Income Inequality between Provinces in Indonesia

Abstract

This study aims to examine the level of income inequality between provinces and its determinants. Using Indonesian data in 2022, we use Centre of Gravity method to examine the level of inequality between eight provinces in Sumatra Island. This study further examines the determinants of income inequality based on ten provinces in Sumatra Island over 2015-2019 using balanced Panel Data Regression sourced from the Indonesian BPS-Statistics and Ministry of Environment and Forestry. It further adopted the Mediation Model to examine the effect of independent variables on income inequality through intervening variables. The Study established that only a relatively low level of inequality exist between provinces. A decrease in dependency burden on the worker can reduce income inequality through an increase in output per capita. Education has a weak effect on improving the environmental quality, but a strong effect on improving output per capita and reducing inequality. However, an increase in the dependency burden of workers can reduce output per capita but improve environmental quality. Finally, increasing environmental quality reduces inequality. Our employment of the centre of gravity method added on to the literature on income inequality. We further contribute by including workers education in explaining inequality. The role of the government is crucial in stimulating economy growth in the Aceh - North Sumatra and Jambi - South Sumatra - Lampung regions to break the concentration of inequality. In addition, the authority needs to provide an inclusive and pro-environmental development direction.