The Potential Scarring Effect Of Covid19 On Productivity And Labor Market: The Case Of Indonesia

This study investigates the potential scarring effect of the pandemic on productivity and the labor market in Indonesia by combining both macro and micro analysis. Using the macro data of the Indonesian economy, we attempt to estimate the potential scarring effect of the COVID-19 pandemic and compare it to the previous two crises, notably the Asian Financial Crisis (AFC) in 1997 and Global Financial Crisis (GFC) in 2008. Our findings indicate that after 40 quarters, permanent supply shocks would increase price and unemployment, whereas output per worker, investment, and output decrease. For the micro analysis, we employ a machine learning approach to empirically test the impact of the pandemic on the labor market, and the result suggests that all crises have negatively correlated with earnings and working hours (except GFC). However, we did not find significant evidence of a historical hysteresis due to the pandemic in Indonesia, and the long-run output fluctuations are mostly driven by supply shocks. We also observe that there are heterogenous impacts of this crisis based on different groups. These findings have important information for policymakers to reduce the potentially long-lasting effects of the pandemic in the future.