World Bank Flags Shrinking Middle Class in Indonesia, Urges Structural Reforms

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JAKARTA, investortrust.id— The World Bank has raised concern over the shrinking share of Indonesia’s middle-income workforce, warning that sluggish wage growth and a surge in layoffs are weakening domestic consumption and widening the inequality gap.

“The share of Indonesian workers earning middle-class wages dropped from 14% in 2019 to just 8% in 2024,” said Habib Rab, World Bank economist for Indonesia and Timor-Leste, during the launch of the Indonesia Economic Prospects report in Jakarta on Tuesday, June 24.

The report attributes the erosion of middle-class income to a lack of high-paying jobs and points to wage stagnation as a broader structural issue. As of February 2025, average wage growth stood at 1.8% year-on-year — merely in line with inflation. By comparison, wages grew by 3.3% in February 2024.

The World Bank's assessment echoes findings from a previous study by the University of Indonesia, which found that the middle class shrank to 47.9 million people in 2024, down from 57.3 million five years earlier.

Surge in Layoffs and Uneven Recovery

Despite modest wage increases, formal sector layoffs have escalated sharply. The number of terminated workers jumped from 3,325 in January 2025 to 18,610 in February, with layoffs heavily concentrated in Central Java, Jakarta, and Riau.

“The hardest-hit sectors include textiles, footwear, and electronics,” Rab noted.

According to the report, the consumption growth rate among the aspiring middle class — those transitioning from poverty — averaged just 1.3% annually between 2019 and 2024. In contrast, the poorest households posted 2–3% consumption growth, largely supported by government social assistance. Meanwhile, the wealthiest Indonesians saw their annual consumption rise by 3%.

“This shows the middle class is increasingly left behind,” Rab said, warning that such trends could undermine Indonesia’s long-term economic trajectory. “Middle-class expansion is crucial for demand in higher-value goods and services, which in turn supports sustainable economic growth.”

Policy Solutions: Education, Health, and Infrastructure

To reverse this trend, Rab urged the government to focus on enhancing the population’s skillsets and cognitive capacity. “This hinges on delivering three essential public services: quality education, healthcare, and infrastructure,” he said.

Financing these improvements will require expanded fiscal space, more efficient public spending, prudent debt management, and increased government revenue, according to the World Bank.

Rab also called on the private sector to take a more active role in job creation. “Ultimately, employment opportunities depend on the depth of the private sector and the competitiveness of the goods and services it produces,” he concluded.