THE EFFECT OF INFLATION AND WAGES ON UNEMPLOYMENT IN EAST JAVA PROVINCE

Abstract

Unemployment is a major challenge in the way of national and regional economic development. Unemployment indicates low labour absorption. This is partly attributable to high rate of inflation  (Karanassou et al., 2010; Mankiw, 2003). Unemployment is also influenced by wages (Case et al., 2007). This research was conducted to analyze the effect of inflation and labour wages on unemployment in East Java. Secondary data published by the Central Statistics Agency for the period 2010 – 2014 is used in the current study to explore this relationship. Samples are taken from seven cities in East Java Province. The panel analyzes the data modelling using the Eviews application software, Version 8. The Fixed Effect model analysis shows that simultaneously, the inflation variable and the wage rate affect unemployment rate in East Java, as indicated by a probability coefficient of 0.000 less than 0.05. The partial test results also show a significant effect, with a probability coefficient of 0.0434 (inflation) and 0.0012 (wages), respectively. The increase in inflation contributed to the rise in unemployment by 1,544.96 against an increase inflation by 1%. The contribution of increased wages to unemployment decreases by 0.0095, assuming the other variables are fixed. The coefficient of determination R² of 0.78 shows that inflation and wages can explain the variation of 78% of the unemployment rate in East Java Province. Other variables outside the model determine the rest (22%).