Indonesia's shrinking skilled workforce raises concerns over long-term competitiveness: World Bank

Indonesia is witnessing a steady decline in medium- and high-skilled employment, raising concerns about the country's ability to sustain economic growth and remain competitive in global value chains, according to the latest World Bank report.

In its June edition of the Indonesia Economic Prospects report, the World Bank said the country's labour market has seen a shrinking share of skilled jobs between 2018 and 2025, contributing to rising educated unemployment and weakening wage growth for middle- and high-income workers.

The report found that wages for medium-skilled and high-skilled occupations declined by around 1% and 2% annually, respectively, during the period. In contrast, wages for low-skilled jobs grew by approximately 1.7% each year.

As a result, the share of middle-class workers has fallen sharply, dropping from 14.5% in 2018 to just 7.1% in 2025. The overall proportion of Indonesia's middle-class population has also continued to decline since 2018.

The World Bank attributed the trend to weak demand for higher-quality jobs, noting that better-educated workers are increasingly being pushed into informal employment that offers lower job security, weaker social protection and limited earning potential.

Among tertiary-educated workers, the share employed in formal wage jobs fell to 67.8% in 2025 from 74.1% in 2018. For upper-secondary graduates, formal employment dropped by nearly seven percentage points to around 30%.

While university graduates have been able to transition into relatively higher-tier informal work, workers with lower educational qualifications are increasingly concentrated in low-tier informal jobs.

The report noted that the traditional link between higher education and formal employment has weakened, suggesting a broader shortage of quality employment opportunities that fully utilise workers' skills.

Labour market experts say the findings reflect deeper structural challenges.

Public policy expert Yayat Supriatna attributed the decline in skilled employment partly to the weakening manufacturing sector, citing factory relocations and slowing industrial growth. At the same time, industries such as trade, logistics and transportation, where informal employment is more common, have expanded.

He also pointed to uncertainty in Indonesia's investment climate as a factor limiting the growth of technology-driven and skill-intensive industries. While government initiatives such as downstream industrialisation have the potential to create domestic employment, he said limited capital and investor participation have constrained their impact.

Mohammad Faisal, Executive Director of the Center of Reform on Economics Indonesia (CORE Indonesia), warned that Indonesia risks losing higher-value segments of global supply chains to competing economies.

As multinational companies increasingly distribute production across multiple countries, he said Indonesia's comparative advantage appears to be shifting toward lower-cost, low-skilled labour rather than higher-value, knowledge-intensive work.

Faisal added that this trend runs counter to the country's ambitions of boosting economic growth, household consumption and purchasing power, all of which depend on the creation of quality jobs.

He also noted that growing investment in capital-intensive industries, coupled with the rapid adoption of technologies such as artificial intelligence, is reducing demand for middle-skilled workers and increasing the risk of job displacement.

Labour researcher Arif Novianto, a lecturer at Tidar University, described the situation as a sign of "jobless growth," where economic expansion is not generating enough employment opportunities, particularly for skilled workers.

The World Bank's findings underscore the need for Indonesia to strengthen investment in higher-value industries, improve job quality and expand opportunities for skilled workers if it is to build a more resilient and competitive economy.