As the largest economy in Southeast Asia, Indonesia experienced outstanding economic growth before the pandemic. In 2020, it had graduated to upper-middle income status with a GNI (gross national income) per capita of 4,050 US dollar. But on July 1, 2021, after just one year, the World Bank downgraded Indonesia to lower-middle income status. One could simply blame this on the pandemic for causing pay cuts, job losses and shuttered businesses. However, even before COVID-19, Indonesia encountered complex challenges in the labor market, including low labor productivity, strong labor market dichotomies, skills gaps, and labor underutilization. In the long run, this problematic labor market performance will jeopardize the country’s plan to become a thriving high-income country – regardless of the pandemic.
Despite economic growth, the quality of jobs has not risen sufficiently
Back in 1967, Indonesia was one of the poorest countries in the world with a GDP of US$ 657 per person. In 2016, its GDP per capita grew to nearly US$ 4,000, sixfold compared to 50 years ago. Jobs have been a major contributor to the economic growth and Indonesia has been successful in job creation, diversification, and formalization. Its employment rate reached a two-decade record high in 2018. Despite the significant progress, Indonesia is not creating the high-productivity, middle-class jobs it needs to sustain a middle-income status.
A range of factors have hindered the country’s transition. Half of all jobs created over the period 2008-2018 were in the sectors with the lowest wages and productivity: wholesale and retail, food and beverage, accommodation, and other services. Also, a significant portion of the labor market is informal and there are very few medium to large enterprises, which would be the most significant creators of middle-to-high-class jobs. Together with slowing growth of the global economy, a loss of competitiveness to neighboring countries in terms of labor productivity as well as an education system with poor learning outcomes, these factors will invariably thwart Indonesia’s aspirations for a sustainable transformation of the labor market. 
Indonesia’s labor market is characterized by multiple dichotomies
There are three dichotomies in Indonesia’s labor market with a substantial impact: formal / informal sectors, rural / urban areas, and female / male labor participation. Although declining, the informal economy still provides a substantial portion of the country’s employment opportunities. According to the OECD, informal workers account for over half of the workforce. Women, migrants, and other vulnerable groups are most likely to be employed in the informal sector with low-quality jobs. In addition, informality is particularly widespread in rural areas, which are largely dependent on agriculture: around 70% of jobs in rural areas are informal, compared to 45% in urban areas.
In 2017, the female participation rate in Indonesia was estimated at 51%. This is 32.7 percentage points lower than their male counterparts (83.7%), a gap significantly higher than the global average. As shown above, reducing Indonesia’s gender gap by 25% could add an additional US$ 216.2 billion to the GDP.
Rocky transition from education to labor market
Compared to other ASEAN countries, Indonesia’s unemployment rate is relatively high, and skills mismatch is one of the key reasons. Young Indonesians, who make up around 40% of the population, are especially facing challenges when entering the labor market, with youth unemployment substantially higher than for adults. According to the OECD, young Indonesians who just finished junior or senior secondary school (aged 15-19) encounter the most difficulties when entering the labor market, with an unemployment rate of 26.7% in 2018 compared with 16.7% for 20-24 year-olds and 4.4% over all ages.
Despite an increasing number of graduates in Indonesia, employers are still struggling to find well-trained candidates, which clearly indicates a significant gap in skills demand and supply. The current pandemic is exacerbating the situation: The hospitality and retail sectors, which provided a significant proportion of (low skill) youth employment, are largely affected, while other sectors such as e-commerce, personal care and information and communication technology, which have thrived in the pandemic, require new skills.
Labor market services provided by local governments
Online job matching, face-to-face consultation, training subsidies and job fairs are provided to job seekers by the local governments. Despite the efforts to match people to jobs, many challenges are preventing a strong employment outcome.
For example, there are two online platforms known as the Info Pasar Kerja and 3 in 1 Kiosk offered by the Indonesian Ministry of Manpower to perform job matching in Indonesia, but few jobseekers find jobs via the online job platforms. According to the OECD, in 2018, there were 539,730 and 485,212 job vacancies available on the two websites respectively, but among the 17,600 registered jobseekers, only 3% found a job on the platforms. Meanwhile, the registered job opportunities vary across provinces due to incomplete information. Limited labor market information is a typical issue for many developing countries.
Strengthening a labor market information system (LMIS)
With advancing technology and increasing availability of data, many countries are developing comprehensive LMIS to go beyond only job matching and provide comprehensive services including career and skills guidance, government support and labor market intelligence.
Indonesia’s National Long-Term Development Plan (RPJPN 2005-2025) recognizes human resource development as one of the key drivers of the national development goals. To build a skilled and competitive workforce, Indonesia is planning to strengthen their LMIS. Currently, the most developed function is AyoKitaKerja, a job-matching platform running publicly since 2016. AyoKitaKerja provides job seekers with basic information about job vacancies and enterprises with basic information about potential candidates to promote employment matching.
In collaboration with World Bank, a vision to move from a basic LMIS to an advanced system in Indonesia has been laid out, including advanced-technology solutions such as advanced algorithms, artificial intelligence (AI), big-data techniques, and integrating traditional and nontraditional sources of data. Feasible action plans covering the short, medium, and long term were also developed.
According to the report, in the short term, Indonesia should focus on increasing the numbers users of the system by improving the efficiency of job matching and setting the ground for a broader LMIS. Concrete actions include mapping and integrating existing labor market data, improving user friendliness, and developing customer response services. Over the medium term, the system could develop a career guidance function, analyze labor market information for future jobs and skills needs. In the long term, the system should provide more in-depth information on career guidance and labor market information, as well as provide guidance for labor market policies, and develop policy tools.
At JANZZ.technology, we have been collaborating with various public employment services to assist their LMIS development. Our services range from AI-powered state-of-the-art solutions to gather real-world labor market data and transform it into smart labor market intelligence – including job and resume parsing, automated classification of job and skills data, and job matching – over intuitive and powerful analysis and dashboarding tools providing meaningful insights such as skill gaps, workforce gaps and career guidance, to designing entire system architectures from scratch. Visit our website and discover the state-of-the-art solutions we have created for public employment services or watch the explainer video for our integrated labor market solution JANZZilms!.
This is another article from our series of JANZZ In-depth Global Labor Market Insights. If you missed our previous post on this topic, please check it out: Promoting more inclusive aging and employment policies. JANZZ.technology has been observing and working with different labor markets around the globe. If you are interested in reading about any labor markets we have not yet covered, let us know and it might be our next topic. Stay tuned.
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 Maria Monica Wihardja and Wendy Cunningham. 2021. Pathway to Middle-Class Jobs in Indonesia. URL: https://www.worldbank.org/en/country/indonesia/publication/pathways-to-middle-class-jobs-in-indonesia