Labour market adjustment to Indonesia's economic crisis: Context, trends and implications

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