Determinants of Income Inequality Among Provinces: Panel Data Evidence from Indonesia

Abstract

The purpose of this study is to determine the factors that have the potential to increase inequality in Indonesia. Inequality can be caused by economic and social factors, including unequal economic potential and activity, quality of human resources (measured by Human Development Index or HDI), population, investment, workforce, and government spending. Using panel data econometrics and taking advantage of the availability of macro data at the provincial level, the researcher investigates the factors that significantly influence inequality in 2010-2017 and proposes the economic and social factors need to improve in the near future. The results show that Gross Regional Domestic Product as a representation of the potential and magnitude of economic activity at Provincial Level has a significant positive influence, as well as the variables of government spending and Labor Force Participation Rate. Meanwhile, HDI and population as social factors have a significant negative effect on income inequality. The results of the individual effect show that the provinces that have the smallest individual values in reducing the Gini Ratio are the Provinces of West Papua and the Bangka Belitung Islands. Meanwhile, the provinces that have the greatest influence in increasing the Gini ratio are West Java, DI Yogyakarta, and Banten.