The Statistics Indonesia (BPS) survey in February 2025 revealed that the share of informal sector workers in Indonesia reached 59.4 percent. This high percentage, according to economists, continues to hinder Indonesia’s ambition to become a developed nation. The inadequate absorption of workers into the formal sector and the decline in full-time employment are considered the primary causes.
According to Dr. Wisnu Setiadi Nugroho, an economist at Universitas Gadjah Mada (UGM), the persistently high number of informal workers strongly correlates with structural poverty. This situation, he explained, stems from the lack of sufficient formal employment opportunities.
“It should be noted that one of the pillars of poverty alleviation is active labor policy, or providing decent and proper employment. I emphasize that although the open unemployment rate may be low, less than five percent, many workers remain underemployed or engaged in informal work without sufficient working hours,” he stated on Thursday (Oct. 30).
The wave of layoffs in the manufacturing and service sectors has pushed many workers to shift to the informal sector due to its flexibility. Additionally, many university graduates and workers have been compelled to enter the informal sector, taking on jobs that do not align with their competencies, due to limited job opportunities.
Dr. Nugroho described this phenomenon as a kind of “lifeline” for the labor force that cannot be absorbed by the formal sector.
“Therefore, I believe that structural poverty and the lack of formal job opportunities are key elements of this problem,” he said.
For Dr. Nugroho, the minimum wage is not the main factor behind the high number of informal workers in Indonesia. Instead, it is the limited absorption of formal labor, the decline in full-time working hours, and the rapid growth of informal household businesses that form the core of this issue.
He noted that 80 percent of new jobs created between 2018 and 2024 emerged in informal household enterprises.
He recommended several measures for the government, including promoting the development of productive sectors, such as labor-intensive industrialization, improving workforce capacity, and supporting microenterprises in their transition toward formalization.
The UGM economist also suggested that the government focus on job quality rather than quantity.
He emphasized the need to encourage formalization and the transition from informal to formal sectors by implementing incentive schemes that help informal businesses, including household enterprises, move up through access to financing, technology, business training, and fiscal incentives, enabling them to become registered, comply with regulations, and employ formal workers.
According to Dr. Nugroho, the government’s efforts should go beyond merely lowering or adjusting the minimum wage. Instead, a comprehensive approach is necessary to enhance productivity, strengthen vocational training, support the formalization of informal businesses, and offer incentives for this process.
Furthermore, he stressed that improving labor productivity and enterprise capacity is crucial to avoid a “skill trap”.
“It is essential to strengthen vocational training systems, apprenticeships, and the link and match between education and industry needs so that graduates possess the competencies required,” he concluded.
Author: Salwa
Editor: Gusti Grehenson
Post-editor: Rajendra Arya
Illustration: Kompas