The Effect of GRDP, Foreign Investment, and Unemployment Rate on Labor Absorption in Central Java in 2020-2024

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FORMOSA NEWS _Surabaya - Economic Growth and Foreign Investment Boost Job Absorption in Central Java, Study Finds. A newly published study reveals that economic expansion and foreign direct investment are key drivers of job creation in Central Java, Indonesia. The research was conducted by Rossalien Umaiya and Wenny Restikasari, researchers affiliated with Universitas Negeri Surabaya. Published in 2026 in the Formosa Journal of Applied Sciences, the paper examines labor market trends across the province’s 35 regencies and cities between 2020 and 2024. Understanding these dynamic relationships is critical for regional economic planning, ensuring that local output growth translates directly into meaningful employment opportunities for the public.

Background: Balancing Economic Growth and Labor Opportunities
Regional economic policy focuses on expanding economic output and transforming local labor potential into productive employment. Central Java presents a complex labor market environment. During the early post-pandemic economic recovery, the province experienced periods where economic expansion did not immediately result in proportional job creation, a phenomenon often referred to as "jobless growth". Over time, this pattern shifted toward pro-growth employment, where economic gains aligned more closely with expanded workforce participation. However, policymakers faced ongoing questions regarding whether regional output, foreign capital, or existing unemployment levels had the strongest influence on overall job absorption across different municipalities.

Research Methodology
The authors evaluated labor market dynamics by collecting secondary data published by Statistics Indonesia (BPS) for all 35 regencies and cities in Central Java over the five-year period from 2020 to 2024.

• Variables Examined: Labor absorption was measured using the Labor Force Participation Rate (TPAK). The independent economic indicators included Gross Regional Domestic Product (GRDP), Foreign Direct Investment (FDI), and the Open Unemployment Rate (TPT).
  
• Analytical Framework: The researchers used a quantitative panel data approach, using natural logarithm transformations to measure relative elasticity.
  
• Model Selection: Statistical evaluation via Chow and Hausman tests determined that a Fixed Effect Model (FEM) provided the most reliable fit for analyzing the panel dataset, effectively controlling for unobserved region-specific characteristics.
  

Key Findings: Production and Capital Drive Labor Absorption

The statistical evaluation confirmed that regional production output and foreign investment play dominant, positive roles in increasing labor absorption across Central Java. Key highlights from the statistical results include:

• Gross Regional Domestic Product (GRDP): GRDP demonstrated a statistically significant positive effect on labor absorption (coefficient = 0.2833, p = 0.0005). Higher regional output directly increases the demand for labor as firms scale up production.
  
• Foreign Direct Investment (FDI): FDI exhibited a statistically significant positive effect on job absorption (coefficient = 0.0030, p = 0.0398). Inflows of foreign capital expand production capacity and trigger multiplier effects across local supply chains.
  
• Unemployment Rate: The Open Unemployment Rate showed a negative relationship with labor absorption, but the effect was statistically insignificant (coefficient = -0.0029, p = 0.8828), indicating that unemployment fluctuations alone do not explain job absorption changes in the region.
  
• Overall Explanatory Power: Together, the three economic indicators explained approximately 65.60% of the variation in labor absorption across Central Java (Adjusted R-squared = 0.6560; F-statistic p = 0.0000).
  

Real-World Impact and Policy Implications
The findings offer practical guidance for regional policymakers, economic development agencies, and industry leaders:
Targeting Labor-Intensive Foreign Investment: Because foreign investment positively impacts job creation, local authorities can focus on attracting foreign capital to labor-intensive industries, such as textiles, garments, and manufacturing, rather than relying exclusively on capital-intensive sectors.
Fostering Inclusivity in Regional Growth: Boosting regional GRDP must remain a priority, accompanied by initiatives that ensure economic expansion supports job creation rather than tech-only automation.
Addressing Skill Mismatches: The lack of statistical significance between the unemployment rate and labor absorption suggests a mismatch between available workforce skills and market requirements. Targeted vocational training and workforce education can help realign job seeker capabilities with industry demands.

Author Profiles
Rossalien Umaiya, S.E. Universitas Negeri Surabaya. Expertise: Development Economics, Regional Planning, and Applied Econometrics.
Wenny Restikasari, S.E., M.SEI. Universitas Negeri Surabaya. Expertise: Macroeconomics, Labor Economics, and Regional Public Policy.

Source
Rossalien Umaiya, Wenny Restikasari. The Effect of GRDP, Foreign Investment, and Unemployment Rate on Labor Absorption in Central Java in 2020-2024. Formosa Journal of Applied Sciences (FJAS). Vol. 5, No. 7, hal. 1523–1536
DOI : https://doi.org/10.55927/fjas.v5i7.78
URL: https://journalfjas.my.id/index.php/fjas