The middle-class crisis

and how to fix it

Krisna Gupta

April 25, 2025

About me

Covers

  • What is middle-class?

  • What happens with the Indonesian middle-class?

  • What to do about it?

  • Are we heading into the right direction?

Why middle-class matter?

  • Typically highly educated, entrepreneurial, able to tolerate a degree of risk.

  • Net-saver, helps with capital deepening.

  • Large consumption and are willing to spend more for quality products.

  • Net tax payer, pays around 50.7% of tax revenue. (84% including aspiring middle class).

What is a middle-class?

class Definition
Poor/miskin Below poverty line
Vulnerable/rentan < 1.5x pl
Aspiring middle class/calon kelas menengah <3.5x poverty line
Middle class/kelas menengah <17x pl
Upper class/kelas atas >17x pl

Poverty line

  • Poverty line (Garis Kemiskinan, GK) measures how much money a person needs in a month to meet basic needs.

  • The number varies by province.

  • national average for cities is around 616k IDR, 567k IDR for rural areas.

Classes in Jakarta

class Definition
Poor/miskin <846k
Vulnerable/rentan <1,267.5k
Aspiring middle class/calon kelas menengah <2,957.5k
Middle class/kelas menengah <14,365k
Upper class/kelas atas >14,365k

Jakarta’s UMR is 5,067,381 IDR, which already give you a “comfortable” middle class living standard if you are single.

Consumption growth

Increasingly carrying consumption growth, at 12% growth rate 2002-2016

Middle class in Indonesia

Middle class in Indonesia

Middle class in Indonesia

Incidence curve

Education

Tertiery education plays an extremely important role.

Pisa

Indonesia’s PISA score is regressing, and comparatively bad

Informality

Higher class works in more formal job

Jobs

Most jobs come from wholesale/retail and manufacturing. Creating good jobs is the key for middle-class growth. Around half of middle class still work at low productivity services.

Good jobs

Good jobs

Good jobs

Top labor absorbers

KBLI Sector Number of HHE
47112 Retail trade (traditional) 3,285,594
56103 Food stalls 1,167,102
49424 Motorcycle ride-hailing 1,112,180
56102 Low-end food stalls 1,094,288
56104 Food traders with mobile/nonpermanent premises 839,678
96999 Other individual service 672,702
14120 Tailoring of clothes to order 513,358
47192 Retail mainly not fbt (grocery items), not in department stores 488,283
47992 Retail trade of food, beverage or tobacco commodities from manufacturing industry 432,801
45407 Motorcycle repair and maintenance 411,656

Jobs

  • Most Indonesian jobs are of low quality, informal (around 75%), pays lower than middle-class income (also 75%).

  • Two key factors to grow the Indonesian middle class:

    • Improving the quality of education and enrollment towards tertiery education.

    • Creating more middle-class jobs

Creating jobs

  • Indonesia has a “hollow middle” problem: Very large size of micro enterprises and large enterprises, small numbers of small and medium enterprises.

  • There seem to be a low level of mobility of enterprises. Various policy can lead to this type of problems.

  • Improving small, household enterprises will also benefit the creation of better paying jobs.

Policy recommendations

  • Integrating small firms to the global value chain (GVC) is an important predictor of a growing household-led enterprises.

  • Hub-spoke model should be used to help spillover of knowhow from FDI, where small firms benefited the supply chain brought by FDI.

  • Labor market efficiency measures: lower searching cost for firms e.g., making KarirHub a bit more mainstream.

  • Measures that Strengthens education and skills.

References