Webinar on “A Double Whammy: Structural Challenges and Scarring Effects of the Pandemic on Indonesia’s Labour Market”

In this webinar, Professor Devanto Shasta Pratomo, Mr Adhi Saputro and Dr Raden Muhamad Purnagunawan shared their observations on Indonesia’s labour market through the pandemic and how it had led to potential long-term scarring effects on both the demand and supply sides of the market.


Thursday, 2 June 2022 – ISEAS – Yusof Ishak Institute invited Professor Devanto Shasta Pratomo (Professor in Labour Economics, Brawijaya University-Indonesia), Mr Adhi Saputro (Senior economist, Macro Policy Lead, Prospera) and Dr Raden Muhamad Purnagunawan (Lecturer in the Department of Economics, Padjadjaran University) to speak in a webinar titled “A Double Whammy: Structural Challenges and Scarring Effects of the Pandemic on Indonesia’s Labour Market”. Moderated by Dr Maria Monica Wihardja (Visiting Fellow, ISEAS – Yusof Ishak Institute), invited speakers presented their findings on how the pandemic had caused significant shifts in both the labour market and business operations in Indonesia that might last beyond the pandemic (‘scarring effects’). They also shared some of their recommendations on how Indonesia could move toward economic recovery in the post-pandemic era, focusing not only on the short-term effects but also on the long-term, scarring effects and pre-existing structural job challenges. 

Professor Devanto Shasta Pratomo
Professor Devanto Shasta Pratomo shared his research findings, looking closely at how the labour market had changed and evolved within the two years of the pandemic. (Credit: ISEAS – Yusof Ishak Institute)

Professor Devanto began his presentation by elaborating on how the pandemic had caused significant impacts on the labour market, which has not shown a sign of full recovery by August 2021. In the first year of the pandemic, most economic sectors suffered a negative shift in employment, except for agriculture and trade, which had a steady increase due to workers in urban areas who lost their employment migrating back to their villages to do agricultural work or moving to informal trade. There was a shift in the labour force from the formal sector to the informal sector as many Indonesians, especially formal workers, lost their jobs during the start of the pandemic. Informalization among youth was most rife across age groups as the share of youth who were employed in the informal sector (vis-à-vis formal sector) jumped more than 10 percentage points in 2020. By the second year of the pandemic, when most economic sectors showed signs of positive employment growth, the share of employment in the formal sector continued to be below the pre-pandemic level at around 40 percent, equivalent to the 2015 level. The sluggish growth in the formal sector employment might suggest a potential scarring effect of the pandemic in terms of formal employment. Professor Devanto also highlighted interesting trends where more young women (female youth aged 15-24) joined the workforce during the pandemic as a means to provide an additional income for the household, resulting in a decline in the unemployment rate among female workers and an increase in the female labour force participation rate by 2021. Apart from that, Female Youth Not in Employment, Education and Training (NEET) also showed signs of decrease by 2021, while Male Youth NEET increased. Youth NEET among the senior high (vocational) graduates and university graduates grew the most in 2020 and it has not come down to the pre-pandemic level by 2021. Professor Devanto believed these profile groups were taking the ‘wait and see mentality’, especially when the probability of being employed in the formal sector was low during the pandemic. Professor Devanto, therefore, believed that there will be significant structural changes in the labour market and a potential scarring effect, particularly in both work hours and earnings, given the slow recovery of the formal sector.

Mr Adhi Saputro
Mr Adhi Saputro elaborated on how the pandemic had affected businesses and firms, focusing primarily on the effects on the supply side of the labour market. (Credit: ISEAS – Yusof Ishak Institute)

Mr Adhi Saputro focused on the supply side of the labour market and elaborated on both the depth of the scarring effects on firms as well as the prospects of economic recovery. According to a longitudinal survey conducted by the World Bank and Prospera, Mr Adhi found that at least 1 in 10 businesses were estimated to have closed during the pandemic, especially during the latest emergence of the delta variant in August 2021 when pandemic measures were tightened in Indonesia. Among those surveyed, almost half of the businesses employed fewer workers than they did pre-pandemic, especially in smaller businesses compared to medium and large businesses. Supported by digital technologies and commodity boom, a large share of businesses in the services and mining sector actually increased the number of workers by August 2021. From the publicly listed companies that were surveyed, Mr Adhi also observed an increased share of debts owned by corporates whose interest payments cannot be sustained by the current earning level. Besides, the total capital expenditure of corporates declined significantly in 2020 while capital investment declined by about 10 percent. Despite the potential scarring effects, Mr Adhi elaborated on the curative prospects for firms with available economic opportunities in most commodities. Capacity utilisation in various sectors is still below the pre-pandemic level, yet the manufacturing sector has started to show a percentage gain. Demand is still yet to come back to the pre-pandemic level while rising inflationary pressure and weakening economies of major trading partners put downward pressures on economic growth. But, commodity cash receipts and global trends including rapid digital economy growth are supporting economic recovery. Moreover, Mr Adhi asserted that the global pandemic had changed the development plans for businesses and job creation. He elaborated it in three ways, 1) changing the demographic structure and increasing demands for a better quality of life, 2) greater emphasis on Environment, Social, and Governance standards and rising valuation of nature, and 3) changing patterns in the global value chain and digital transition.

Dr Raden Muhamad Purnagunawan
Dr Raden Muhamad Purnagunawan elaborated on the various government responses that were implemented during the pandemic and recommended new strategies to resolve the potential scarring effects on the economy. (Credit: ISEAS – Yusof Ishak Institute)

Dr Raden Muhamad Purnagunawan began his presentation by reiterating the effects of the COVID-19 pandemic on the working class, highlighting wage reduction, lower working hours and the inability to enter the labour market as some of the key impacts. He elaborated on learning loss for students and its impacts on their lifetime earnings. Other ‘hidden’ long-term scarring effects could arise including unemployment, mismatch of skills and capital depreciation. Through his observations, Dr Raden believed that the Indonesian government had been relatively fast in laying out key policies to handle the pandemic and its economic recovery. An increased emphasis on health reforms and social protection had been observed for 2020 and 2021 when the government increased the budget for health as well as invested more in the expansion of social protection programmes. Apart from that, the government had also put in measures to save businesses by providing business incentives and support, among others through loan restructuring. Protection of workers was also observed in the form of wage subsidies, new unemployment benefits and quality training programmes to re-integrate workers back into the workforce with new skills. While the responses seem befitting of the current economic situation, Dr Raden argued that much of the government responses were catered toward resolving the immediate effects of the pandemic but policies to overcome the long-term scarring effects still need to be developed. With that, he recommended future policies to focus more on strengthening the various institutions’ resilience to global shocks like a pandemic, including by reforming the social protection system; continuously improving human capital, including through skilling, up-skilling and re-skilling current and incoming workers; and investing in digital infrastructure by reducing digital divide across regions, schools and communities.

The webinar drew an audience of 97 participants from both Singapore and abroad. The panel then discussed a range of topics during the Question-and-Answer segment which included topics such as female labour force participation, the length of the scarring effects exacerbated by the current geopolitical situation, the impacts of vocational training on labour market recovery, fiscal policy to overcome debt accumulation, and issues related to the upcoming presidential elections in 2024 that might deepen the scarring effects of the pandemic on the economy.