Overview

Original Research

EMPLOYMENT ABSORPTION IN INDONESIA: REGIONAL HETEROGENEITY AND THE TRANSMISSION MECHANISMS OF WAGES AND GOVERNMENT EXPENDITURE

AYU LATIFAH ALFISYAHRIN, SANUSI FATTAH, NUR DWIANA SARI SAUDI and AMANUS KHALIFAH FIL’ARDY YUNUS.

Vol 21, No 07 ( 2026 )   |  DOI: 10.5281/zenodo.21713705   |   Author Affiliation: Student of Economics Doctoral Program, Faculty of Economics and Business, Hasanuddin University, Makassar, Indonesia, Islamic Economics and Business Department, Faculty of Economics and Business, Hasanuddin University, Makassar, Indonesia 1, Department of Economics, Faculty of Economics and Business, Hasanuddin University, Makassar, Indonesia 2,3,4.   |   Licensing: CC 4.0   |   Pg no: 97-113   |   Published on: 31-07-2026

Abstract

Employment creation remains an important challenge in Indonesia due to differences in labor market conditions across regions of the country. This study examines whether wages and government expenditure affect employment differently in Western and Eastern Indonesia. Using balanced panel data from 33 provinces from 2010 to 2019, separate simultaneous equation models are estimated for 20 provinces in Western Indonesia and 13 provinces in Eastern Indonesia. The analysis considers investment, human capital, and economic growth as transmission mechanisms that link wages and government expenditure to employment absorption. The results show that wages do not have a significant direct effect on employment absorption in both regions. However, wages significantly increase investment and human capital in both Western and Eastern Indonesia. Investment contributes positively to economic growth only in Western Indonesia, but does not significantly increase employment absorption in either region. Human capital, measured by average years of schooling, has a significant negative relationship with employment absorption in both regions, indicating a mismatch between educational attainment and labor market demand. Government expenditure significantly increases investment in both regions but does not have a significant direct effect on employment absorption. Likewise, its effects on investment and economic growth are not significant. The findings also show that the mechanisms influencing employment differ across regions, with investment playing a greater role in Western Indonesia, while human capital remains an important factor in both regions. These findings suggest that employment policies should consider regional economic differences and focus on strengthening investment, human capital, and labor market conditions to improve employment absorption in Indonesia.

Keywords

Employment Absorption; Wages; Government Expenditure; Regional Disparities; Simultaneous Quation Model; Indonesia.