Demographic Dividend and Manufacturing Employment Absorption in Indonesia: Does Human Capital Quality Moderate Regional Employment Deindustrialization?

Abstract

Indonesia is entering the peak of its demographic dividend even as the manufacturing sector keeps losing share, a pattern of premature deindustrialization that threatens its path to high-income status. Deindustrialization is conventionally measured by the manufacturing share of output, yet the demographic dividend is fundamentally about labor supply. This study measures deindustrialization from the labor side, namely the share of manufacturing workers in total employment, and compares it with the output-based measure. Using a panel of 33 provinces from 2010 to 2021 (391 observations), it applies two-way fixed effects, an interaction model with human capital, and separate estimates for the Western and Eastern regions. The results differ by measure. With the output measure the association is not significant, whereas with the employment measure the economic support ratio is positively and significantly associated with the manufacturing employment share, with markedly higher explanatory power and the effect strengthens with years of schooling. The association disappears under a first-difference specification and the moderation weakens without the pandemic years, so it is reported as an association rather than a causal relationship. A subsector decomposition shows that surging manufacturing output in nickel provinces is not always matched by employment: in Central Sulawesi the output share rose 22.5 points but the employment share only 3.3 points. The findings position skill-based, labor-absorbing industrialization as a priority for inclusive development.

Keywords:  demographic dividend, employment absorption, human capital, premature deindustrialization, nickel downstreaming