Does Education Increase Labor Productivity? An Evidence from Indonesia during Reform Era

Abstract

This research investigates the effect of education on labor productivity in Indonesia, after the establishment of new education budget policies in the reform era. The focus of this study aims to measure the significance of the influence of primary, secondary and tertiary education variables on labor productivity. The data source in this study is panel data covering 34 provinces in Indonesia and time-series data from 2015 to 2018. Through the econometric approach of the fixed-effect model, the objective of this research is to observe whether it is true that education increases labor productivity in Indonesia. Therefore, the null hypothesis built is that education in Indonesia does not affect the level of labor productivity. The results showed that the level of primary, secondary and tertiary education had a strong and significant positive effect on increasing labor productivity in Indonesia, so the null hypothesis was rejected. However tertiary education has a lower influence than primary and secondary education. The increase in the education budget introduced by the government has been able to prove an equal distribution of education at every level in each province, thereby affecting the productivity of the Indonesian workforce. This study recommends that the Indonesian government focus its attention on tertiary education and keep improving the quality of education at this level so that the workforce capabilities of tertiary-institution graduates are able to increase and the graduates can compete in the labor market with reliable productivity and can be evenly distributed in each province as well as be able to meet labor market standards.