Testing for convergence clubs in real wage across Indonesian provinces from 2008 to 2020

Abstract

This study evaluates empirically the convergence in real wages across 34 Indonesian provinces. The authors apply the club convergence test on real wage data at the province level from 2008 to 2020. An overall convergence in real wages has not been found. Instead, three significant club convergences have been identified. Furthermore, regional factors that influence club convergence formation are investigated by using the ordered logit model. It has been found that club convergence formation is jointly influenced by the following factors: share of employment in the manufacturing sector, investment share to GDP, labour force participation rate, and the initial level of wage. The findings support the evidence of club convergence studies that emphasise the role of the initial condition and regional characteristics on the formation of club convergence. The results should alert national and provincial governments to synchronise policies promoting sound and competitive labour markets across provinces from a policy standpoint.