Analysing the Structural Relationship between Labor Productivity and Investments in Indonesia: An Application of Two Stage Least Square

Investments play an important role in driving an economy to produce
goods and services and also create jobs. For those, to attract the
investors, we need to improve the quality of human resources
measured through labour productivity especially in Indonesia. In line
with the issue, Indonesia as a country that has many labour forces
reported low productivity compared with Singapore, Malaysia and
Indonesia. Thus, this study aims to analyse the relationship between
labour productivity with investment and regional economic growth in
Indonesia. This quantitative study designed using the simultaneous
equation model. The data analysed by utilising the Two-Stage Least
Square Approach. A total of three simultaneous equation models were
proposed and the data consist of 33 provinces and six-year starting
2013 to 2018 that collected from the central bureau of Statistic. The
results of this study found that investment has significant in increasing
labour productivity, and it is boosting investments. Next, an increase
in human development index, provincial minimum wage and
investments are significant in increasing labour productivity, while
increasing the significant health complaints in decreasing workforce
productivity. Also, an increase in labour productivity and human
development index is significant in increasing investments while the
increasing provincial minimum wage significantly in decreasing the
investment. Lastly, labour productivity has been positive and
significant against gross regional domestic product per capita. Foreign
direct investment and domestic capital investment does not
significantly affect Gross Regional Domestic Product per capita. In
conclusions, the investment, human development index, provincial
minimum wage have positively significant affecting labour
productivity and its effect on gross regional domestic product. In
contrast, investments (foreign direct and domestic capital) do not have
a relationship with gross regional domestic product.