Jakarta. Indonesia's continuing wave of layoffs risks evolving into a broader economic slowdown as weakening household purchasing power threatens the country's main growth engine, according to economists.

The warning comes despite Indonesia maintaining solid GDP growth, highlighting a widening disconnect between economic expansion and job creation.

Yusuf Rendy Manilet, an economist at the Center of Reform on Economics (CORE) Indonesia, said prolonged layoffs would directly hit household consumption, which remains the largest contributor to Indonesia's gross domestic product.

"A decline in purchasing power will suppress demand, forcing companies to cut production, which could then trigger another round of layoffs. This cycle risks slowing economic growth over the medium term," Yusuf said on Sunday.

Yusuf said that Indonesia's main challenge is no longer merely slower economic growth but the quality of that growth, which has failed to generate sufficient employment.

While economic growth above 5% appears encouraging, he said its benefits have yet to translate into stronger labor market conditions, creating what economists describe as jobless growth, an economy that continues expanding while its capacity to create jobs weakens.

Data show investment grew around 12.7% in 2025, while employment increased by only about 10.4%. At the same time, the amount of investment required to create a single job has continued to rise.

"In other words, every additional investment is generating fewer jobs, meaning growth has yet to become truly inclusive," Yusuf said.

He acknowledged that global headwinds have weighed on businesses through weaker export demand and rising geopolitical uncertainty. However, he argued that domestic structural issues remain the bigger challenge.

Indonesia continues to grapple with high energy costs, weakening industrial competitiveness, regulatory uncertainty, and an influx of cheap imported goods. These pressures have made it increasingly difficult for labor-intensive industries such as textiles, garments, and footwear to expand, despite being among the country's largest employers.

Yusuf also noted that rising investment has not translated into stronger job creation because much of it has flowed into capital-intensive industries, including mineral downstream processing and basic metals.

"These sectors do increase value-added output and exports, but production relies heavily on technology and automation, so labor demand remains relatively limited," he said.

Investment efficiency also remains a concern. Although Indonesia's Incremental Capital Output Ratio (ICOR) has improved, it remains relatively high compared with several regional peers, reflecting persistent logistical costs, lengthy bureaucracy, and other economic inefficiencies.

Meanwhile, elevated industrial gas prices and competition from cheap imported products continue to erode corporate profit margins.

"As profit margins shrink, many businesses choose to improve efficiency through automation rather than expand hiring," Yusuf said.

He urged the government to prioritize the quality—not merely the volume—of investment. Fiscal incentives, he said, should be tied to formal job creation, while labor-intensive industries should receive support through lower energy and logistics costs and stricter oversight against dumping practices.

"Economic success should not be measured solely by high GDP growth, but by whether that growth creates productive jobs and improves public welfare more broadly," Yusuf said.

The warning comes as layoffs continue across multiple sectors. Data from the Ministry of Manpower show more than 88,000 workers lost their jobs throughout 2025, while another 23,470 workers were laid off between January and May 2026. Most recently, TikTok reportedly cut jobs in several countries, including Indonesia.

The figures stand in contrast with Indonesia's economic performance. Indonesia’s Center Statistics Agency (BPS) recorded GDP growth of 5.11% in 2025, accelerating to 5.61% in the first quarter of 2026, underscoring the paradox of solid economic expansion alongside weak employment absorption.

Government data also show that 705,932 workers lost their jobs between 2020 and 2025.

Tadjuddin Noer Effendi, a professor at Gadjah Mada University's Faculty of Social and Political Sciences, warned that layoffs would have far-reaching economic and social consequences.

"Layoffs will increase open unemployment, reduce household income, weaken purchasing power, raise the risk of poverty among affected families, and potentially lead to higher crime rates," he said.

Tadjuddin argued that one of the main drivers behind the surge in layoffs was the relaxation of import restrictions under Trade Minister Regulation No. 8/2024. Although intended to facilitate raw material imports, the policy has intensified competition for domestic labor-intensive industries.

"The policy remains controversial. Domestic industries, particularly textiles, footwear, ceramics, and consumer goods, now face tougher competition from cheaper imported products. As local manufacturers lose market share, production inevitably declines," he said.

Falling production has forced many companies to cut costs through workforce reductions.

"To sustain their operations, many domestic companies have had no choice but to reduce their workforce through layoffs," he added.

Several economic institutions project layoffs will continue through the second half of 2026, with manufacturing expected to be the hardest-hit sector. Manufacturing could shed an additional 8,700-12,100 jobs, followed by services with 3,300-4,500 jobs and parts of the agricultural sector with around 3,300-3,600 job losses.

More specifically, Tadjuddin identified manufacturing, garments, footwear, ceramics, electronics, automotive, retail, and logistics as the industries most vulnerable to global supply chain disruptions, rising production costs, and weakening demand.

He said government efforts have yet to fully stem the wave of layoffs and called for stronger coordination among policymakers, businesses, and labor unions.

Tadjuddin said that the government's Layoff Task Force should immediately formulate strategic measures, including tax incentives, subsidized lending for labor-intensive industries, and stricter supervision of imports that could harm domestic manufacturers. He also urged companies to treat layoffs as a last resort.

"Before resorting to layoffs, companies should consider alternatives such as reducing working hours, implementing shift rotations, limiting new hiring, cutting overtime, offering voluntary early retirement, or improving operational efficiency in areas unrelated to labor," he said.