Why Trillions in Investment Isn't Creating Formal Jobs in Indonesia

18 December 2025 • • min read

Table of Contents

Summery

As of 2025, 86.55 million Indonesians work in the informal sector, driven by a 32% rise in layoffs and a lack of formal job openings.
Despite high investment, labor absorption has crashed because funds are flowing into capital-intensive sectors rather than manufacturing, leaving a low-education workforce behind.
The reliance on informal labor creates a "vicious cycle" of low purchasing power and reduced tax revenue, increasing the risk of the Middle Income Trap.

The streets of Indonesia are increasingly populated by online motorcycle Driver (ojol) drivers and diverse street coffee vendors, a visible symptom of a labor market where more than half the workforce now operates in the informal sector. As of February 2025, the Central Bureau of Statistics (BPS) reported that 86.55 million people are employed informally, an increase of 3.16 million since 2023. This shift highlights a growing divide between formal workers who enjoy contracts, regulated wages, and social protection and the expanding legion of self employed or casual workers who operate outside the bounds of labor regulations.

A primary driver of this trend is the surge in layoffs, with the Ministry of Manpower recording a 32% increase in job losses by June 2025 compared to the previous year. For many, the informal sector is a survival mechanism; a survey by Prakarsa found that 60% of ojol drivers turned to the profession after being laid off, swelling the number of drivers to approximately 4.2 million by 2024. Unlike formal employment, these roles offer easy entry via digital platforms but lack essential safety nets like health insurance, holiday bonuses, or severance pay, leaving workers vulnerable to economic shocks and opaque algorithmic management.

Structural economic shifts are exacerbating the scarcity of formal jobs. Despite investment realization reaching Rp1,418.9 trillion in 2023, labor absorption has plummeted to just 1,081 workers per trillion rupiah a stark drop from 4,594 workers a decade prior as capital flows into capital intensive extractive industries rather than labor intensive manufacturing. This "premature deindustrialization" is compounded by a workforce where more than a third possess only an elementary education, limiting their access to the few formal positions available.

The human toll is evident in the stories of individuals like Fauzan Lazuardi, an illustrator who struggles with uncertain monthly income and feels that creative work is undervalued and threatened by AI. While Indonesia struggles to protect these workers, other nations offer potential blueprints for reform; Spain now recognizes app based drivers as formal employees entitled to benefits, and Singapore has implemented a Progressive Wage Model to systematically improve informal worker welfare through training and clear career paths.

Ultimately, the unchecked expansion of the informal sector risks trapping Indonesia in a "vicious cycle" of economic stagnation. With urban poverty rising by 220,000 as of March 2025, the dominance of low wage informal work suppresses purchasing power, which in turn triggers further layoffs in the formal sector. This dynamic not only threatens to push the country into the Middle Income Trap but also poses a double risk to the government: a decline in income and value added tax revenues paired with an increasing social burden to support a vulnerable population.