Introduction Informality remains a defining feature of labor markets across Southeast Asia, where many workers continue to operate in low-productivity activities despite sustained economic growth. In Indonesia, as highlighted in the Asian Development Outlook 2026, informal employment still accounts for a substantial share of total employment even as the economy expands. This suggests that the central challenge is not informality itself, but the limited ability of workers and firms to move into more productive activities. As economies become more technologically sophisticated and integrated into regional and global value chains, these transitions become increasingly important. Firms need workers with stronger technical, problem-solving, and interpersonal skills, while workers need pathways into sectors and occupations that offer higher productivity and better-quality jobs. Digital transformation can support these transitions by improving job matching, lowering the costs of formalization, strengthening worker capabilities, and helping firms adopt more productive technologies. Using Indonesia as a case study while drawing broader lessons for Southeast Asia, this article argues that reducing informality requires moving beyond a focus on job creation alone. The priority is to help workers and firms move into higher-productivity activities, with digital transformation serving as an important enabler alongside skills development and firm upgrading. Informality Reflects Incomplete Structural Transformation Informality continues to constrain productivity growth and labor market outcomes across Southeast Asia. Figure 1 shows that informal employment continues to account for more than half of total employment in Indonesia, even as the economy expands. Much of recent job creation has occurred in sectors characterized by low productivity, limited technology adoption, and restricted access to social protection. Figure 1: Formal and Informal Employment Shares Source: Statistics Indonesia. From a structural transformation perspective, informality reflects the economy's limited ability to reallocate workers from lower- to higher-productivity activities. Many workers remain concentrated in low-productivity sectors, while sectors with greater productivity and growth potential account for only a small share of employment. As a result, economic expansion does not necessarily lead to sustained productivity growth or widespread improvements in job quality. Addressing this challenge requires more than job creation alone; it requires enabling workers and firms to move into more productive activities as economies evolve. Skills and Firm Capabilities Constrain Movement into Higher-Productivity Activities A key factor underlying persistent informality is the segmentation of labor markets by education and skills. In Figure 2, data from the National Labor Force Survey show that formal employment is concentrated among workers with higher levels of education, while workers with lower educational attainment are disproportionately represented in informal employment. Figure 2: Educational Composition Within Formal Employment by Sector, 2024 ICT = information and communication technology.Source: National Labor Force Survey (Sakernas) 2024, Statistics Indonesia. Higher-productivity sectors increasingly demand workers with stronger problem-solving, technical, and interpersonal skills. Yet many workers lack the skills needed to access these opportunities. At the same time, firms frequently report difficulties finding workers with the competencies they require, highlighting broader challenges in skills development and labor market matching. Labor reallocation has also been slow. Workers have moved more into agriculture and lower-productivity service activities than into sectors associated with faster productivity growth. As economies modernize and integrate into more complex value chains, demand for nonroutine skills involving problem-solving, communication, and adaptability continues to increase. However, the supply of these skills has not kept pace, leaving many workers unable to access higher-productivity opportunities. Skills alone, however, are not enough. Workers can move into higher-productivity employment only when firms are able to upgrade, expand, and adopt more productive technologies. Evidence from Innovate Indonesia: Unlocking Growth through Technological Transformation published by the Asian Development Bank (ADB) suggests that skill shortages and firm-level barriers to technology adoption jointly constrain structural transformation. Many firms, particularly in manufacturing, continue to rely on basic technologies, while only a small minority have adopted advanced digital solutions. These constraints reinforce one another. Limited firm upgrading reduces demand for higher-level skills, while shortages of skilled workers constrain firms' ability to adopt new technologies and expand. Together, skills and firm capabilities shape the pace and direction of structural transformation. Table 1 summarizes the skills associated with movement into higher-productivity employment and policy approaches adopted internationally. Table 1: Skills and Policy Approaches for Transitioning to More Productive Employment: International Experience Skill area Examples Why it matters for formal job creation Illustrative policy approaches Technical and digital Digital literacy and data processing in manufacturing, ICT, and finance Enables workers and firms to adopt and use modern technologies in production Industry-led training systems (e.g., Brazil SENAI) Cognitive Problem-solving and analytical thinking across manufacturing and modern services Supports movement into nonroutine, higher-productivity roles Firm-linked training and applied programs (e.g., Denmark KOMP-AD) Interpersonal Communication and teamwork in services and customer-facing activities Facilitates coordination in formal services and modern production systems Apprenticeships and workplace-based learning (e.g., India apprenticeship programs) Adaptive Learning ability and flexibility across sectors undergoing technological change Enables workers to adjust to changing technologies and move across jobs and sectors Lifelong learning systems (e.g., Singapore SkillsFuture) Source: Asian Development Bank. 2020. Innovate Indonesia: Unlocking Growth through Technological Transformation (Table 5.2 and Box 5.5; adapted and synthesized). Digital Transformation as an Enabler Digital transformation can support structural transformation by reducing barriers that prevent workers and firms from moving into more productive activities. By improving information flows, lowering transaction costs, and expanding access to markets and services, digital technologies can facilitate the movement of labor and firms toward higher-productivity activities. For workers, digital platforms and labor market information systems can improve job matching by connecting individuals to opportunities more efficiently and reducing information gaps. Digital credentialing systems can also support mobility across occupations and sectors. For firms, digital technologies can lower operating costs, improve market access, and facilitate participation in more sophisticated value chains. Digital public infrastructure can further reduce barriers to formalization and expand access to financial services. Indonesia's experience with the Quick Response Code Indonesian Standard (QRIS) illustrates this potential. By providing an interoperable digital payment system, QRIS has expanded access for micro and small enterprises while lowering the costs of participating in the formal economy. However, significant barriers remain. Firm-level evidence indicates that financial constraints and shortages of skilled workers are among the main obstacles to technology adoption. Figure 3 shows that technical uncertainty, organizational resistance, and infrastructure gaps further limit firms' ability to upgrade. Figure 3: Barriers to Technology Adoption among Manufacturing Firms in Indonesia Source: Asian Development Bank. 2020. Innovate Indonesia: Unlocking Growth through Technological Transformation. In Table 2, international experience shows that reducing adoption barriers while aligning skills systems with firm needs is important for scaling productivity gains from digital transformation. Digital technologies alone cannot drive structural transformation, but they can accelerate when complemented by investments in skills, innovation, and firm capabilities. Table 2. Reducing Technology Adoption Barriers: International Approaches Approach Illustrative example What it helps solve Plug-and-play and low-cost technologies Industrial Value Chain Initiative (Japan); Digital Manufacturing on a Shoestring (United Kingdom) Lowers upfront costs and enables SMEs to adopt affordable and modular digital solutions Centralized and curated technology platforms Tech Depot (Singapore) Reduces information, coordination, and financing barriers through vetted solutions and grant support SME-focused applied digital support Made Smarter Adoption Programme (United Kingdom); SMEs Go Digital (Singapore) Builds firm capabilities through hands-on support, demonstration projects, advisory services, workforce training, and tailored digital implementation support Industry-linked support systems A*STAR and SME Centres (Singapore); Smart Factory Initiative (South Korea); Manufacturing Extension Partnership (United States) Strengthens links between technology providers, skills institutions, and firms to accelerate capability-building, technology diffusion, and industrial upgrading across sectors Source: Asian Development Ban. 2020. Innovate Indonesia: Unlocking Growth through Technological Transformation (Box 5.4; adapted and synthesized). These lessons extend beyond Indonesia. Across Southeast Asia, many economies continue to face persistent informality, uneven productivity growth, and widening skill gaps, while firms face growing pressure to adopt new technologies and participate in increasingly sophisticated production networks. Implications First, labor market systems need to better support worker mobility. Strengthening labor market information systems, job-matching platforms, and portable certification mechanisms can help workers move across sectors and occupations as labor demand evolves. Second, skills systems must be more closely aligned with industry needs. Expanding technical and vocational education, apprenticeships, and firm-led training can help workers acquire the technical, cognitive, interpersonal, and adaptive skills increasingly demanded in higher-productivity activities. Third, strengthening firm capabilities is essential. Improving access to innovation infrastructure, technical advisory services, technology transfer mechanisms, and financing for technology adoption can help firms upgrade and expand. Initiatives such as the Pusat Industri Digital Indonesia (PIDI) 4.0 can play an important role in supporting industrial upgrading, technology diffusion, and workforce development. Fourth, digital technologies and public infrastructure should be leveraged as enablers of structural transformation. Investments in interoperable payment systems, digital identity systems, and labor market platforms can reduce transaction costs, improve matching, and lower barriers to formalization. Indonesia’s experience with QRIS demonstrates how such systems can expand participation in the formal economy. More broadly, policies that support firm upgrading in labor-intensive manufacturing and modern services remain important, as these sectors can absorb workers transitioning from informal activities while generating productivity gains. Aligning labor, industrial, skills, and digital policies will be critical to ensuring that technological change translates into productivity growth, decent work, and more inclusive development outcomes across Southeast Asia. Ask the Experts Priasto Aji Economist, Indonesia Resident Mission, Asian Development Bank Priasto Aji is an economist at the Asian Development Bank’s Indonesia Resident Mission. He conducts macroeconomic surveillance and policy‑oriented research, contributing regularly to the Asian Development Outlook series. His work focuses on structural reform, digital transformation, and industrial upgrading in Indonesia, and he is actively engaged in regional economic policy dialogue in Southeast Asia. He holds an MSc in Business Economics from the University of Strathclyde in the UK and a PhD in Economics from the University of Siena in Italy. Follow Priasto Aji on Putri Riswani Halim Labor Economist, Strategic Support Team, Minister of Manpower of Indonesia Putri Riswani Halim is a labor economist affiliated with UNU-WIDER as a PhD Fellow and research consultant and a former Visiting Researcher at King’s College London. She holds a PhD in Economics from Padjadjaran University, Indonesia. Her research focuses on labor markets, economic development, inequality, and applied economic research. Follow Putri Riswani Halim on Carlos López-Gómez Head of Unit, IfM Engage, Institute for Manufacturing, University of Cambridge Carlos López-Gómez is head of unit at IfM Engage, the knowledge transfer arm of the Institute for Manufacturing, University of Cambridge, where he leads work on industrial and innovation policy. His team advises governments, international organizations, and development banks on technology, innovation, and competitiveness. He has held international roles at the Japan Science and Technology Agency and the University of Tokyo. He holds a PhD from the University of Cambridge and is a Fellow of Churchill College. Follow Carlos López-Gómez on Leave your question or comment in the section below: View the discussion thread.