Dynamics of Inflation and Unemployment: Applying Threshold Models to Assess Critical Points in the Economy in Indonesia

Luh Sri Marlina, Ni Luh Rosinta Yogantari, Muhammad Rafi Bakri, Putu Permana Bagiada

Abstract


This study examines the nonlinear relationship between inflation and unemployment in Indonesia using a panel threshold regression model. Utilizing data from 34 provinces over the period 2016–2023, the analysis identifies a single significant inflation threshold at 1.9 percent. Below this threshold, inflation significantly increases the open unemployment rate, whereas inflation above 1.9 percent reduces unemployment. The results remain robust when the sample is divided into pre-COVID (2016–2019) and post-COVID (2020–2023) periods, although the relevant thresholds rise to 2.68 percent and 3.11 percent after the pandemic. Higher per-capita income, regional economic output, and educational attainment significantly lower unemployment, while higher minimum wages, poverty levels, and democracy scores are associated with higher unemployment. These findings support the short-run Phillips Curve in a regime-dependent framework and highlight the importance of maintaining moderate inflation above the identified thresholds, accompanied by policies that strengthen human capital and income growth. The study contributes to the literature by providing the first provincial-level threshold estimates of the inflation–unemployment nexus in Indonesia and by incorporating institutional and human-capital controls.

Keywords


inflation threshold; unemployment; Phillips Curve; panel threshold model; Indonesia; COVID-19

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DOI: http://dx.doi.org/10.33087/ekonomis.v10i2.2972

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