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INCOME INEQUALITY IN EAST JAVA: A Test of the Kuznets Inverted U

Hypothesis

Setyo Tri Wahyudi

Department of Economics-Faculty of Economics and Business

Brawijaya University, Malang East Java

Corresponding: setyo.tw@ub.ac.id; setyo81@gmail.com

Abstract

East Java is one of the provinces in Indonesia with the highest economic growth

relative to the average national economic growth in recent years. The sectors having the

largest contribution to economic growth of East Java are: (i) trading, hotel, and restaurant, (ii)

manufacturing, and (iii) agriculture. However, such high economic growth does not spread

evenly in the entire regency as some regions are developed while there others not developing

yet. This indicates that the problem of imbalance development in East Java has not yet been

solved.

This study aims to identify income inequality, analyze factors that contribute to the

inequality as well as prove whether Kuznets hypothesis about inverted U curve are evident

for the case of East Java province. The data used are secondary data on city-level in East Java

in a period of 2008 – 2011. The analysis method conducted includes: (i) disparity analysis

using Williamson index, (ii) estimation of panel regression model, (iii) a test of Kuznets

hypothesis.

The study results show that most cities in East Java have value of Williamson index in

intermediate category (0.3<IW<0.7), showing a tendency to decline along the period of

study. In addition, variables of PDRB per capita and labor show significant influence on the

income inequality while these two variables have negative correlation. This means that the

increases in PDRB per capita or sum of labor will reduce the level of income inequality in

East Java, whereas IPM has no significant influence on income inequality. Furthermore, the

test of the Kuznets inverted U hypothesis shows that the relationship between income

inequality and economic growth in East Java is in a shape of inverted U curve. This is in

accordance with Kuznets hypothesis stating that in early stage of development, income

inequality will increase and will decline in a long term. Therefore, the Kuznets hypothesis

does apply to the province of East Java.

Keywords: Income inequality, Kuznets inverted U hypothesis, East Java.

1. BACKGROUND

The purpose of economic development is to create more prosperous, wealthy, and just

society. To reach such society requires potential and resources management possessed by

each region. To create prosperity, a collaboration between government, society, and private

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sector continues being done by every region in effort to manage potential and resources in

order to create job market as well as to stimulate the development of economic activities

(Arsyad, 1999). Although development policy has been directed to attain high economic

growth by taking advantage of potential and resources possessed, the success of development

is not even and there is an interregional inequality, especially income inequality. Alisjahbana

(2005) proposes that one of main problems of inequality in Indonesia is interregional

inequality as a consequence of the centralization of economic activities in the islands of Java

and Bali.

One of measurements frequently employed to evaluate the development performance

is GDP growth. An economy is said to be growing if the rate of economic activities is higher

than that of the previous period (Sadono, 1996). High and continuous economic growth is the

main condition for the sustainability of economic growth. Thus, every region always has to

set a target for high growth rate in the plan and goal of development. Although the GDP

measurement is frequently used to evaluate economic performance as well as represent

income rate per capita, its usage only views things on one perspective and thereby unable to

show how income is evenly distributed among people in reality. The rise in income per capita

does not mean that most people feel better about themselves. To get a clear picture, therefore,

the distribution of income needs to be measured.

East Java as one of provinces in Indonesia is frequently called the barometer of

national economy because the economic performance of East Java always represents the

highest growth performance relative to the average national economic growth. According to

the statistics of East Java (BPS, 2014), within the period of 2005 – 2013, East Java marked

higher economic growth compared to the national average. In 2013, the economic

performance of East Java reached 6.55%, weaker than that in 2012 at 7.22% but still higher

than that of national economy at only 5.78%. The major contributors to economic growth of

East Java are still dominated by 3 sectors, they are: trading, hotel and restaurant sector with a

contribution of 31.33%, followed by manufacturing sector and agriculture sector, each with a

contribution of 26.6% and 14.91%.

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Source: BPS East Java, 2014

Figure 1. Economic Growth of East Java and Indonesia, 2005-2013

Although various data and publications always place East Java as a region that is able

to have a higher economic growth rate than the national average, it does not necessarily mean

that the problems faced by East Java province have also ended. On the contrary, the issues of

poverty, unemployment as well as income inequality are still the classical problems that have

to be solved. Based on the data from BPS-Statistics Indonesia, the amount and percentage of

poor citizens in East Java during the period of 2008 to 2013 tended to decrease but still in a

large number, as poor rural become the main contributors to poverty in East Java. This

indicates that there is an uneven distribution of income among citizens living in urban and

rural areas. Therefore, it is natural if an urbanization act keeps on happening.

Table 1. Poverty in East Java, 2008-2013

Year

Total of Poor Citizens (in thousands)

Percentage of Poor Citizens

Poverty Line (IDR/Capita/Month)

Urban Rural Urban Rural Urban Rural

2008 2.438 4.581 13,15 23,64 183.408 155.432

2009 2.148 3.874 12,17 21 202.624 174.628

2010 1.873 3.655 10,58 19,74 213.383 185.879

2011 1.734 3.492 9,66 17,66 242.403 214.166

2012 1.605 3.354 8,9 16,88 253.947 234.556

2013 1.622 3.243 8,9 16,23 278.653 269.294

Source: BPS East Java, 2014

Based on these facts, the attainment of economic growth rate of East Java still leaves

some problems, especially the uneven distribution of income. This indicates that the usage of

5.84 5.86.11 6.16

5.01

6.687.22 7.27

6.55

5.69 5.5

6.356.01

4.63

6.226.49 6.23

5.78

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009 2010 2011 2012 2013

Jawa Timur NasionalEast Java Indonesia

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development performance measurement that is only focused on the improvement of

economic growth is not sufficient. What is more important, however, is how high economic

growth is able to play a role in improving the society’s prosperity as a whole. Economic

growth is supposedly able to reduce the disparity among citizens either in urban or rural areas

through the efforts to improve level of welfare, especially for those still below the poverty

line. Moreover, equal distribution of income as a whole shown by rate of increase in income

of the poor is greater than that of the rich. The purposes of this study are to (i) analyze

income inequality between regions in East Java, (ii) prove whether Kuznets hypothesis about

the trade-off between growth and equitable distribution or known as “inverted U curve”

hypothesis applies to East Java, and (iii) analyze factors that contribute to income inequality

in East Java.

2. INCOME DISTRIBUTION AND KUZNETS HYPOTHESIS

The main problem of income distribution is the income inequality among society groups in a

region. The disparity of income distribution is a classical problem faced by every country, not

only by developing but also by developed country. The difference lies in the proportion of

disparity rate as well as the way to solve it. The difference in ownership of resources and

production factors becomes one of the causes of disparity. According to neoclassical theory,

inequitable distribution of income caused by production factor ownership can be reduced

through an automatic adjustment process, that is the process of trickling down and spreading

so that new balance arises.

Hirschman (in Arsyad, 1997) proposes that economic development is seen imbalance

geographically, or uneven to all regions. In the beginning, economic growth is centered in

some regions as opposed to some other regions. In the next process of growth, these

differences will widen as there are various factors that cause difficulties for poor regions to

develop. Thus the role of government is needed. If a region is developing, the development

will bring influence on other regions. According to Hirschman, regions in a country can be

distinguished into poor regions and wealthy regions. If the distinction between the two is

narrowing, then there is a trickling down effect. On the other hand, if the distinction is

widening, then there is a polarization effect (Arsyad, 1997).

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Figure 2. Inverted U Curve (Kuznet Hypothesis)

The evolution of inequality in income distribution is initially dominated by what is

called Kuznet hypothesis. By using cross-section and time-series data, Kuznet finds an

inverted-U-shaped relation between income inequality and income rate per capita, where at

the beginning process of development the inequality tends to increase (divergence). However,

if the development keeps on continuing and capital mobility as well as labor run smoothly,

the inequality will decrease (convergence). This result is interpreted as an evolution of

income distribution in a transition process from rural economy to urban or industrial

economy (Abipraja, 2002).

Figure 2 shows that at the beginning process of development, inequality in income

distribution increases as a result of urbanization and industrialization process. At the ending

process of development, the inequality decreases when labors from rural or agricultural sector

come or when the share of agriculture is smaller in terms of production and income

generation (Tambunan, 2001). Kuznet mentions that among social, economic, and political

factors influencing this pattern, there are two critical factors including the concentration of

capital in high income group and the society shift from traditional agricultural sector to

modern industrial sector (Abipraja, 2002).

Various studies about income distribution in Indonesia using Kuznet hypothesis have

been carried out. Syafrizal (1997) in a title of “Economic Growth and Regional Inequality in

Western Indonesia” conducted a study about economic growth and regional inequality in

Western Indonesia using Williamson index analysis. The study result shows that generally

the rate of income inequality in Western Indonesia is lower than that of Indonesia as a whole.

Economic growth rate

Ine

qua

lity r

ate

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This indicates that equitable development between regions in Western Indonesia is relatively

better than the average condition in the entire Indonesia.

Prapti (2006) conducts a study on the correlation between economic growth and

income distribution in rural and urban areas of Central Java in a period of 2000 – 2005. The

study results show that although the rate of income inequality of population in 35 regions of

Central Java is relatively low, there is a linkage that the increasing economic growth will be

followed by the increasing rate of income inequality in major regions of Central Java.

Hartono (2008) analyzes the inequality in economic development in Central Java using

Williamson index with a conclusion that during the period of 1981 – 2005, development

inequality tends to increase. Variables of private investment per capita, labor rate, and

allocation of development funds per capita significantly contribute to the income inequality.

3. METHODS

This study employs secondary data covering 38 regions in East Java province in a period of

2010 – 2013. The data consist of regional GDP, inflation, investment, and employment data

obtained from BPS-Statistics Indonesia. The testing stages of this study are as follows:

1. Analysis of the level of inequality

Williamson index is a coefficient of weighted variation proposed by Williamson in 1965.

Williamson index is highly sensitive to measure the differences between regions and to

watch the trend of inequality that occurs. In this study, Williamson index is used to see

how high the rate if income inequality among regions in East Java, that is formulized as

follows (Sjafrizal, 2009):

𝐼𝑊 =1

𝑦 (𝑦𝑖 − 𝑦 )2

𝑝𝑖𝑝

𝑛

𝑖=1

Where:

IW = Williamson Index

yi = Regional GDP of region 1

𝑦 = Average regional GDP per capita of province

pi = Total of population of region 1

p = Total of population of province

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Williamson index has a value of between 0 and 1 (0 < IW <1). If the index value is

nearing 0, then the income inequality is smaller and if the index value is nearing 1, then

the inequality is bigger. Furthermore, based on the calculation results of Williamson

index as well as referring to the research by Bappenas (2013), this study will group

regions based on the level of income inequality, they are low level of inequality (IW <

0.3), intermediate level of inequality (0.3 ≤ IW ≤ 0.7), and high level of inequality (IW >

0.7). The purpose of grouping is to select several samples of region in each group for

further test to determine factors that influence the inequality in East Java. The

representation of regions on each level is expected to represent the real situation of

income inequality.

2. Analysis of panel regression model

The analysis of panel regression model is used to determine factors that influence the

level of income inequality in regions of East Java. The general model that will be

estimated is as follows:

IWit = β0 + β1PDRBit + β2IPMit + β3TKit + еit

Where:

IW : Williamson index

PDRB : Regional GDP

IPM : Human development index

TK : Total of labor aged above 15

3. Test of Kuznet hypothesis

Kuznet, who pioneered the analysis of historical growth patterns in developed countries,

proposes that in the early stages of growth, the distribution of income shows a tendency to

worsen, but will improve in the later stages. If the observation result is shown in a curve,

it will form an inverted U curve as shown in Figure 2. It is what is known as Kuznets

inverted U hypothesis. Referring to Kuznets hypothesis, this study will prove whether the

distribution of income in regions of East Java also shows a tendency as proposed by

Kuznet.

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4. RESULTS AND DISCUSSION

4.1 Overview of Economy of East Java

One of macroeconomics indicators that is mostly used to evaluate performance on

development is regional GDP or PDRB. Regional GDP is a total of added value of all goods

and services generated by all business units within a year. According to the report by BPS-

Statistics East Java, regional GDP of East Java in 2013 cumulatively grows by 6.55%

compared to 2012, exceeding national growth that is only 5.78% and other regions such as

Jakarta that grows by only 6.11%, West Java by 6.06%, and Central Java by 5.81%.

Meanwhile, the rate source of economic growth based on employment during 2013 shows

that all of the sectors experience positive growth, with the highest growth in communication

and transportation sector by10.43%. Furthermore, buildings sector grows by 9.08%, hotel and

restaurant sector grows by 8.61%, financial reserve and service grows by 7.68%,

manufacturing industry grows by 5.59%, and the lowest in agricultural sector that grows by

only 1.59%.

Source: BPS-Statistics East Java, processed. 2014

Figure 3. Comparison of Economic Growth of East Java and Indonesia

Although the data about economic development of East Java during the year of 2013

shows good results, high economic growth is still highly susceptible to inflation fluctuation.

The occurring price fluctuation will influence consumers buying power; high inflation rate

will increase prices that consequently reduce consumers buying power. The monthly inflation

in East Java during a period of 2008 – 2013 is shown in Figure 4. In 2013, inflation in East

5.19 5.67 5.744.77

6.14 6.35 6.3

5.86.11 5.94

5.01

6.687.22 7.27

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012

Jawa Timur Indonesia

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Java shows a fluctuating tendency with improving trend. Although the inflation is higher than

previous years, it is still better compared to 2008. In 2012, PDRB inflation declines into

6.25%. The declining inflation rate is a good indication because it shows that the production

cost expensed by economic actors in East Java decreases.

Source: BPS-Statistics East Java, processed. 2014

Figure 4. Monthly Inflation (yoy) East Java, 2008-2013

The success development in East Java is also indicated by the open unemployment

rate. Based on the publication of the Department of Labor, Transmigration, and Population in

East Java Province (2013), noting that the open unemployment rate in 2013 was successfully

reduced until 0,12 percent to 4 percent in 2013 compared to 2012 (4,12%), as well as the

labor force participation rate that was rose from 69,62 percent (2012) to 70,12 percent (2013).

Even so, the population growth rate that is still relatively high is one of the challenge for the

local government to reduce the unemployment rate.

4.2 Income Inequality in East Java

To determine the income inequality rate in East Java, Williamson Index was calculated.

Regional GDP per capita is used as the calculation basis, so that the value of the index is

strongly influenced by the disparity of regional GDP per capita. The more unequal the

growth of regional GDP, the higher the value of Williamson index. Using the data from

regency/city in East Java in 2007-2011 period, the Williamson index calculation results using

regional GDP at constant prices (panel a) as well as at current prices (panel b) is shown in

figure 5. Based on figure 5, it is known that the income disparity rate in regency/city in East

7.04 7.36

8.739.29

10.16 10.3911.26 11.36 11.39 10.96

10.459.66

8.00 8.207.71

6.976.01

4.01

2.90 2.65 2.99 2.68 2.813.62

4.233.75

3.173.86 4.23

4.85

6.47 6.836.05 5.94

6.406.96

3.82 3.93 3.974.47 4.58 4.62 4.66 4.97

4.51 4.86 4.564.505.14

5.896.75

6.20 5.83 5.93

8.39 8.06 7.78 7.55 7.537.59

0.00

2.00

4.00

6.00

8.00

10.00

12.00Ja

nu

ari

Feb

ruar

i

Mar

et

Ap

ril

Mei

Jun

i

Juli

Agu

stu

s

Sep

tem

ber

Okt

ob

er

No

vem

ber

Des

emb

er

2008 2009 2010 2011 2012 2013

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Java during the period of 2007-2011 is still high where most of the regency/city Williamson

index value greater than 0,5. Based onn that calculation, the city of Kediri and Surabaya were

excluded because the regional GDP value in both cities far exceeds the other regions.

(a) (b)

Figure 5. Williamson Index in Regency/City in East Java based on regional GDP

at Constant Prices (panel a) and at Current Prices (panel b)

0.000 0.500 1.000 1.500 2.000

Pacitan

Ponorogo

Trenggalek

Tulungagung

Blitar

Kediri

Malang

Lumajang

Jember

Banyuwangi

Bondowoso

Situbondo

Probolinggo

Pasuruan

Sidoarjo

Mojokerjo

Jombang

Nganjuk

Madiun

Magetan

Ngawi

Bojonegoro

Tuban

Lamongan

Gresik

Bangkalan

Sampang

Pamekasan

Sumenep

Kota Blitar

Kota Malang

Kota Probolinggo

Kota Pasuruan

Kota Mojokerto

Kota Madiun

Kota Batu

JAWA TIMUR

2010 2009 2008 2007

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The high difference between regional GDP per capita in regency/city, shown by

Williamson index in regency/city that is high, also caused Williamson index in East Java to

show a high number (IW is greater than 1). Meanwhile, if two cities in East Java (city of

Kediri and Surabaya) excluded from the calculation, Williamson index number in East Java

decreased significantly, IW number in East Java in intermediate category (0.3<IW<0.7).

When examined, Williamson index number in East Java during the periods of 2007-2011

showed a tendency to be fluctuate with a declining trend. This means that there was a slight

decline in economic disparities between regency/city in East Java, in the other words

indicating an increase in equity between regions in East Java province (table 2).

Table 2. Williamson Index in East Java

Year

IW in East Java

IW (at

Constant)

IW (at

Constant)*

IW (at

Current)

IW (at

Current)*

2007 1.040 0.711 1.537 0.563

2008 1.027 0.693 1.503 0.549

2009 1.027 0.694 1.481 0.546

2010 1.014 0.687 1.472 0.542

2011 1.027 0.696 1.498 0.550

Source : BPS-Statistics East Java Province, precessed. 2014

Exp. *) without the city of Kediri and Surabaya

Based on the calculation of Williamson index for all of the regency/city in East Java,

then a grouping between regency/city based on categories, those are low (WI < 0.3),

intermediate (0.3 < WI < 0.7), and high category (WI > 0.7) was done. Based on the

categorization, if the city of Kediri and Surabaya was included in calculation analysis, then

the Williamson index number was in the high category (WI > 0.7), meanwhile, if those two

cities was excluded in calculation analysis, then the Williamson index number was in the

intermediate category (0.3 < WI <0.7) (see table 2). Further, referring to the categorization

results, if using regional GDP at constant prices, there were 7 regencies with low level of

disparity, 8 regencies with intermediate level of disparity, and 21 regencies with high level of

disparity. Meanwhile, when using regional GDP at current prices, there were 8 regencies with

low level of disparity, 21 regencies with intermediate level of disparity, and 7 regencies with

high level of disparity (see Table 3).

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Tabel 3. Categorization of Williamson Index Based on Categories

Williamson Index

Categoris

Regency/City

At Constant Prices At Current Prices

High

(WI>0.7)

Pacitan, Ponorogo, Trenggalek, Blitar,

Kediri, Malang, Jember, Bondowoso,

Pasuruan, Sidoarjo, Jombang,

Nganjuk, Ngawi, Bojonegoro,

Lamongan, Gresik, Bangkalan,

Sampang, Pamekasan, Sumenep, City

of Malang

Kediri, Malang, Jember,

Pasuruan, Sidoarjo, Gresik,

City of Malang

Intermediate

(0.3 <WI<0.7)

Lumajang, Situbondo, Probolinggo,

Madiun, Magetan, Tuban,

Banyuwangi, Mojokerto

Ponorogo, Trenggalek,

Blitar, Pacitan, Lamongan,

Banyuwangi, Probolinggo

Lumajang,Tulungagung,

Jombang, Nganjuk, Ngawi,

Bondowoso, Situbondo,

Madiun, Magetan,

Bangkalan, Sampang,

Pamekasan, Sumenep,

Bojonegoro

Low

(WI<0.3)

Tulungagung, City of Blitar, City of

Probolinggo, City of Pasuruan, City of

Mojokerto, City of Madiun, City of

Batu

Mojokerto, Tuban, City of

Blitar, City of Probolinggo,

City of Pasuruan, City of

Mojokerto, City of Madiun,

City of Batu

Source: BPS-Statistics East Java Province, processed. 2014

An increase in disparity between regencies should be watched out because it could threat the

sustainability of the development. According to Sjafrizal (2008) the emergence of disparity

between regencies was caused by first, differences in natural resource, that is regency with

low disparity index tend to have limited resources with barren lands and agriculture became

the mainstay. This situation makes the growth rate low and lags behind the other regencies.

Second, differences in demographic codition, that is demographic area with mountains,

separated by the forest, sea, and hill become a barrier in investment activities. Transportation

expense for the production result become expensive so that become isolated. Third, the less

fluent the mobility of goods and services caused by the minimum fund to repair/construct will

make the production result of one region difficult to be marketed and does not develop.

Fourth, the concentration of economic activities on a region that is close to the source of the

raw materials, cheap human resources, and affordable transportation that makes the other

regions neglected. Finally, the allocation of development funds between regions that are less

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fair makes producing region less developed. Provision of infrastructure and public services

become limited and trigger a sense of dissatisfaction.

Model Estimation Result

The main focus that is analyzed in this research is how much the influence of regional GDP

per capita, human development index (IPM), and labor force variables toward income

inequality in regency/city in East Java province based on the calculation analysis of

Williamson index result. Based on Table 3, using purposive random sampling method, five

regency/city were selected for each category as a study sample. For the high WI category,

Kediri, Malang, Jember, Pasuruan, and Sidoarjo were selected; the intermediate WI category,

Pacitan, Ponorogo, Trenggalek, Blitar, and Lamongan were selected; whereas the low WI

category, Mojokerto, Tuban, City of Blitar, City of Probolinggo, and City of Pasuruan were

selected. The selection of regional representatives were expected to represent the income

disparity in regency/city in East Java.

Further, analysis of the factors that influence the level of income inequity between

regency/city in East Java Province were estimated using data panel method. Panel method

used because this model could show heterogenity for each cross section unit that became

sample in this study. In order that heterogenity could be displayed in model, so fixed effect

approaches or random effect aproach became the main options. So that Chow test was not

used in this study because if using pooled least square approach, heterogenity in each cross

section unit can not be estimated. Statistic basic to decide whether using fixed effect or

random effect approach was using Hausman test that is if the probability of Hausman test was

less than real level of 5 percent, so the model used was fixed effect model.

To perform the Hausman test, the hypothesis used were:

H0 = Random Effect Method

H1 = Fixed Effect Method

If P-Value Cross-section random < α significance, H0 rejected and H1 accepted or fixed effect

method used. Based on the estimation result, data obtained as follows:

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Table 4. Hausman Test Result

Correlated Random Effects - Hausman Test

Pool: East Java

Test cross-section random effects

Test Summary

Chi-Sq.

Statistic Chi-Sq. d.f. Prob.

Cross-section random 46.417472 3 0.0000

Source: Processed data, 2014

Table 4 showed Hausman test result to choose fixed and random model. Based on

probability value, known that hausman test probability < real level of 5 percent means model

chosen was fixed effect model. Fixed model test result displayed in table 5. Based on table 5,

known that PDRB and labor force variable showed significant influence on income disparity

level (Williamson index), while IPM variable did not significantly influence on disparity

level.

Table 5. Fixed Effect Model Test Results

Dependent Variable: IW?

Method: Pooled Least Squares

Sample: 2008 2011

Included observations: 4

Cross-sections included: 15

Total pool (balanced) observations: 60

White cross-section standard errors & covariance (d.f. corrected)

Variable Coefficient Std. Error t-Statistic Prob.

C 0.455946 0.474336 0.961230 0.3419

PDRB? -0.008250 0.002598 -3.175749 0.0028

IPM? 0.011910 0.007610 1.565057 0.1251

TK? -1.17E-06 1.82E-07 -6.438010 0.0000

Fixed Effects (Cross)

PACITAN--C -0.383693

PONOROGO--C -0.054257

TRENGGALEK--C -0.288124

BLITAR--C 0.033645

LAMONGAN--C 0.177367

KEDIRI--C 0.356204

MALANG--C 1.045279

JEMBER--C 1.129032

PASURUAN--C 0.445173

SIDOARJO--C 1.025996

MOJOKERTO--C -0.322197

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TUBAN--C -0.150178

City of BLITAR--C -1.031902

City of PROBOLINGGO--C -1.051883

City of PASURUAN--C -0.930461

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.981722 Mean dependent var 0.539583

Adjusted R-squared 0.974323 S.D. dependent var 0.305300

S.E. of regression 0.048921 Akaike info criterion -2.953887

Sum squared resid 0.100518 Schwarz criterion -2.325583

Log likelihood 106.6166 Hannan-Quinn criter. -2.708123

F-statistic 132.6938 Durbin-Watson stat 1.647351

Prob(F-statistic) 0.000000

Source: Processed data, 2014.

Based on the table 5 above, the regresion model can be written in the form:

WI = 0.455 – 0.008 PDRB + 0.011 IPM - 0.0000016 TK + ϵt

In accordance with the study findings, the three variables (PDRB, IPM, TK) could

explain the income disparity with a high value (R-square = 0.98), that is 98 percent. Variable

PDRB per capita and sum of the labor had probabilities that is smaller than 0.05 means

significantly influencing income disparity level, while variable IPM did not significantly

influence.

Based on estimation results, PDRB per capita significantly influence income disparity

and the relationship was negative. The relationship between PDRB per capita with the region

income disparity that was negative was in line with the theory that an increase in PDRB per

capita will decrease the income disparity, vice versa. PDRB per capita is an indicator to see

economic growth in a region, the higher PDRB per capita in a region, so the economic

growth in a region could be considered high. The high economic growth is one form of

success in economic development, which in turns could decrease the region development

inequity.

Further, the labor force variable showed a sognificant influence with negative and

small coefficient (0.0000016). This means that the increase of the labor force would

contribute on the decrease of income disparity level. The more the number of people that

work and have access to get a job the lower the rates of unemployment, and the higher

production activity that would reduce the income disparity between the people.

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Meanwhile, human development index (IPM) that is expected to influence the

decrease of income disparity indicates the opposite result, that is IPM did not significantly

influence income disparity. This could be caused by high IPM indicator showing that the

quality of the people increased. The better quality was shown by the indicator of the decrease

of the unemployment (which means an increase in employment). Therefore, even though IPM

was not significant, it was implicitly described by the influence of the labor force that was

significant.

4.4 Kuznet Hyphothesis Test

Kuznet hypothesis showed the relationship between economic growth (PDRB) and income

inequality level (Williamson index). The evidence of Kuznet hypothesis was done by making

graphic explaining the relationship between Williamson index and the economic growth. The

following a graph showed the relationship between growth and disparity level:

Source: BPS-Statistic East Java Province, processed.

Figure 6. Curve of Relationship between Williamson Index and Economic Growth Rate

in East Java

Figure 6 showed the relationship between income inequality and economic growth

that shaped inverted U-curve. This finding was consistent with Kuznet hypothesis stating that

in the early stages of development, income disparity would increase and in the long run

would decrease so that Kuznet hypothesis is applied in East Java Province. Income disparity

.530

.532

.534

.536

.538

.540

.542

.544

.546

4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4

ECONOMIC_GROWTH

WIL

LIA

MS

ON

_IN

DE

X

17 | P a g e

in one region increased in certain period then decreased when the growth continued to

increase and it becomes a repeating process.

5. CONCLUSION

Income inequality in regency/city in East Java Province measured by Williamson index from

2008-2011 showed that income disparity level in East Java measured using PDRB at current

prices showed that most of the regency/city in East Java were classified as disparity in

intermediate level - 8 regions with low level of disparity, 21 regions with intermediate level

of disparity, and 7 region with high level of disparity. Eventhough they were included in

intermediate level of disparity, most of the regions had Williamson index more than 0.5 even

close to the limit of high disparity that is 0.7. This showed that inequality reduction program

in East Java had not been optimal to reduce the Williamson index number so that inclusive

growth has not been reached.

The estimation result to know factors influencing the disparity level using variables of

PDRB per capita, human development index, and labor force by using five regencies in each

category as the samples showed that PDRB and labor force variable gave significant

influence on the occurence of disparity in East Java while IPM variable did not. Then, the

result of Kuznet hypothesis on inverted U-curve was proved in East Java province. In the

early development stages disparity tends to increase but in the later stages disparity would

decrease along with the growth. This process occured repeatedly so that in the long run the

relationship between economic growth and income inequality is negative. The government

should continue to encourage the economic growth so the equality would be realized soon.

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