Indonesia’s best chance of delivering durable wage gains is to raise productivity first, not simply mandate bigger paychecks, according to a CSIS economist who warned that the country’s labor market is still too weakly formalized to support lasting income growth.
Indonesia labor market needs productivity for wage gains
That matters because wage growth that runs ahead of output is rarely sustainable for long. Workers may see a short-term boost, but companies eventually respond by hiring less, relying more on contract labor, or automating faster. For investors, that is the real story: a labor market that cannot lift productivity tends to cap consumption, limit corporate margin expansion, and keep the economy stuck in a low-wage equilibrium.
CSIS senior researcher Deni Friawan said Indonesia’s minimum wage remains low in absolute terms, but still looks expensive relative to productivity, meaning the gap between pay and output has widened. He also said wage growth has been broadly stagnant in recent years and has not fully returned to pre-pandemic levels, even for more educated workers.
The policy implications are bigger than the wage debate alone. Friawan argued that the government’s labor law overhaul should not be framed only around pay, but around lifting formality, improving protection and making firms more willing to hire. That is crucial in a country where only about 36% of workers enjoy wages above the minimum standard, 26.6% receive severance coverage and just 21.2% have job-loss insurance, according to the remarks cited by Antara.
Those numbers help explain why Indonesia’s labor market remains vulnerable. When employers face high uncertainty, they avoid large permanent hires and instead lean on informal work, short contracts and machinery substitution. In other words, weak protections can create the very informality that keeps productivity low, which then keeps wages low — a vicious circle that is hard to break without reform.
For long-term investors, that is why this is more than a social-policy story. Higher productivity would give businesses room to pay more without destroying competitiveness, and it would support stronger domestic demand over time. That can matter for everything from consumer spending to bank lending to industrial investment, especially if reforms help move workers into more formal jobs with better training and clearer rules.
Indonesia’s next step, then, is not just to argue about wage levels. It is to build an economy where wages can rise because workers are producing more, firms are more efficient and formal employment is becoming the norm. That is the kind of foundation investors should want to own for years, not just months, and it is worth watching closely as labor-law discussions continue.
| Entity | Gains | Losses |
|---|---|---|
| Workers with higher productivity | ▲Higher wages over time | ▼Stagnant pay under current model |
| Employers/formal firms | ▲Better margins from efficiency | ▼Higher labor costs without output gains |
| Indonesian economy | ▲Stronger consumption and competitiveness | ▼Low-wage, low-productivity trap |
| Informal/contract labor model | ▲Little | ▼Formal hiring and worker protections |
