Human Development Index and Labor Productivity in Central

Sulawesi Province: Granger Causality Test and Panel Data

Regression
Suparman1, Wahyuningsih2
1,2
Faculty of Economics and Business (FEB) Tadulako University, Indonesia
[email protected], [email protected]

Abstract Keywords
Productivity; productivity index;
This study aims to analyze the effect of the human development
index (HDI) on labor productivity. This study used panel data by HDI; OUR; LFPR
district/city in Central Sulawesi Province in 2017-2020. The
analytical method used is the Granger Causality Test and the
panel data regression model. This study found that first labor
Productivity (LP) had a positive and significant effect on the
productivity index (PI). Second is the open unemployment rate
(OUR) has a positive and significant effect on the human
development index (HDI). Third, the open unemployment rate
(OUR) has a negative and significant effect on the labor force
participation rate (LFPR).

I. Introduction

Economists have long highlighted and emphasized the importance of human capital
to economic growth and Productivity (Xiang and Wei, 2013). Human capital is a critical
component of economic growth (Azorin, and De La Vega, 2015). According to Lucas
(1988), Romer (1990), and Barro (2001), the accumulation of human capital leads to
higher growth since it generates positive externalities and contributes to the development
of new LPucts, hence accelerating technological advancement.
In the meantime, productivity has garnered much attention in recent macroeconomic
research. Where human capital (health and education) drives labor Productivity, it becomes
extremely significant. The health and education workforce quality is critical and has an
impact on labor Productivity (Ezoji et al., 2019).
Chandran et al. (2020) stated that boosting productivity is vital not only for
enhancing competitiveness but also for gaining additional benefits. Mate (2015) found that
the association between education and Productivity development is valid when analyzing
time-series panel data from diverse nations.
Previous empirical studies conducted by Fuente and Demenech (2000; 2002), Arnold
et al. (2007), Cohen and Soto (2007), indicating a direct influence of human capital on
productivity and economic growth, or empirical findings by Fuente and Demenech (2000;
2002), Arnold et al. (2007), Cohen and Soto (2007), support this condition. It demonstrates
how human capital is crucial to technological advancement. Durlauf et al. (2008) and
Henderson et al. (2010) investigated the existence of empirical evidence of the relationship
between human capital and technological development (2012). According to Chandran et
al. (2020), boosting Productivity is vital not only for increasing competitiveness but also
for improving wellbeing. However, empirical research suggests that economic growth and
gains in human capital have little or a limited link. However, empirical research suggests
that economic growth and gains in human capital have little or a limited link. On the other
hand, Pritchett's findings support the presence of a weak link between the variables of
economic growth and human capital (2001).
______________________________________________________________
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DOI: https://doi.org/10.33258/birci.v5i1.4351
 Budapest International Research and Critics Institute-Journal (BIRCI-Journal)
Volume 5, No 1, February 2022, Page: 6271-6280
e-ISSN: 2615-3076 (Online), p-ISSN: 2615-1715 (Print)
www.bircu-journal.com/index.php/birci
email: [email protected]
Investment in human capital, which stresses formal and informal education, is one of
the most significant procedures in generating a quality workforce to meet labor market
demands (Rukumnuaykit and Pholphirul, 2015). Increased labor productivity leads to
higher earnings, better living conditions, and economic prosperity, which may be judged as
a success in human capital investment.
According to data given by Central Sulawesi Province's Central Statistics Agency
(CSA), HDI values have increased in all districts/cities. Palu City has a very high HDI
rating (81.5), and there are three districts with high HDI values: Morowali Regency
(72.02), Poso Regency (71.28), and Banggai Regency (70.52). In Central Sulawesi
Province, on the other hand, the open unemployment rate (OUR) in 2020 was 3.77 percent,
up 0.66 points from the previous year. According to the data, there are 83 thousand
unemployed persons in Central Sulawesi Province, divided among districts and cities. Palu
City, with 9.78 percent unemployment, Morowali Regency, with 7.19 percent
unemployment, and Poso Regency, with 4.48 percent unemployment, are the three regions
with the highest unemployment rates. This study explores the impact of human capital
development on broad labor Productivity and economic growth in Central Sulawesi
Province based on these empirical settings. Human Resources (HR) is the most important
component in a company or organization to run the business it does. Organization must
have a goal to be achieved by the organizational members (Niati et al., 2021).
Development is a change towards improvement. Changes towards improvement require the
mobilization of all human resources and reason to realize what is aspired (Shah et al,
2020). The development of human resources is a process of changing the human resources
who belong to an organization, from one situation to another, which is better to prepare a
future responsibility in achieving organizational goals (Werdhiastutie et al, 2020).
Human development in Central Sulawesi continues to grow, according to data from
the Central Statistics Agency (CSA) of Central Sulawesi Province, as evidenced by an
increase in the Human Development Index (HDI). The HDI for Central Sulawesi Province
will be 69.79 in 2021. This HDI increased by 0.24 percent from 2020 when it was 69.55, a
0.35 percent rise. The quality of human development in Central Sulawesi remains
moderate in 2021, as it was in 2020. The enhancement in the dimensions of HDI
production is responsible for the increase in HDI. In February 2021, the working-age
population will be 2.28 million individuals. The workforce employs the majority of the
working-age population, which totals 1.58 million people. Meanwhile, the rest of the
population is unemployed. The labor force participation rate (LFPR) in February 2021, on
the other hand, was 68.93 percent, 0.51 percent lower than in August 2020. Meanwhile, in
February 2021, the open unemployment rate (OUR) was 3.73 percent, 0.04 points lower
than in August 2020. Meanwhile, 973.27 thousand persons, or 64.17 percent of the
population, were employed in the informal sector in February 2021, down 3.20 percent
from August 2020. Meanwhile, the highest percentage of full-time workers (at least 35
hours per week) was 61.88 percent in February 2021. Meanwhile, 38.12 percent of the
population worked part-time (less than 35 hours per week), accounting for 8.3 percent of
the unemployed and 29.82 percent of part-time workers.

II. Review of Literature

The concept of human capital became popular in the 1960s (Le et al, 2019). Human
capital is a collection of skills and knowledge that is manifested in the ability to labor and
so generates economic value. Human capital can encompass information, skills, and traits
that benefit individuals, society, and the economy as a whole (Rodriguez and Loomis,

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2007). According to Le et al (2019) labor Productivity can rise in the short or long term
through any lessons, including learning from mistakes and beneficial experiences, or
owing to workers' ability to learn on their own. In addition, according to Le et al (2019),
the twenty-first century is an economic period centered on knowledge and the creative
economy. Science and technology are transformed into LPuctive forces in society. In
developing and poor countries, there has been a growing demand to enhance worker
Productivity and LPuct quality on a national level. Based on empirical facts, the countries
of Korea, Taiwan, and Singapore have demonstrated that innovation and creativity are
critical determinants in enhancing worker productivity and growth. Meanwhile, according
to Silver (2014), the labor Productivity index is defined as GDP per hour worked, whereas
labor input is defined as the average hours worked by all employed persons multiplied by
the number of workers in each country.
Empirical data suggest that if the workforce owns the correct circumstances of health
care and education, LPuction will increase. For Pakistan, studies by Khan et al (2005) and
Afridi (2016), for Greece, Benos and Karagiannis (2016), Tsai et al (2010), and Li and
Wang (2018), and China, research by Tsai et al (2010) and Li and Wang (2018).
Sustainable output growth and enhanced labor productivity, according to Ezoji et al (2019),
are dependent on the availability of human capital, which improves because of improved
education, better health, and new learning and training activities. Investing in human
capital entails making investments in areas such as health and education, all of which lead
to higher employee productivity. Training and investment in education have been
demonstrated to not only reduce mortality and malnutrition but also to raise life
expectancy, according to empirical research.
Hermannsson and Lecca (2016) found that the key transmission mechanism depends
on the interaction between the labor market and trade, which leads to overall results, when
looking at the impact of human capital on economic development, particularly the impact
of labor Productivity on macroeconomic performance through two processes, namely,
boosting worker Productivity and enhancing competitiveness to stimulate exports. Baker et
al. (2020) investigated the mediation effect of internet use on the connection between
human capital and total labor Productivity, as well as labor Productivity by sector. The
results of the mediation model, which used panel data regression with a fixed effect (fixed
effect) and bootstrapping, revealed that internet use has a mediating effect of 24.20 percent
on total human capital, 27 percent on labor Productivity in the service sector, and 23
percent in industry, but the mediating effect was inconsistent in agriculture.
The findings of Merchante and Ortega's (2012) research, which identified the key
factors of labor Productivity, demonstrate that there is a gap between employee education
and the education required for a certain worker. Where hotel personnel (employees) with
work-related education are more LPuctive than those with non-work-related education.
Furthermore, hotel personnel (workers) with lower levels of education are less efficient
than those with greater levels of education. This research also discovered that hotel
personnel (workers) with an average tenure of more than ten years perform better in terms
of Productivity.
According to Van Zottum and Van Zanden's (2014) findings on the relationship
between labor productivity and human capital in the European maritime sector in the 18th
century, the level of human capital on board European ships was relatively high. In
addition, there was a strong relationship between labor productivity and the quality of the
workforce in the shipping sector. This is a clear result that shipping is a high-tech industry
that not only utilizes high-quality capital goods but also requires high-quality people to manage
ships. Moreover, their increasingly sophisticated equipment is a complementary input.

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 III. Research Method

The Granger causality test and the Danel data regression model were used to analyze
the data in this investigation, which was done in two stages. In stage 1, a Granger causality
test was used to determine the relationship between variables, allowing the direction of
each variable to be determined. As shown in Table 3.1, the Granger causality test model is
as follows.

Table 1. Granger Causality Test

Model Granger Causality Test
1. Model I

2. Model II

3. Model III

4. Model IV

5. V model

6. Model VI

7. Model VII

8. Model VIII

9. Model IX

10. Model X

11. Model XI

12. Model XII

13. Model XIII

14. Model XIV

15. Model XV

16. Model XVI

17. Model XVII

18. Model XVIII

19. Model XIX

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20. Model XX

21. Model XXI

22. Model XXII

Following the results of the Granger causality test study in Table 3.1 (first stage),
analysis was conducted using a panel data regression model with three primary forms.
Those are CEM (common effect model), FEM (fixed-effect model), and REM (random
effects models). The effect of each independent variable (influential variable) on the
dependent variable (influenced variable) will be displayed in the regression analysis stage
of the panel data.

IV. Result and Discussion

4.1 Granger Causality Test Results

Table 2. Granger causality test results

Null Hypothesis: Obs F-Statistics Prob.

PI does not Granger Cause LP 26 290.997 5.E-16

LP does not Granger Cause PI 1.42093 0.2638

HDI does not Granger Cause LP 26 0.32276 0.7277

LP does not Granger Cause HDI 0.69848 0.5085

LFPR does not Granger Cause LP 26 2.08731 0.1490

LP does not Granger Cause LFPR 0.50128 0.6128

OUR does not Granger Cause LP 26 0.09331 0.9113

LP does not Granger Cause OUR 0.04070 0.9602

HDI does not Granger Cause PI 26 0.10325 0.9024

PI does not Granger Cause HDI 0.89712 0.4228

LFPR does not Granger Cause PI 26 0.32396 0.7268

PI does not Granger Cause LFPR 0.81211 0.4574

OUR does not Granger Cause PI 26 0.52702 0.5980

PI does not Granger Cause OUR 0.50179 0.6125

LFPR does not Granger Cause HDI 26 5.07691 0.0159

HDI does not Granger Cause LFPR 0.45880 0.6382

OUR does not Granger Cause HDI 26 0.85769 0.4385

HDI does not Granger Cause OUR 4.77352 0.0195

OUR does not Granger Cause LFPR 26 0.17754 0.8386

LFPR does not Granger Cause OUR 2.78283 0.0847

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 Causation test by Granger several variables in Table 4.1 have a one-way relationship,
and none of the variables have a two-way relationship. The following variables have a one-
way relationship:
1. Productivity Variable (LP) Affects Productivity Index (PI) and not vice versa;
2. The Human Development Index (HDI) variable affects the Labor Force Participation
Rate (LFPR) and not vice versa;
3. Variable Open Unemployment Rate (OUR) affects the Human Development Index
(HDI) and not vice versa;
4. The Open Unemployment Rate (OUR) variable affects the Labor Force Participation
Rate (LFPR), and not vice versa.

Based on the Granger causality test findings in table 4.1, the second step of the
analysis, namely the panel data regression model for each variable with a directional
relationship (the Granger causality test results), is carried out as follows:

Table 3. Panel Regression Model

Model Form
1. Model A

2. Model B

3. Model C

4. Model D

According to Table 4.2, the relationship between human capital and productivity is
studied using four (four) panel regression models.

Table 4. Results of Model A. Panel Regression

Dependent Variable: PI
Independent Common Effect Fixed Effect Model Random Effect Model
Variable Model
LP 3.347070*** 4.857655*** 3.247070***
R-squared 0.318962 0.435907 0.318962
Adjusted R-
Square 0.305341 0.24297 0.305341
F-statistics 23.41731 2.258825 23.41731
Note: ***) significant at = 1%; **) Significant at = 5%; *) Significant at = 10%.

Based on the results of the panel regression model A above, it can be explained that
the labor Productivity variable (LP) has a positive and significant effect on the Productivity
index variable (PI) according to districts/cities in Central Sulawesi Province. Panel data
regression analysis based on the three common effect models (CEM), fixed effect model
(FEM), and random effect model (REM) that were used gave the same results. This
condition indicates that if the labor Productivity variable (LP) increases, the productivity
index (PI) will also increase.

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 Table 5. Panel Regression Results Model B
Dependent Variable: LFPR
Independent Common Effect Fixed Effect Model Random Effect Model
Variable Model
HDI 0.071053 0.077276 0.076360
R-squared 0.022134 0.774956 0.049264
Adjusted R-
Square 0.002576 0.697967 0.030249
F-statistics 1.131731 10.068584 2.590821
Note: ***) significant at = 1%; **) Significant at = 5%; *) Significant at = 10%.

Based on the results of panel regression model B in the table above, it can be
concluded that while all three-panel regression models state that the relationship between
the HDI and the LFPR is positive, none of the three models provide significant results in
explaining the effect of HDI on LFPR by regencies/cities in Central Sulawesi Province.
Meanwhile, according to the Granger causality test, the human development index (HDI)
variable has an effect on the LFPR variable in a one-way and significant relationship.
However, it is not empirically confirmed in the panel regression model analysis.

Table 6. Panel Regression Results Model C

Dependent Variable: HDI
Independent Common Effect Fixed Effect Model Random Effect Model
Variable Model
OUR 2.345130** -1.160386 1.709567
R-squared 0.094350 0.457826 0.043820
Adjusted R-
Square 0.076237 0.272345 0.024696
F-statistics 5.208986 2.4468323 2.291385
Note: ***) significant at = 1%; **) Significant at = 5%; *) Significant at = 10%.

Only the common effect model (CEM) yields the results indicating the open
unemployment rate (OUR) variable has a positive and substantial effect on the variable
human development index (HDI) per district/city in Central Sulawesi Province, based on
the results of the panel regression model C above. This implies that those with secondary
education (SMU/SMK/MI) and higher education (D1/D2/D3/Bachelor) account for the
majority of the open unemployment rate (OUR).

Table 7. Panel Regression Results Model D

Dependent Variable: LFPR
Independent Common Effect Fixed Effect Model Random Effect Model
Variable Model
OUR -0.979916** -0.338691 -0.511200
R-squared 0.072223 0.763216 0.023367
Adjusted R-
Square 0.053668 0.682211 0.003834
F-statistics 3.892282 9.421826 1.196302
Note: ***) significant at = 1%; **) Significant at = 5%; *) Significant at = 10%.

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 Only the common effect model (CEM) yields the finding that the variable open
unemployment rate (OUR) has a negative and substantial effect on the labor force
participation rate (LFPR) by district/city in Central Sulawesi Province, based on the results
of the panel regression model D above. That is, the lower the open unemployment rate
(OUR), the greater the labor force participation rate (LFPR), and vice versa, the higher the
OUR, the lower the LFPR.

V. Conclusion

It can be inferred as follows based on the results and discussion utilizing the Granger
causality test analysis model and the panel data regression model.
1. Productivity (LP) has a positive and significant effect on the productivity index (PI) by
district/city in Central Sulawesi Province.
2. The open unemployment rate (OUR) has a positive and significant effect on the human
development index (HDI) by district/city in Central Sulawesi Province.
3. The open unemployment rate (OUR) has a negative and significant effect on the labor
force participation rate (LFPR) by Regency/City in Central Sulawesi Province.

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