Blog
Understanding labour market inequality in Indonesia and India

Growing income inequality poses a major global challenge, even as the inequality between countries has shrunk due to rapid economic growth in nations like China and India. Both Indonesia and India experienced decades of gradually increasing national income inequality, beginning in the 1980s. The Gini index—a key measure of income inequality—peaked around 2012, reaching levels of 51.4 for India and 41.2 for Indonesia. Since then, Indonesia’s Gini fell by 3 points, while India’s has plateaued. 

A major driver of these trends in national income inequality is the labour market, particularly changes in workers’ real earnings. In low- and middle-income countries, the earnings divide between formal and informal sector occupations is an important part of the story. For example, Indonesian lower-tier informal wage workers earned less than half of what formal sector workers did in the most recent year for which data are available (2022). In India, the disparity was even greater, with upper-tier waged informal workers earning half that of formal waged workers and lower-tier informal workers less than one-third their peers in the formal sector.  

While both Indonesia and India performed well in economic growth compared to peer countries (by income group), they have relatively young workforces and high degrees of informality. For India, despite economic growth, real wages fell between 2012 and today, while they rose in Indonesia. Either way, changes in the overall level of real wages have not strongly changed earnings inequalities or the employment structure. The ILO (2018) estimates that 85.6% of Indonesia’s total workforce and 88.2% of India’s total workforce are informally employed workers. Therefore, both countries face similar challenges in terms of creating well-paid jobs for their workers with decent working conditions. 

Figure 1: Real wages in Indonesia

Source: Our calculations, from Sakernas Surveys.

Figure 2: Real wages in India

Source: Our calculations, from EUS and PLFS.

Our research, recently published in the Bulletin of Indonesian Economic Studies, explores how inequality within labour markets, particularly between informal and formal work statuses, affects the overall economic landscape in these two major Asian economies. The documented earnings divide between different types of employment is an inequality that intersects with other inequalities, such as those between genders, castes, or ethnolinguistic groups. 

Labour markets in Global South countries are often divided into formal and informal sectors. Formal workers have access to benefits like social security, while informal workers lack job security and often face lower wages. Our recent work highlights that even within informal work, there is a clear division. On the one hand, you have ‘upper-tier’ informal workers who might run small businesses or have some level of technical skills, and on the other hand, ‘lower-tier’ informal workers, who often perform manual, repetitive, or otherwise devalued labour.

To understand labour market inequality, it’s important to recognize this hierarchy, or ‘job ladder,’ which classifies workers from the most secure and well-paid jobs at the top, to the least secure and worst-paid jobs at the bottom.

Indonesia and India: similar challenges, different pathways 

Indonesia and India are both populous nations with a shared challenge: millions of people lack job security and adequate pay. When comparing the two countries, we find that Indonesia has made more progress in creating formal jobs than India.

In Indonesia, formal employment nearly doubled between 2001 and 2020. In contrast, India’s formal employment grew more slowly, with its share reaching only about 10% in 2022. This discrepancy might be due to Indonesia’s focus on labour-intensive manufacturing, which absorbed many workers into the formal sector. Meanwhile, India’s growth is driven more by service sectors, such as IT, where fewer jobs are created for the average worker.

Education and gender: intersecting inequalities

One of the key determinants of a worker’s position on the job ladder is education. In both countries, workers with higher levels of education are more likely to secure formal or upper-tier informal jobs. In Indonesia, university graduates have better chances of landing formal jobs compared to graduates in India, where the returns to education are lower.

Women in both Indonesia and India are more likely to be found in lower-tier informal jobs, especially in rural areas. However, in Indonesia, we’ve seen a growing share of women in formal wage jobs, highlighting the importance of labour market policies that address gender disparities to narrowing earnings gaps.

What can be done? 

Both Indonesia and India need to focus on policies that create more formal jobs, particularly for women and less-educated workers. This means investing in education, enforcing minimum wage laws more strictly, and developing industries that can absorb large numbers of workers into formal employment. By investing in education, addressing gender inequalities, and focusing on job creation in key sectors, both countries can help more workers climb the job ladder toward better, more secure employment.

For workers who may never make it to the top of the job ladder, improving the conditions in lower-tier informal jobs is crucial. This could involve providing better social protection, even for informal workers, and ensuring that these jobs offer livable wages and opportunities for advancement.

Kunal Sen is Director of UNU-WIDER.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.