Stuck in the Middle with You? An Assessment of Income Dynamics in Indonesia

The middle class can play a pivotal role as a growth driver in achieving Indonesia’s Golden Vision of becoming a high-income country by 2045. However, it remains narrow, at under 20 percent of the total population. It is also highly vulnerable, given a waning purchasing power, and unfavorable labor market dynamics. In contrast with the steady progress of the bottom half of the income distribution, the middle-class share has declined since 2019, driven, inter alia, by labor market shifts toward informality, falling real incomes, pandemic scarring. Reversing this trajectory requires broad-based structural reforms focused on revitalizing private-sector led growth, including investment to create formal sector jobs, aligning education with labor market needs and develop skills to raise economic sophistication, and enhancing productivity and resilience. Reforms that enhance the ease of doing business, such as reducing regulatory barriers and uncertainty and improving governance, can help facilitate convergence to high-income status and benefit the middle class.