Indonesia’s Growth Paradox: Why Informal Jobs Still Dominate a Rising Economy

Indonesia’s strong growth has failed to create enough formal, secure jobs, leaving most workers and firms trapped in informality with low productivity and little social protection. The World Bank warns that without reforms to make formal work and business worthwhile, this informality will block Indonesia’s path to high-income status by 2045.

Indonesia’s economic rise over the past two decades has been widely praised. Steady growth, averaging more than five percent a year, lifted millions out of poverty and helped the country reach upper-middle-income status. But a new World Bank report produced by its Poverty and Equity Global Practice and the Macroeconomics, Trade, and Investment Global Practice warns that this success masks a serious structural weakness. Too many Indonesians work in informal jobs, and too many businesses operate outside the formal economy. Unless this changes, the report argues, Indonesia’s ambition to become a high-income country by 2045 is at risk.

Informal Work Is the Rule, Not the Exception

In most countries, informal work shrinks as incomes rise. In Indonesia, it has not. Fewer than one in five workers has a job that meets international standards of formality. When stricter criteria are used, such as having a written contract, earning at least the minimum wage, and receiving social insurance, the share of fully formal workers falls to less than ten percent. Most Indonesians work without pensions, unemployment protection, or paid leave. Most firms are unregistered and untaxed. Informality, the report makes clear, is not a temporary phase but the dominant way the economy functions.

What Informality Means for Workers and Families

For workers, informality brings insecurity. Self-employed Indonesians earn much less than salaried workers and face sharp swings in income as hours and demand change. These ups and downs make it hard for families to plan, save, or cope with shocks. Food insecurity is more common, and many households rely on debt or selling assets to get by. Old age offers little comfort. With very limited pension coverage and no universal social pension, Indonesians often work well past retirement age, usually in informal jobs that offer no protection against illness or economic downturns.

Small Businesses, Big Barriers to Growth

Indonesia’s economy is dominated by micro and small businesses, most of which are run by a single person and focused on survival rather than growth. Very few are registered, not because of tax avoidance, most microenterprises are legally exempt, but because owners see little benefit in formalizing. Many do not know that registration is free and quick through the government’s Online Single Submission system. As a result, informal firms struggle to access finance, join supply chains, or invest in better technology. Yet the report finds that many informal businesses are already productive and could expand if barriers were removed, showing that informality often reflects policy failures rather than a lack of ability.

When Rules Push People Out of the System

At the heart of Indonesia’s informality problem lies a policy imbalance. The country collects relatively little tax, limiting the government’s ability to fund social protection or enforce rules. To compensate, policymakers have relied heavily on labor regulations. Minimum wages, severance pay, long-service benefits, and employer-paid leave are generous on paper but costly in practice. Compliance costs have risen much faster than productivity, pushing many workers and firms out of the formal system. Indonesia’s minimum wage, relative to typical earnings, is among the highest in the world. Instead of helping the poorest workers, it increasingly benefits a small, privileged group while others are excluded into informality.

Women, Youth, and the Cost of Informality

Women and young people pay a particularly high price. Indonesia requires employers to fully finance maternity leave, discouraging firms from formally hiring women and contributing to extremely high female informality. Young workers face similar barriers, with many unable to find formal jobs at all. Digital work has opened new opportunities, offering higher pay and better conditions for some, but uneven internet access and regulatory uncertainty threaten to limit its potential, especially outside major cities.

A Way Out of the Informality Trap

Indonesia is stuck in an informality trap where weak tax capacity, limited social insurance, and heavy regulations reinforce one another. Escaping this trap will require a shift in approach. Instead of punishing informality, policies must make formality worthwhile by expanding social insurance, improving access to finance, supporting digitalization, and strengthening state capacity. Without these reforms, Indonesia risks becoming richer without becoming more secure, productive, or equal.