Labour Market Adjustment to Indonesia's Economic Crisis: Context, Trends and Implications

This paper focuses on labour market adjustment during the economic crisis of 1997–98. It shows how labour processes help explain better outcomes for the poor than were initially predicted. The Indonesian experience is viewed in a framework that contrasts two extreme models: a Keynesian world of rigid real wages, and a neoclassical situation of flexible adjustment to economic shocks. It was found that the Indonesian case is more consistent with the neoclassical than the Keynesian model, despite the tendency for greater government intervention in labour markets before the crisis. The paper also finds that the large change in relative prices from the exchange rate depreciation had a smaller effect than expected on employment structure. These conclusions are discussed in the context of major changes in labour markets prior to the economic crisis.