Simultaneous Connection Analysis of Wage Rates and Labor Absorption as well as Variables that Influence it

Abstract

The economic crisis in 1997 in Indonesia led to complexities in labor issues, particularly those that relate to low wages and labor absorption. Since 2000, the economy has improved and has given hope to better labor conditions in Indonesia. However, increased economic growth has been followed by high unemployment. This study aimed to examine the simultaneous connection among wage rates and labor absorption as well as variables that influence it. Simultaneous equations model were used in this study and data sources were investigated from panel data. The simultaneous test has shown that there was simultaneous connection between the wage rates and labor absorption. The 2SLS (two stage least squares) method with fixed effects was chosen as the best parameter estimation method. The test also revealed that the gross regional domestic product variable influenced the wage rates and labor absorption significantly. The regional minimum wage and education levels significantly affect the wage rates. While the variables of physical investment and the consumer price index significantly affects labor absorption.