Indef Study: Economy Grows, but Job Creation Capacity Declines
JAKARTA – Indonesia’s economic growth, which has remained around 5 per cent, has not generated jobs in proportion to the increase in economic activity. A study by the Institute for Development of Economics and Finance (Indef) found that employment elasticity plunged by about 62 per cent in 2025, reflecting the economy’s declining ability to create jobs as it grows.
The findings are set out in Indef’s study, titled An Evaluation of the Economy under President Prabowo’s Two Years in Office, published in October 2026. The report says the government has succeeded in maintaining growth stability and expanding several priority programmes, but has not achieved an acceleration in economic transformation commensurate with the resources deployed.
According to Indef’s calculations, employment elasticity fell from 0.68 in 2024 to 0.26 in 2025. The decline of 0.42 points, or around 61.8 per cent, indicates that economic growth is increasingly accompanied by a smaller increase in the number of people employed.
“Employment elasticity fell by around 62 per cent, from 0.68 in 2024 to 0.26 in 2025,” the Indef study said on Friday (23 October 2026).
Employment elasticity measures the relationship between economic growth and growth in the number of people in work. The lower the figure, the smaller the increase in employment accompanying each rise in gross domestic product (GDP).
This occurred while Indonesia’s economy continued to grow. The economy expanded by 5.11 per cent in 2025, a slight increase of 0.08 percentage points from the 5.03 per cent growth recorded in 2024.
In the first half of 2026, economic growth reached a cumulative 5.45 per cent. However, year-on-year growth slowed from 5.61 per cent in the first quarter to 5.29 per cent in the second quarter of 2026.
“The first two years produced growth stability without structural acceleration. Manufacturing’s contribution weakened, capital efficiency remained low, economic activity remained highly concentrated in Java, and growth absorbed fewer workers,” Indef said in its study.
Employment concerns are also reflected in the slower increase in the number of people in work. In the February comparison, the number of additional workers fell from 3.59 million in 2025 to 1.90 million in 2026.
Of those 1.90 million additional workers, around 1.16 million, or 61 per cent, were in informal employment. This indicates that new job opportunities do not yet fully provide income security and adequate protection.
The share of underemployed workers also rose from 31.9 per cent to 33.2 per cent. Meanwhile, youth unemployment remained at around 16–17 per cent during the period covered by the report.
Although the open unemployment rate fell to 4.68 per cent in February 2026, Indef cautioned that a decline in unemployment does not automatically indicate an improvement in job quality. Adequate working hours, income levels, social protection and the match between skills and jobs must also be used to assess labour-market conditions.
Employment conditions
Weak job absorption has occurred even as national investment has continued to rise. Indef says the additional investment has not been sufficiently effective in expanding production capacity or generating quality jobs.
One indicator highlighted is the incremental capital-output ratio (ICOR), which measures the additional capital required to generate an increase in economic output. A higher ICOR means more investment is needed to achieve growth.
Indonesia’s ICOR improved from 6.50 in 2024 to 6.24 in 2025. Despite the decline, the figure still indicates a relatively high capital requirement to generate additional economic value.
“An ICOR of 6.24 and employment elasticity of 0.26 show that the quality of growth in 2025 remained weak,” the Indef study said.
Similar concerns are evident in the structure of economic growth in the first half of 2026. Gross fixed capital formation (GFCF) contributed 1.79 percentage points to growth in the first quarter, rising to 2.06 points in the second quarter.
The contribution from exports also increased, from 0.21 to 0.99 percentage points over the same period. However, the rise in the contributions of investment and exports was not enough to prevent an overall slowdown in economic growth.
At the same time, manufacturing’s contribution to growth fell from 1.03 to 0.90 percentage points. The decline indicates that increased investment has not yet been accompanied by a stronger manufacturing sector, a key source of productive employment.
In its assessment of downstreaming, Indef also noted that investment in the sector rose from Rp280.8 trillion in the first half of 2025 to Rp300.1 trillion in the first half of 2026. However, manufacturing’s share of GDP fell from 18.95 per cent to 18.77 per cent, while the sector’s growth slowed from 5.12 per cent to 4.78 per cent.
Indef says increased investment in downstream processing has not automatically strengthened manufacturing across the economy. The concentration of investment in natural-resource processing, reliance on imported technology and limited participation by domestic suppliers continue to constrain the economic benefits.
“Concentration on resource processing, reliance on imported technology and weak domestic suppliers limit the economic benefits,” Indef said in the executive summary of its study.