Macro Economics Country Analysis Report: Indonesia

Q2) Discuss the relationship between the unemployment rate and the rate of economic growth.
Start with your hypothesis about what you expect this relationship to be, and why. Then include
ten-year charts of each of the variables. Comment on whether your country’s data supports your
hypothesis.

Introduction
Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods
and services produced within a country's borders in a specific time period. As a broad measure of
overall domestic production, it functions as a comprehensive scorecard of the country’s
economic health. Though it has limitations, GDP is a key tool to guide policymakers, investors,
and businesses in strategic decision making.

The unemployment rate is the share of the labor force that is jobless, expressed as a percentage.
When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected
to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be
expected to fall. Unemployment rate is the proportion of the labor force that is not currently
employed but could be. Unemployment is a negative phenomenon in any human society as it
adversely effects in different dimensions and directions, in addition it refers to an economic
defect affecting the economy structure.

Relationship
When it comes to studying the economy, GDP growth rate and unemployment rate are two
primary factors economists must consider. There is a clear relationship between the
unemployment rate and the rate of economic growth. Output depends on the amount of labor
used in the production process, so there is a positive relationship between output and
employment. Total employment equals the labor force minus the unemployed, so there is a
negative relationship between output and unemployment and therefore according to my
hypothesis the unemployment rate should decrease if there is an increase in economic growth
rate and vice versa. High rates of economic growth indicate the need for additional labor to be
employed from the surplus of the labor market. On the other hand, recession indicates increases
the unemployment rates due to losing jobs.

According to Okun's law - to achieve a one percentage point decline in the unemployment rate in
the course of a year, real GDP must grow approximately 2 percentage points faster than the rate
of growth of potential GDP over that period. So, for illustration, if the potential rate of GDP
growth is 2%, Okun's law says that GDP must grow at about a 4% rate for one year to achieve a
-By Kunal Damani
PGDM-GEN-04
one percentage point reduction in the rate of unemployment. This relation is among the most
prominent in macroeconomics theory and has been found to be hold for several countries and
regions mainly, in developed countries.

Growth can occur through different channels: it can be led by different sectors; be domestically
or externally driven; arise from growth in productivity of resources or an increase in resources,
etc. While growth of aggregate output translates to growth of income, traditionally measured in
terms of GDP per capita, it is the composition or the drivers of growth that determine its
distribution. Indonesia showed considerable resilience following the Global Financial Recession
in 2008.

Conclusion

- As per Word Bank Data

-By Kunal Damani

PGDM-GEN-04
The table above shows Indonesia's relative unemployment rate in recent years. A steady decline
is visible between 2010-2018. The effects are verified by the presence of causal relation between
rates of economic growth and the changing rates of unemployment prevailing in the economy.
However, the theoretical analysis does not confirm this relationship. The empirical results from
the above data do not indicate robust evidence and do not confirm an inverse linkage between
unemployment rate and economic growth, as the Okun's Law suggests. It doesn’t exist a causal
relationship between these two variables and a change in the growth rate of real GDP doesn’t
cause a change in the rate of unemployment and vice-versa.

Nowadays the world faces with major economic and financial problems, including among others
the problem of unemployment and insufficient economic growth. The economic growth and the
unemployment rate are the key indicators that simultaneously are monitored by both the policy
makers and the public as they create a clear picture about the economic development of a
country.

Unemployment analysis in Indonesia reveals several factors that contribute significantly to the
low rate, including among others, around half of the Indonesian women who are in the working
age are employed in formal jobs which is actually slightly higher than the world average,
increase in foreign direct investment, the decrease in informal economy, improvement in ease of
doing business. Due to rising economic activity many new jobs were created, hence pushing
down the nation's unemployment rate. Indonesia’s labour force has made achievements in
education with most of the gains being made in the secondary level. The share of the labour force
with less than primary education has been decreasing.

GDP growth has the expected direction of correlation with levels of educational attainment being
negatively associated with lower than primary education and positive with higher level. Thus,
even though the real GDP in Indonesia went down slightly from 2016, it wasn’t accompanied
with an increase in unemployment.

-By Kunal Damani

PGDM-GEN-04