Estimating Employment elasticity for the Indonesian Economy

Abstract

One indicator widely used for analysing the operation of the labour market is employment elasticity. The latter measures the percentage changes in employment induced by changes in GDP. Hence, the elasticity of employment seeks to capture the responsiveness of the labour market to changes in macroeconomic conditions (as represented by GDP growth). The concept appears to be popular in policy-making circles in Indonesia. For example, a widely cited statistic is that every one per cent growth in GDP leads to the creation of 400,000 jobs. This led a recent ILO Mission to Indonesia to conclude that the economy would have to grow at 5 per cent to absorb new entrants to the labour force (ILO, 1999), but even such a growth rate would not be able to cope with the backlog of the unemployed and underemployed. Although relatively easy to compute, the use of the notion of employment elasticity, both for labour market analysis and policy-making purposes, is vulnerable to a number of methodological complexities. This technical note suggests that while these complexities cannot be fully reconciled, there is considerable scope for improvement in the way in which employment elasticity is computed, interpreted and disseminated in policy-making circles.