The study provides evidence on the transition and growth of the formal sector in the Indonesian economy. It utilizes data from the National Labour Force Survey (SAKERNAS) for tracking the previous work status of workers as formal or informal workers. The study also examines the implication of formalization of employment for the different rates of earnings of formal sector workers, given their human capital characteristics and different industries of employment. The study finds that the growth of employment in the formal sector is mainly the result of entry of younger and better educated new entrants. Although there is some mobility from the informal to the formal sector, the results show that individuals who were previously working in the informal sector are less likely to move into formal sector. In terms of earnings, there is evidence of scarring effects: individuals who are initially in the formal sector earn more than individuals who are initially in the informal sector.