Ph.D Student in Economic Science, Faculty of Economic and Business Syiah Kuala University Banda Aceh, Indonesia, Lecture in Faculty of Islamic Economics and Business, State Islamic University Ar-Raniry, Banda Aceh Indonesia
The main purpose of our study is to determine the causality relationship between economic growth, regional minimum wages (RMWs), unemployment rate and labor force participation rate (LFP). Using cross-section data set of 27 provinces from Indonesia for the period of 2003-2015, data analyzed using panel co-integration test, panel vector error correction model, and Granger causality test. Panel co-integration test indicates that there is a long-run relationship between the variables. In the long-run, LFP positively related to the economic growth, and negatively related to RMWs. The unemployment is positively related to both the economic growth and RMWs. In the short-run, RMWS has a significant and positive effect on economic growth. The unemployment and LFP have a negative and significant effect on RMWs. LFP has a negative and significant effect on unemployment and RMWs has a positive and significant effect on LFP. Furthermore, economic growth has a negative and significant effect on LFP. The result of Granger causality test points out that there is a bidirectional causality relationship between economic growth and RMWs and between RMWs and LFP. In addition, unemployment rate causes RMWs, and LFP causes unemployment.
Keywords: Economic growth, regional minimum wages, labor force participation, unemployment and panel vector error correction model
JEL classification: J31, O4, R23