Indonesia's consumers aren't spending as job market stagnates

Indonesian consumer demand was once closely correlated to the nation's key export commodities, such as palm oil, coal and nickel. When prices for these exports were good, Indonesians would spend -- particularly on autos.

Lately, this relationship has broken down -- suggesting there are structural issues weighing on Indonesia's job market, from wage-eroding sticky inflation to an inadequate education system. (We've previously written about a similar – but much more positive – disconnect from commodity prices in neighboring Malaysia.)

As our first chart shows, Indonesia's inflation is more than offsetting pay increases: real wages have yet to recover to pre-pandemic levels.

And as our second chart shows, the pain has been most pronounced for high school and university graduates, who have lost more ground than less educated, "informal" workers in agriculture and services. Recent graduates have been stuck in underemployment, or appear to be taking lower-quality jobs than previous generations.

Formal employment, where higher-skilled jobs are typically concentrated, still only accounts for about 40% of the workforce. As our third and fourth charts show, pension-fund participation – a rough proxy for formalization – peaked a decade ago at 3.8% and was falling back even before the pandemic. This indicator had yet to make up the lost ground as of 2023.

A contributing factor may be the country’s relatively low average human capital. Despite improvements in access to education across Indonesia's far-flung archipelago, skill levels remain insufficient to attract large-scale investment in manufacturing and high-value services. This limits the economy’s ability to create the well-paying jobs that would support a stronger recovery in consumption.

Click here to read about  export commodities, such as palm oil, coal and nickel,  inadequate education system, disconnect from commodity prices in neighboring Malaysia.