43 OUTPUT AND UNEMPLOYMENT: TESTING OKUN’S LAW IN INDONESIA Umi Karomah Yaumidin Economic Researcher at the Economic Research Center Indonesian Institute of Sciences Umi_karomah@yahoo.com umi.karomah.yaumidin@lipi.go.id ABSTRACT This paper reports a study of the testing of Okun’s Law in the Indonesian economy: we test difference and gap models of Okun’s thesis. For this we use annual data on GDP and unemployment rates for Indonesia from 1980 to 2013. The main conclusions are, first, that Indonesia still faces a continuing high unemployment rate according to the results of the output gap model and of the first difference model. Second, in the long term, demand in Indonesia’s employment market is inelastic, especially during financial crises. Indonesia needs high economic growth to cause demand for labour to be more elastic to absorb many more into the labour force. Overall, our analyses found that interpretations of Okun’s Law might not be applicable to Indonesia’s economy. Keywords: Indonesia, Unemployment, Okun’s Law, Output. JEL Classification: C1, E3, E6 INTRODUCTION Indonesia has resumed a high economic growth and its performance is close to those of India and China. During the global financial crisis of 2008–09, real GDP grew positively at 6.0 per cent in 2008 and 4.5 per cent in 2009. Moreover, high and inclusive growth of domestic demand, particularly consumption, has made a significant contribution to improving macroeconomic performance. From an economic point of view, higher growth contributes to creating jobs, and to reducing the unemployment rate and the poverty rate, which will then lead to increases in human welfare. Despite