Determinants of Income Inequality in Indonesia: Case Study of 33 Provinces in 2011-2016

Abstract

This study intends to determine factors that influence income inequality in Indonesia based on regional data. The independent variables are macroeconomic (economic growth, unemployment, and inflation), fiscal (expenditure) and financial (the tradable credit). By applying the fixed effect panel framework, the study concludes that macroeconomic and fiscal factors have a significant impact on income inequality. In contrast to previous studies, the impact of economic growth on income inequality is positive. On the other hand, the fiscal variable has no impact on income inequality as most regional expenditures are used for unproductive purposes, such as payroll, goods, and services.