Data from Statistics Indonesia (BPS) show that, as of February this year, the group comprised more than 60 percent of the 138.63 million active workers in Indonesia, compared with the 56.64 percent of the working population in February 2020.

BPS describes the informal sector as being characterized by a lack of legal registration and by self-employment of workers in “invisible” locations, such as small shops that tend to remain small-scale operations.

“From the argument of decent livelihood and income, it is obviously a problem,” Association of Lecturer and Labor Law Practitioner Indonesia (P3HKI) chairwoman Agusmidah told The Jakarta Post on Thursday.

Labor experts say most informal workers have a low level of education, with the majority of elementary and middle school graduates ending up in the informal sector.

Over 70 percent of people in the group with no education higher than elementary school worked as informal workers in 2022, while that share dropped to 59 percent among middle school graduates, BPS data show.

The national average net income for the former group was between Rp 1.3 million (US$86) and Rp 1.6 million per month, whereas the latter averaged Rp 1.89 million, BPS said.

The higher the education level, the smaller the proportion of people working in the informal sector, and the higher the salary, with high-school graduates averaging more than Rp 2 million in monthly income.

The number of informal-sector workers has risen over the past few years, partly because of the system of contract workers and outsourcing under the 2003 Labor Law, according to Gadjah Mada University (UGM) researcher Arif Novianto.

He said this “informalization” of labor had gained “wider” influence with the imposition of the Job Creation Law that allows employers to lay off workers at any time without a third-party audit.

“Government protection is not good, because it is not enough, given that job security only applies to formal workers. Informal workers have been overlooked by the prevailing regulations,” Arif told the Post on Thursday.

Tadjuddin Noer Effendi, another labor expert from the UGM, said the high share of informal workers reflected the government’s failure in creating jobs, as most of these workers had difficulty getting formal jobs”.

“Rather than being unemployed without any income, when economic needs press, they choose to enter the informal sector,” Tadjuddin told the Post on Thursday.

In some cases, the informal sector acted as a safety net or a cushion in the middle of a crisis, he said, as it could help laid-off worker get employment.

However, he noted that, in a long term, they did not contribute much to the economy, due to the sector’s unrecorded and invisible nature.

According to the International Monetary Fund (IMF), regions or countries with large informal sectors remain below their economic growth potential, as informal businesses do not contribute to the tax base and tend to remain small, while informal laborers are more likely to be poor than their formal peers.

The P3HKI’s Agusmidah said that a laissez-faire attitude could not reign labor, since letting “market mechanisms” rule leads to the question: “where is the state?”

“Did vulnerability arise because it was one’s own fault or did the structure cause it?” Agusmidah asked.

“The state has committed two sins, namely [allowing] poverty and low education, plus how they [have liberalized] labor,” she added.

She also urged the government to impose regulations on outsourced labor for industry, arguing that the industry was profiting from it as employers in the system were often paid unequal wages to workers.

Although outsourcing can be viewed as a part of the efficiency principles industry must undertake, she saw it as a system that is void of much-needed regulations and urged the government to “not turn a blind eye”.

Indonesian Employers Association (Apindo) chairwoman Shinta Kamdani said the main problem causing this is the lack of “investment competitiveness”, which has brought about limited formal job creation.

“With a bigger economy and better governance, the state can increase the capabilities of formal economy job creation better,” Shinta told the Post on Thursday.

“Therefore, we need consistency in our structural reform that won’t be let down by populist policy,” she added.

According to Shinta, businesses can help resolve this problem by providing training for informal workers as well as connecting industry with the group, for example by becoming off-takers to what the sector produces.