President Joko Widodo tenure in office appeared promising concerning the issue of unemployment rate in Indonesia. He pledged many promises such as splashing billions of investments to improve infrastructure as the strategy to save the country’s economy, which was struggling. Until today, the majority of the campaign promises were not enacted due to bureaucratic barriers that revolve around the government and politics. Another challenge fronting the government of Indonesia is the slight escalation in the percentage of unemployment. From the data that currently exists, there is 5.81 percent unemployment as of February 2015 as compared to 5.70 percent last year. The increase can be attributed to the heavy layoffs that are occurring in the business sector across the country. Companies are finding it hard to make the required profits; hence they resort to reducing the number of their workers to compete with the rest of the world. Profits are not being realized because of the existing ban on mineral ore exports as well as a drop in the prices of commodities. In fact, some of the companies are badly affected by the state of the economy to the extent that they have declared bankruptcy. Thus, the situation only increases the number of able citizens without employment in a country where 2 million people join the workforce each year. A third of the workforce, which comprises youths aged between 15 and 29, are jobless. However, the government can seize the human resource to bring Indonesia a great demographic dividend. Consequently, it is imperious to identify the root reasons and effects of unemployment in Indonesia and suggest a lasting solution to drive its economy forward.
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Imposing a ban on the export of mineral ore is a contractionary policy, which shifts the aggregate demand curve to the left, whereas any expansionary policy shifts the aggregate demand curve to the right. On the other hand, the aggregate supply curve usually does not shift independently as does the aggregate demand curve. The reason for the difference is that the equation for the aggregate supply curve does not contain any term that indirectly relates to output or price. Aggregate supply illustration instead covers terms from the AS-AD model only. Short-term aggregate tends to shift to the left because it is independent of factors of production. Additionally, the alteration is enhanced by long-term factors, which cause dependency on the factors of production. Consequently, the phenomenon triggers a change in price levels; hence causing a shift in aggregate demand. However, aggregate expenditure is the sum total of consumption, which grosses the largest portion of investment of a country, government procurements as well as net exports. Whenever a country reduces its exports, the aggregate expenditure will also decrease significantly. Thus, autonomous consumption is useful in determining the total consumption of a country. The calculation must ensure that autonomous consumption is independent of marginal propensity to consume and of disposable income.
Money market permits the government to relate the money demanded by the economy to the money in the supply. The contrast is vital in the assessment of the effects of money supply and money demand and their relationship with the nominal interest rates of the economy of the country. The Indonesian government has to certify that there is adequate money supply in the economy. The plan to invest billions of dollars into improving the country’s infrastructure is a brilliant idea since it increases the amount of money circulating in the economy. In fact, money demand has a negative slope and has a relation to the nominal interest rate as opposed to the money supply, which does not affect the nominal interest rate. The people of Indonesia possess little money at hand when the nominal interest rates are low because they are aware of being lower yields from their savings.
Figure 1: Unemployment
The quantity of money demanded increases since most people hold more cash. When interest rates are high, people will tend to save more; hence there will be additional money supply available to the government for other investment. Therefore, the quantity of money demanded becomes low at the point of interest rate fluctuations. Incomes in the economy of Indonesia have fallen as witnessed by the major layoffs by companies. The labor market change leads to less money being held in liquid form. The result of such instances is that it creates a rightward shift in the demand curve. Moreover, the decrease in income reduces the economy’s nominal interest rates because a shift to the right of the demand curve establishes a new equilibrium at a lower interest rate with the same quantity of money.
Causes and Outcomes of Unemployment
Unemployment is one of the major challenges facing the macroeconomy of Indonesia. Inflation and stagnation in economic growth are other problems. Unemployment occurs when a country does not achieve its goal of employing the entire workforce.
The statistics above show the number of workforce vis-a-vis the population employed as well as the unemployed. It is evident that the number of citizens, who were liable for employment between the year 2014 and 2015, increased. The country faces several causes of unemployment, which in turn lead to poor economic growth. The reasons include population explosion, political instability, sub-standard education system, changing seasons of production and the high level of illiterate adults. For instance, population explosion can lead to unemployment in the sense that when the number of residents in Indonesia grows beyond the level that can be naturally absorbed into the job sector, then the unemployment would increase. A nation should always enforce family planning to be able to have control population and secure the new generation with the existing scarce resource. Moreover, regulating the number of immigrants can be of great positive strategy for controlling a country’s unemployment. In fact, economic planning can be accommodating for the population natives but it becomes a crisis when immigrants flood the country to fight for the same resources that are planned for in the national budget. However, a larger population can be an asset, since it presents a larger pool of ready and able labor force. The agricultural sector, which is one of the largest sectors of the economy in Indonesia, can be at an advantage.
Most of the adults are illiterate in Indonesia. Moreover, a high percentage of the workforce either has a secondary level of education or lower. Thus, they cannot qualify for jobs requiring skills acquired through education. The skilled labor force, therefore, has to be outsourced from abroad, which decreases the country’s revenue. The Indonesian government has to ensure that it invests in education even though it may be expensive. Improvement in education surely will yield a return on investment in the future.
Another cause of unemployment is the existence of a sub-standard education system. The graduates from most institutions in the country do not fit in the job market due to the insufficient skills they acquire. If the country is geared towards growing its economy and lowering to a minimum the unemployment rate, then it has to invest heavily in the education of its population. The exchange rates of the country’s currency are also affected by inflation. For example, Indonesian rupiah traded at 10,341.6 against the US dollar in 2013, increased from 9,386 in 2012.
Inflation contributes to economic problems when the country’s purchasing power is weak. Higher levels of inflation result to increase in the prices of essential commodities, which further affect the common citizen. Moreover, banks will be forced to take over the assets of companies that fail to settle their dues. The situation will lead to more troubles in the economy since citizens will lose jobs as witnessed in the case of workers protesting on the streets of Jakarta because their employer company was declared bankrupt. The country’s inflation rate in 2013 stood at 7.7 percent, but the suggested value to the prosperous country is less than 5 percent.
In trying to solve the problems facing Indonesia’s macroeconomy, the government has introduced policies to save the economy. Lowering the current account deficit to a minimum is the goal in order for a country not to depend on borrowing, but actually striving to sustain its own budget by cutting government expenditure. Moreover, it is not necessary to increase taxes, since the strategy will only lead to its citizens struggling to make a living.
Another problematic policy set by the government was the ban on mineral ore export to tackle the issue of the current account deficit. The law has not been successful. Moreover, the main cause of the current account deficit is the gap existing in the oil and gas sectors. In order for the government not to exceed the constitutional limit of 3 percent budget deficit, the politicians have to ensure the reduction of the fuel subsidies. A strategy is a sustainable approach for the government to fund its developments effectively.
Improving infrastructure is yet another policy for economic growth goals. Marine infrastructure, in particular, is the focus. The industry is essential in improving the competitiveness of manufacturing and boosting non-commodity exports. Finally, the government should plan on investing heavily in the education of the children. 8 million children are not enrolled for schooling, which represents 77 percent of the child population. Employing more teachers is one of the focuses and expanding the education system so that the citizens do not have to travel all the way to Jakarta or Bandung to get a quality education. Thus, the aforementioned policies are geared towards making the country more self-reliant in managing its affairs.