As Indonesia aims to transform into a developed country by 2045, the nation faces a significant challenge: a growing number of unemployed Gen Z individuals. This downward trend in job creation is pushing Gen Z into the informal sector, with negative consequences for the economy.
The average age in Indonesia is 30, a stark contrast to the aging populations in many developed countries, like Japan, where the median age is 50. This demographic suggests that the majority of the population should be at peak productivity. However, Indonesia is grappling with a significant challenge in its formal economy: Gen Z graduates are finding it difficult to secure employment and integrate into the workforce.
Generation Z, encompassing those born between 1997 and 2012, is currently the biggest generation group in Indonesia with 28% of the total population or 75 million people.
The Central Statistics Agency of Indonesia (BPS) reported that 9.9 million people were not engaged in education, employment, or training (NEET) in 2023, most of whom were Gen Z who are at their “productive age.” Around 1 in 5 people in this age group are classified as NEET.
Deputy Minister of Finance, Suahasil Nazara, responded to this news, insisting that the government must monitor labor absorption developments and the conditions of labor supply and demand, although he did not elaborate on what support those entering the workforce will receive.
“Maybe the link is not strong enough to match the industry,” said sociologist Imam Prasodjo from the University of Indonesia, referring to the mismatch between education and job market needs. He asserts that many entrepreneurs have succeeded in creating jobs in the country and that this creativity should be encouraged to create new forms of jobs for the younger generation.
Experts warn that developed countries with aging populations, including China, will soon experience a slowing down of economic growth. But in an interview with CNBC Indonesia, senior economist Raden Pardede said that this presents Indonesia with a unique opportunity to boost productivity while this demographic advantage lasts. By 2040, Indonesia, too, will enter an aging demographic phase. “As the nation ages, the number of productive people decreases,” he added.
Generation Z is having a harder time finding work
Indonesia’s job market trends show a troubling decline in formal sector opportunities, including for new graduates. Over the last 15 years, job creation in the formal sector has significantly decreased, with the number of jobs dropping from 15.6 million from 2009 to 2014, to just 2 million from 2019 to 2024. This has forced many young people to turn to the informal sector, which now employs around 74 million workers compared to 57 million in the formal workforce.
This shift comes with important implications for income stability and employment protection. Formal sector jobs, involving workers with a work agreement with a legal entity, with an average salary of 3.1 million Indonesian rupiahs per month (193 dollars), offer better security and legal protection than the informal sector, where the average income is 1.9 million rupiahs (118 dollars) and lacks comprehensive social security.
IDN Research Institute published a report on Gen Z, revealing that more than half of this generation still lives, and financially depends on their family because a “notable characteristic of this generation is their relatively limited or nonexistent personal income.”
Tadjuddin Noor Effendi, a Gadjah Mada University lecturer, explains that complicated licensing processes and illegal levies are among the factors deterring companies from investing in Indonesia, thus exacerbating the decline in formal labor absorption. Foreign investments have also been discouraged due to these issues, along with unstable political conditions and lower workforce competency.
“There are policies that make foreign investment reluctant to enter Indonesia, including obtaining permits which is quite difficult and takes 1–2 years,” he explained.
The informal sector’s significant presence poses challenges for Indonesia’s macroeconomic development. Informal workers, such as street vendors, home and car renovations, as well as prostitution and drug dealing, are unmonitored by the government, paid in cash and do not pay taxes.
And this does little to alleviate long-term poverty: Their income barely covers daily living expenses.
