2020 by 8.08 percent from 6.29 million (January 2020) to 5.79 million (February 2020). The decrease in aircraft passengers will be even greater due to the implementation of Large-Scale Social Restrictions (PSBB) which requires a maximum aircraft occupancy rate of 50 percent. The impact of PSBB on airlines is confirmed by data from PT Angkasa Pura II which states that the number of aircraft or flight movements at Soekarno-Hatta Airport experienced a daily decline of 22.86 percent as of April 11, 2020. The decline in flights also occurred at Halim Perdanakusuma Airport, by 29.33 percent.
The dependence of workers in the air transportation sector is of course very large, not only for those directly related to flight operations, such as pilots, flight attendants, and ground staff, but also support workers such as customer service, cleaning service, security, porters, and many more. Even the International Air Transportation Association (IATA) estimates that of the 65.5 million people who depend on the aviation industry worldwide, including sectors such as travel and tourism, there will be a potential loss of 25 million workers in the aviation sector. The number of layoffs in the aviation industry is spread across the Asia-Pacific region by 11.2 million people, the European region by 5.6 million people, the Latin American region by 2.9 million people, the North American region by 2 million people, the African region by 2 million people, and the Middle East region as many as 0.9 million people.
In addition to the reduction in airline passenger numbers, a decline also occurred in train transportation by 5.41 percent, from 34.13 million passengers (January) to 32.29 million passengers (February). Likewise, the number of ship passengers recorded decreased by 9.78 percent, from 2.21 million people (January) to 1.99 million people (February). The drop in the number of passengers for land and sea transportation will be even deeper, given the government instructions to the general public not to return to their hometown in the villages for Eid Al Fitr Holiday this year. Last year alone the number of passengers during the homecoming period decreased by 17.18 percent, for only 11.5 million.
Next sector is the accommodation and food and beverage sectors, which will also be a service industry that will further contribute to more unemployment in Indonesia. The accommodation and food and beverage sector which has been synonymous with the tourism sector has certainly felt a crushing blow from the Covid-19 pandemic. The impact was felt by these sectors, due to the drop in numbers of tourists from China since early January, when the Indonesian government began to ban foreign tourists from that country, considering that in 2019 alone Chinese reached 2.1 million people, for a share of 12.86 percent of total foreign tourists. Now, practically all flights from abroad to Indonesia have been closed off, so automatically the regions that depend on the tourism sector are the one that suffered the hardest hit. The proof, according to a release of BPS Room Occupancy Rate (TPK) for Star rated hotels in Indonesia in February 2020, was only 49.22 percent or down 3.22 points compared to February 2019. The sharpest declines in hotel Room Occupancy Rate, among others, are in the Riau Islands Province (TPK 35.58 percent), Bali Province (TPK 45.98 percent), North Sulawesi Province (TPK 44.01 percent), and North Maluku Province (TPK 41.15 percent).
The threat of the heaviest wave of unemployment facing Indonesia actually comes from the informal sector. The number of workers in the informal sector in Indonesia has continued to increase significantly in the last four years, moving from 66.31 million in August 2015 to 70.49 million in August 2019, an increase of 6.3 percent. The share of informal sector workers who reach 55.72 percent of the total national workers faces a big problem. Workers in the informal sector do not have the basic protection and security generally obtained by formal workers, including social security guarantees. These informal workers also tend to have no access to health care services and would not get their income reimbursed if they stop to work or are sick. As a consequence, these informal workers will continue to risk their lives to remain outside of home to look for income despite the threat of Covid-19.
Suppressing Social Turmoil
After having to face the employment dilemma above, whatever the catastrophe Covid-19 may generate to the wave of layoffs, the government must still ensure that these concerns do not lead up to social upheavals. Moreover, it is clear that the mandate of the 1945 Constitution Article 27 paragraph (2) stipulates that “every citizen has the right to work and earn a decent living for humanity”.
On the basis of the constitutional mandate, the state is obliged to guarantee that every person gets a job and a decent quality of life for the sake of humanity. The ideals of prosperity for the Indonesian people have also far preceded the global consensus in the framework of the Sustainable Development Goals (SDGs) specifically in goal 8 which required the realization of decent work for everyone without exception (no one left behind).
The potential of an unemployment explosion that is ongoing in almost all sectors of the economy must be anticipated by the government. The government must encourage companies to refrain from layoffs amid the Covid-19 pandemic. Emergency measures that companies can take, for example, by reducing wages and top-level employee facilities, such as managers and directors. Then, reducing working hours (shifts), limiting or eliminating overtime hours, reducing working days, and taking turns for temporary holidays or suspension for employees. These alternatives are hoped to reduce the number of formal workers laid off by companies.
The company’s efforts to upgrade efficiency must also be supported by the government with stimulus instruments. The government’s response to the battle against Covid-19 and the socio-economic impact so far has resulted in 3 waves of stimulus. Volume I stimulus released in January 2020 led to the acceleration of labor-oriented government spending. For example, the acceleration of capital expenditure disbursements, social assistance spending, and transfers to regions and village funds. Meanwhile, in the 2nd volume stimulus package the incentives provided by the government focus on efforts to maintain people’s purchasing power and ease exports and imports. For example, in the form of stimulus to workers in the manufacturing industry sector who earn a maximum of IDR. 200 million, then the Income Tax (PPh 21) is borne by the government with a budget allocation of IDR. 8.6 trillion. In addition, support for the industry is carried out with the exemption of Income Tax for 22 import instruments in 19 specific sectors, and a reduction of Income Tax by 25-30 percent for certain sectors.
Then, after seeing the significant risk of the Covid-19 pandemic on national economic stability, the government finally proposed a Regulation in lieu of Law (Perppu) No.1 Year 2020, which was substantially used as a legal basis to amend the 2020 State Budget with additional fiscal deficits exceeding 3 percent. With this Perppu, the government will increase state spending by IDR. 405.1 trillion, of which about IDR. 75 trillion of funds are to be used for financing the Health sector, in order to support the fight against Covid-19, about IDR 110 trillion of funds allocated to the expansion of social safety nets, IDR. 70.1 trillion allocated to support Industry, and lastly, IDR. 150 trillion allocated for financial support for the national economic recovery program.
One of the programs derived from the fiscal stimulus provided by the government is the pre-employment card program. The budget allocation for this program has been increased by the government from IDR. 10 trillion to IDR. 20 trillion. This pre-employment card program is designed to improve the skills and capacity of 5.6 million jobseekers. Later, each participant will get online training for 4 months and every month the participant will get an incentive for training: a participation grant of IDR. 600 thousand plus an incentive for filling the survey in the amount of IDR. 50,000 per month, so that the total cash received by participants during training reaches IDR. 550,000. The problem is that the pre-employment card program is quite ideal in normal situations, but in the midst of the Covid-19 pandemic, which caused many companies to close their operations, the implementation of the pre-employment card program at this time becomes irrelevant and even unimportant. A cash allowance of IDR. 600 thousand per month is certainly not enough to meet the basic needs, such as foods, of one family. Moreover, pre-employment card participants will have to spend more to buy an internet quota package. Not to mention this Pre-Employment Card has not been able to accommodate 7 million unemployed people (2019). In fact, the highest TPT today is mostly of those aged 15-24 years, with a vocational education background.
Government policies that lead to labor-intensive programs should be the main focus that must be implemented as soon as possible. For example, by allocating spending at the Ministry / Institutional level, which can have a multiplier effect on job creation. In addition, village funds, which in total are approximately IDR. 72 trillion in 2020, can also be a productive source of community empowerment. Meanwhile, in maintaining the existence of Micro and Small Medium Enterprises (MSME), the government needs to mobilize MSMEs, both in the production of needs for simple medical devices such as masks, hand sanitizers, Personal Protective Equipment (PPE), and also in the process of procuring and distributing basic food assistance to beneficiary families.
Finally, the fundamental step that the government must improve in creating massive and quality jobs is to maintain the quality of investment. Therefore, employment (especially the formal sector) will only be created if investment can be increased consistently in line with the increase in the national workforce. All stimulus that has been allocated by the government must of course have a positive correlation with efforts to improve the real sector, so that an unemployment explosion can be avoided and the nation is free from the threat of social turmoil. (Abra el Talattov)
Abra el Talattov, is a researcher at the Institute for Development of Economics and Finance. He received his bachelor’s degree from Diponegoro University, Central Java. Later on, he continued his studies at Trengganu University, Malaysia. Prior to becoming a researcher at INDEF, Abra was a researcher at INTERESS (Institute for Economic Research and Social Studies).