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Abstract

Indonesia continues to bear the scars of the 1997 financial crisis, with the highest open unemployment rate in Southeast Asia. The orthodox interpretation is that the post-crisis era is typified by overly generous labor legislation granting higher minimum wages and other provisions; the rise in real wages adversely impacted the investment climate and employment growth. However, detailed sectoral analysis reveals very little evidence of a wage-driven profit squeeze. This article contends that Indonesia's current unemployment woes are best understood as the reflection of a demand-constrained economy, where important sectors are operating at around 70 percent of their capacity. It, thus, outlines an alternative macroeconomic policy framework in the Post Keynesian tradition.