Email this article REGIONAL OUTPUT AND OPEN UNEMPLOYMENT ACROSS INDONESIAN PROVINCES: A SPATIAL SIMULTANEOUS EQUATION APPROACH
Abstract
Indonesia’s regional output in 2024 reveals disparities among provinces, and open unemployment rates also differ between regions. In the context of the regional economy, regional output and unemployment can exhibit a reciprocal relationship and spatial interdependence among provinces, whereas most previous studies examine them using single-equation models. Therefore, this study aims to analyze the relationship between regional output, measured by Gross Regional Domestic Product (GRDP) at constant prices, and the open unemployment rate (OUR) by considering potential simultaneity and spatial dependence between provinces. This study uses cross-sectional secondary data for 38 provinces in 2024 from the Central Statistics Agency of Indonesia. The two-equation system is estimated using Generalized Spatial Two-Stage Least Squares (GS2SLS) with spatially autocorrelated errors and a k-nearest neighbor spatial weight matrix (k = 6) based on distances between provincial capitals. GRDP is positively and significantly associated with OUR (0.080; p = 0.015), as is average years of schooling (0.674), while the labor force participation rate is negatively associated with OUR (−3.848). In the GRDP equation, population is significant (0.725), whereas the coefficients of OUR (0.482) and domestic investment (0.206) are not significant under heteroskedasticity-robust standard errors. Exogeneity is not rejected, and spatial error dependence appears only in the OUR equation at the 10% level. The positive association disappears when Java is excluded or GRDP per capita is used, indicating a scale and composition effect. Higher regional output therefore does not coincide with lower open unemployment, so labor absorption needs separate policy attention, although the single cross-section limits causal interpretation.
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DOI: https://doi.org/10.20961/jaedc.v11i2.126975
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