Growth, Poverty and Labor Market Rigidity in Indonesia: A General Equilibrium Investigation

In this paper, we argue that the intensification of capital use and an acceleration of real wage growth can be the main culprits of the “jobless growth” in Indonesian manufacturing sector for the period of 1999-2008, a period of recovery from the Asian Crisis. This can also endanger the poverty reduction aspiration during the same period. We simulate the situation using a Computable General Equilibrium model and find that the effect of the increased capital utilization and the acceleration of real wage growth are equally important in explaining the jobless-growth phenomenon. Increased capital utilization help the economy recover and reduces poverty but when constrained with the increasing real wage, the recovery and the rate of poverty reduction is slower. The situation is in favor of the non-poor because first, the poor is mainly dependent on non-formal employment, hence do not benefit from the increased real wage; second, the slower expansion of the manufacturing sector affect the rest of the economy affecting the real wage of the labor employed in other sectors, such as unskilled non-formal labor and agricultural labor upon which the poor are heavily dependent; and third, the income rise from increased capital utilization mainly benefits the urban non-poor.