The Shrinking Middle Class in Indonesia

Key Takeaways:

1. Size of middle class in Indonesia is shrinking due to wage growth not keeping up with inflation, rising living costs, and declining education quality.

2. The pandemic caused a shift of the workforce to the informal sector with unstable income and often lacking benefits like insurance.

3. Most workers have only completed high school or less, which correlates with low skills and low-wage jobs.

4. The decline of the middle class negatively impacts overall economic growth.

5. Government plans aim to improve standard of living and middle-class growth.

Since the COVID-19 pandemic, Indonesia's middle class has declined in both size and proportion. According to the National Socio-Economic Survey (Susenas), while the middle class is shrinking, the number of people categorized as "aspiring middle class" has increased. It is estimated that the proportion of the middle class has decreased from 21.45% in 2019 to 17.13% in 2024 (Figure 1). This change reflects an economic environment that is less favorable for upward social mobility.

Figure 1: Number of Middle-Class, Approaching Middle-Class, and Vulnerable-to-Poverty (2019-2024)

Source: Central Statistics Agency (BPS), JUARA, Susenas

The decline of middle class in recent years is attributed to various economic and social factors, such as wage growth, rising living costs, the shift from formal to informal employment, and decreasing education quality. This situation reflects challenges for post-pandemic economic recovery and highlights the need for economic drivers to restore middle-class growth in Indonesia.

The middle class promotes economic growth through their high purchasing power and tax contributions. They enhance domestic consumption by spending more on discretionary goods and services using their greater disposable income compared to lower social classes. Additionally, their tax contributions boost state revenue, making the increase in the middle class vital for economic growth.

According to the World Bank (2020), the middle class in Indonesia is defined as those with monthly expenditures between Rp1.2 million and Rp6 million. Before the pandemic, the middle class was the fastest-growing segment of the population, with a growth rate of 10% per year and an increase of around 38 million people from 2002 to 2016 (World Bank, 2020).

However, data from Susenas shows that the number of middle-class individuals in Indonesia has contracted in recent years. In 2019, approximately 57 million people were classified as middle class, but this number is expected to decrease to 48 million by 2024. Conversely, there has been an increase in the population categorized as aspiring middle class and vulnerable to poverty, indicating a decline in social class for many Indonesians.

The decline in social class may be attributed to rising costs that have become increasingly unaffordable. The average salary increase from 2019 to 2023 has not kept pace with inflation during the same period. The average inflation rate from 2019 to 2023 is estimated at 2.9%*, which is higher than the average salary increase of 1.8%**.

Figure 2: Average Wage (2019 – 2023)

Source: BPS, JUARA

This situation affects people's ability to meet daily needs and reduces the disposable income available for spending on non-essential goods and services. The decline in disposable income leads to a decrease in consumption of discretionary items, such as entertainment, fashion, and recreation.

In addition to salary factors, the shift of labor from the formal to the informal sector also contributes to the decline in social class. In 2019, the proportion of formal workers in Indonesia reached 44.12% (Figure 3). However, this number drastically decreased during the pandemic, and the graph shows that the number of formal workers has not returned to previous levels (Figure 3). This situation indicates that many people now work in the informal sector, where their income is uncertain.

According to BPS, formal labor includes workers, employees, civil servants, or entrepreneurs who employ at least one permanent employee, while informal workers consist of those who work independently, assisted by temporary labor, freelancers, or unpaid family workers.

Figure 3: Percentage of Formal Workers (2019 – 2023)

Source: BPS, JUARA

Informal workers' incomes can fluctuate based on demand and are often project-based, temporary, and even daily jobs. They may not receive benefits like insurance that formal workers typically do. This makes informal workers vulnerable to financial hardships, especially in times of emergencies or unforeseen circumstances.

Another factor contributing to the decline of the middle class is the drop in education quality. As of 2023, 74.7% of workers aged 25-64 had only completed upper secondary education (equivalent to high school) or lower (OECD, 2023). According to the Programme for International Student Assessment (PISA), Indonesian students' abilities in mathematics, science, and reading have also decreased since 2016. This low quality of education results in a workforce with inadequate skills, which, in turn, restricts job opportunities primarily to low-wage positions. This makes it increasingly challenging for individuals to elevate their social status and enhance their living standards.

Figure 4: Student Knowledge and Skills in Literacy, Mathematics, and Science

Source: JUARA, Organisation for Economic Co-operation and Development (OECD), PISA

However, amidst these challenges, there is strong optimism regarding efforts to improve the living standards of the Indonesian population. The government's plan to achieve the Indonesia Emas Vision in 2045 through increasing accessibility and quality of education (education budget: Rp724 trillion, 20% of 2025 state budget) and providing nutritious food for schoolchildren, is expected to support their transition to higher social classes.

Additionally, free health check-up programs and plans to build quality hospitals (health budget: Rp198 trillion, 5% of 2025 state budget) will alleviate healthcare costs that middle class need to spend, allowing them to allocate more income for other non-essential expenditures. These efforts will not only improve their quality of life but also stimulate overall economic growth in Indonesia.

*The average inflation calculation uses YoY data, CAGR formula. **The average salary increase calculation uses BPS data from February and August, CAGR formula.

Juara Capital Indonesia, 30 September 2024