01.03.07. Prevalence of the informal economy | Indonesia

01.03.07. Prevalence of the informal economy | Indonesia

13 Apr 2022

Based on labour force surveys, it has been estimated that between 61 and 70 per cent of the labour force are employed in the informal sector (Alatas & Newhouse, 2010; Firdausy, 2000). Rothenberg and colleagues (2016) explain the development of the Indonesia economy and its impact on the informal sector. Since the 1970s, Indonesia has developed from a ‘primarily agriculture-based economy’ to an economy based largely on manufacturing and services. In terms of GDP, the share of agriculture declined from 45 per cent (1970) to 14 per cent in 2014. The authors further explain that the reduction in agriculture coincided initially with urbanisation that led to an increase in the informal sector within urban areas. Growth in the manufacturing and service sectors led to an increase in formal sector employment ‘from 34.7 per cent to 44.9 per cent in 1997’ (Alatas & Newhouse, 2010, p.32). However, the economic crisis in 1998 led to shift from people formerly employed in the formal sector becoming employed in the informal sector. The following political crisis, resulting in ‘a regime change and political reform’ aimed to increase minimum wages. This development is understood to have contributed to the ‘weak recovery of formal sector employment’ (Rothenberg et al., 2016, pp.99-100).


Alatas, V., & Newhouse, D. (2010). Indonesia Jobs Report: Towards Better Jobs and Security for All (Vol.2): Main Report (English). http://documents.worldbank.org/curated/en/601901468285575499/Main-reportAlzheimer’sDiseaseInternational

Firdausy, C. M. (2000). The social impact of economic crisis on employment in Indonesia. http://www.ismea.org/asialist/Firdausy.html

Rothenberg, A. D., Gaduh, A., Burger, N. E., Chazali, C., Tjandraningsih, I., Radikun, R., Sutera, C., & Weilant, S. (2016). Rethinking Indonesia’s Informal Sector. World Development, 80, 96–113. https://doi.org/10.1016/j.worlddev.2015.11.005