The Impact of Fiscal Desentralisation on Income Inequality and Labor Market Performance in East Kalimantan Province, Indonesia: A Structural Model Analysis

Abstract

This paper elaborates the effects of fiscal decentralisation in Eastern region of Indonesia by taking East Kalimantan Province as focused area. The main objective of this paper is to analyse the impact of natural resource revenue and capital expenditure on welfare indicators (income inequality and labor market outcome approached by labor absorptions) directly and indirectly through sectoral economic performance. Here, structural model of econometrics technique is used to find those effects among variables. Empirical results from this research show that fiscal decentralisation is able to reduce the degree of inequality particularly from the expenditure performance rather than income side. This is indicated by the negative findings on the effects of direct capital expenditure on the Gini Index. These findings are consistent with the hypothesis and significant in terms of statistical calculations. The expenditure side is also able to increase the ability of the labor market to absorb labor force in large numbers, although not significant statistically.

Keywords: Fiscal desentralisation; income inequality; labor; Gross Domestic Product