The Effect 0f Regional Minimum Wage, Educational Attainment And Industrial Investment On Labor Absorption In The Manufacturing Sector
DOI:
10.46729/ijstm.v7i5.1458Published:
2026-08-30Downloads
Abstract
This study aims to comprehensively analyze the effect of Regional Minimum Wage (UMR), educational attainment, and industrial investment on labor absorption in Indonesia's manufacturing sector. Structural transformation positions the manufacturing sector as a strategic pillar in formal employment creation and the reallocation of surplus labor. Employing a quantitative approach with balanced panel data covering 34 provinces in Indonesia from 2017 to 2024 (272 observations), the econometric model is estimated using the Fixed Effect Model (FEM) with Driscoll-Kraay robust standard errors to resolve groupwise heteroskedasticity, serial autocorrelation, and cross-sectional spatial dependence. The empirical results reveal that: (1) Regional Minimum Wage exerts a statistically significant negative effect on manufacturing labor absorption (β = -0.218, p < 0.05), validating neoclassical theory regarding wage rigidity that incentivizes capital-for-labor substitution in labor-intensive industries; (2) Educational attainment, proxied by mean years of schooling, has a positive and significant effect on labor absorption (β = 0.145, p < 0.01), substantiating that human capital quality is essential for adapting to modern technology; and (3) Industrial investment (DDI and FDI) significantly fosters labor absorption (β = 0.092, p < 0.05), although its elasticity is moderate due to capital-deepening trends. These findings recommend productivity-indexed minimum wage formulas, accelerated vocational link-and-match curricula, and targeted fiscal incentives to prevent premature deindustrialization.
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