Passed by the House of Representatives on Oct. 6 to fulfill a Constitutional Court order separating labor rules from the Job Creation Law, it introduces a severance reserve fund as one of many measures aimed at giving workers greater security.

The law covers a worker’s entire working life, from recruitment and job placement to training, wages, workplace safety and dismissal. Fixed-term contracts will be capped at four years, two years with up to two one-year extensions, and outsourcing will be limited to support services. Internships may not exceed six months and must come with an allowance and social security coverage.

Minimum wages will be based on a living-cost survey conducted by Statistics Indonesia (BPS) with the national wage council and the new reserve fund will work alongside the existing job loss insurance program (JKP).

For Indonesia’s formal workers, this is a genuine step forward, because the law tackles problems they have long faced: losing their jobs with no certainty of receiving severance pay and being kept on short-term contracts for years. Recorded layoffs reached 105,658 in 2025, up 35.5 percent from the previous year, according to Manpower Ministry data. And when companies go under, severance payments can take years to reach workers.

The new law addresses these problems in several ways. The roughly 60 million Indonesians in formal work will have a better chance of receiving their severance pay even if their company goes bankrupt, clear limits on how long they can be kept on short-term contracts, stronger protection against having their regular jobs handed over to outsourcing companies and closer government oversight to make sure these rules are followed. Internships, often young people taking their first step into work, can no longer be treated as cheap labor.

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Formal workers, however, are one part of a broader labor market.

Of Indonesia’s 155.4 million-strong labor force, 7.2 million people, or 4.65 percent, were unemployed in May 2026, according to BPS. For some groups the rate is considerably higher: unemployment among those aged 15 to 24 reached 17.4 percent, nearly four times the national average, and graduates of vocational high schools face the highest rate of any education level. For these job seekers, the priority is finding work in the first place.

Among the 148.2 million people who are employed, 40.7 percent work formally. The remaining 59.3 percent, around 88 million, are informal: own-account workers, small business owners who rely on temporary or unpaid help, casual laborers and unpaid family workers, who largely fall outside the reach of minimum wage rules, employment contracts and severance pay.

The bigger challenge is where new jobs are being created. Between February and May 2026, the largest gains came from accommodation and food services, which added 195,000 workers, transportation and storage (121,000) and other services (110,000), while wholesale and retail trade shed 128,000. These are sectors where small businesses, self-employment and, increasingly, digital platform work are common, precisely where formal employment protections reach least.

There are two broad ways to shield people from the risk of losing their livelihood. One is to make dismissals harder and costlier, so that workers keep the jobs they have. The other is to support people when they lose a job or are still looking for one, through unemployment benefits, retraining and help finding work.

The new law makes a strong start on the first. The government has framed it as protection for job seekers and employers as well as workers, and the implementing rules will decide whether that balance holds. The one-year transition before the law takes effect, which the Manpower Ministry has indicated, is the time to start.

For those who lose their jobs, the severance reserve fund could be designed as pooled insurance linked to the JKP, with transparent, actuarially set contributions and an independently governed manager. If done well, it would turn severance from an unexpected lump sum into a predictable cost that makes sure workers get paid when they lose their jobs. The JKP itself could be made more meaningful and paired with stronger retraining and job-matching services.

For those still looking for their first job, the priority is different. Young job seekers need quality training, apprenticeships and job-matching portals far more than they need severance rules. And because many of the new jobs are emerging in tourism, food services, logistics and digital platform work, stronger protection should go hand in hand with a push for formal job creation in these sectors, including basic social security for digital platform workers that follows the worker rather than the contract.

Finally, the government should track whether formal hiring and youth employment improve and refine implementation as the evidence comes in.

The law sets the framework. The implementing regulations, including the one on the severance fund, will decide how far it reaches. The law has made a promising start in protecting those who already have formal jobs. The coming year is a chance to extend that promise to the millions still looking for one.

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The writer is an analyst at Mandiri Institute.

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