Relationship Between Poverty and Unemployement in Indonesia

POSSIBILITIES
By
1.Verina Afra Zahirah (110705007)
2. Elysabeth Nababan (110705057)
3. Herta Gultom (110705065)
4. Cristine Falentina (110705061)

Abstract
Poverty is one of fundamental problems which become major concern of
Indonesia Government. World Poverty Commission said that unemployment is
one of the main causes of poverty. A lot of literatures state that there is a strong
correlation between unemployment and poverty, but to prove it empirically, was
not easy. rise in the stage when open unemployment rate is less than 3.87, and
will be declined when the open
unemployment rate moved between 3.87 and 4.24. But after the open
unemployment rate reached 4.24, the percentage of poverty re-patterned
quadratically but decreased slowly. So, for the case in Indonesia, unidirectional
relationship between poverty and unemployment in the region occurred only
partially, while some are actually spinning.
1. Introductions
Poverty is one of the fundamental issues which become major concern of
Indonesia government. It is inevitable that one of poverty cause is
unemployment. Unemployment indicator selection based on the fact that the
indicator is directly related to income levels. World Poverty Commission also
noted that unemployment is a major cause of poverty.
Theoretically, the poverty rate will move to follow the rate of
unemployment. In this case when the unemployment rate increase then the

poverty level will automatically increase. Positive relationship between poverty

and unemployment are found in several countries. In Korea, for example, found
a very strong relationship between poverty levels and unemployment rates.
When the unemployment rate increases, the poverty rate also rose and when the
level of unemployment inclined, the poverty levels also fell.
However, the changes between unemployment level and poverty are not
always consistent as that found in studies in another country. For example, as
quoted by [20] based on research in the United States found that poverty does
not have a strong correlation with unemployment. Defina [20] further stated that
the relationship between unemployment and poverty is strongly influenced by
how poverty is measured. On the other hand, the weak relationship between
poverty and unemployment can also be caused by weak measurement of the rate
of unemployment. This is evidenced by the based on their study using Brazilian
data. Son dan Kakwani propose a new measure of unemployment based on not
only the unemployed but also those whose earnings are below the minimum
wage set by the government. By modifying the conventional unemployment rate
measurements they found that the correlation between unemployment and
poverty is very significant, while the size of unemployment based on the
conventional relationship between unemployment and poverty do not seem
significant. How does the pattern of the relationship between poverty and
unemployment in Indonesia? A lot of literature state that there is a close link
between unemployment and poverty, but to prove it empirically is not easy. In
purpose to modelling the relationship between poverty and unemployment in
Indonesia, where the pattern of relationship is not known in advance, then used
a nonparametric regression model. Nonparametric regression models that
often gets the attention of the researchers is the Kernel ([38], [25]), Spline ([23],
[47], [18], [11], [8]), Fourier series [2] and wavelets [3]. Among the
nonparametric regression model above, the spline is a model that has a very

special and very good statistical and visual interpretation because it has high
flexibility ([21], [13]). Besides, spline is able to handle data character / function
properties of smooth and fluctuate in the subsub- interval ([16], [13]). It has also
been shown by [4] which compares Kernel smoothing spline technique with the
data of gross national product of Turkey. Spline is a polynomial function form
which is defined in sub-sub-intervals (piecewise polynomial). Boundary points
of these intervals are called knots. The knot will connect the polynomials which
are defined on the subintervals in such a way to form a continuous function.
How many knots and where knots are located are some of problems in spline
using. Another problem is spline basis functions selection. There are several
bases functions of spline, including power cuts, cubic spline, and Bspline.
Spline estimator can be obtained by solving the penalized least square (PLS)
optimization or minimize the number of data matches (Goodness of fit) and the
size of curve smoothness. Spline estimator in nonparametric regression
developed by many researchers by taking the variation in the Goodness of fit
and size of curve smoothness. Kimeldorf and Wahba , Craven and Wahba [18]
and produces a natural spline estimator (the original). Spline estimator is
recommended for being use on smooth data. Cox and OSullivan obtain the Mtype spline estimators to deal with outliers in nonparametric regression. Oehlert
[30] provide a relaxing spline estimator and [29] gives the quantile spline
estimator. Budiantara, et. Al [8] gives a weighted spline estimator to deal with
inequality of variance (heteroskedastic) in nonparametric regression.
Spline in its development, it can not resolve the problem of inference such as
confidence intervals for regression curve. For that [44] provide a Bayesian
approach for the original spline estimator in Gaussian response data and [45]
also have to construct confidence intervals for the original spline model. Gu
[24]has developed the results obtained by [44] for non-Gaussian response data.
Smith and Kohn [36] using a Bayesian approach in estimating Bspline

functions in bivariate nonparametric regression model with autocorrelation

error. Budiantara and Subanar [9] generalize the Bayesian approach of [45] for
weighted spline estimator in nonparametric regression. Holmes and Malick [26]
using Bayesian analysis in multivariate linear spline model regression for
Gaussian response data. Berry, Carroll, dan Ruppert [5] using a Bayesian
approach to model the smoothing regression spline function and regression Pspline with the presence of measurement error. Adebayo [1] using a Bayesian
approach with B-spline basis functions for the model of malnourished children
in Zambia. Crainiceanu, Ruppert dan Wand [17] demonstrated the use of BUGS
in semiparametric regression models. Chib dan Greenberg [14] developed a
Bayesian analysis for nonparametric regression models with cubic spline basis
functions and a mixture of Dirichlet processes distributed errors in the data that
[43] regarding the credit rating firm Standard and Poor's.
In this paper, nonparametric regression model which is used in modeling
the relationship between poverty and unemployment in Indonesia is a spline
model with Bayesian approach. Prior distributions used in this research is
limited in distribution Gaussian Improper prior.
2. The Pattern of Poverty and Unemployment Relation in Indonesia
A lot of literature state that there is a close relationship between
unemployment and poverty, but it is not easy to prove it empirically. Ussually
the analysts use two data sources to see its relationship in Indonesia. Poverty
data are calculated from the results of Susenas (National Social Economic
Survey) and unemployment data are obtained from the Sakernas (National
Labour Survey). The difficulty to show the relationship between unemployment
and poverty in Indonesia empirically, can be solved by using a spline
nonparametric regression model. According to scatter plot in Figure 1, we can
see that the relationship between open unemployment rate and poverty

percentage has no pattern. So that, the level of poverty in Indonesia is modeled

using spline nonparametric model where knots point is selected using GCV
Method
In 2010, the percentage of poverty in Indonesia has a quadratic pattern
and rise at the open unemployment rate is less than 3.87, and will decline when
the open unemployment rate moved between 3.87 and 4.24. After the open
unemployment rate reach 4.24, the percentage of poverty re-pattern
quadratically but decrease slowly. Based on data from BPS publication, the
relationship between the level of unemployment and poverty in Indonesia does
not follow a pattern like that found in Korea. The fact that there is at provincial
level when the unemployment rate increases, the poverty rate is
decreasing or vice versa (see Figure 1). So in the case of Indonesia, the
relationship between unemployment and poverty are not always in the
same direction according to the assumption of existing economic theory, but it
has an inverse relationship. This weak unemployment-poverty relationship is
evidently seen at provincial level. In 2010, Indonesia which is consists of 33
provinces, there were some provinces such as Riau, South Kalimantan and
North Sulawesi, which tend to have a fairly strong relationship between
unemployment and poverty, but in the provinces such as Papua, West Papua,
Maluku, West Sulawesi, Southeast Sulawesi, Gorontalo, West Nusa Tenggara,
East Nusa Tenggara, and NAD, the poverty rate seems very high compared to
the level of unemployment. This is because some people who work in those
areas are low paid, so that their income is limited or still below the poverty line.
This phenomenon is not only influenced by the economic side, but social
cultural and geographical conditions also contributed greatly to the level of
poverty. The poverty level in Jakarta and Banten, seems too low compared to
the level of unemployment. This phenomenon can be explained as follows.
People who are able to be unemployed in a household may indicate that

those household have sufficient income to support the unemployed. In term of

poverty, the unemployed in those household does not automatically become
poor because there are other family members who have sufficient income to
sustain his family live above the poverty line. In addition, the facts show that in
urban areas there are some people who voluntarily unemployed because they
are waiting to get the job according to the their skill or education, and they are
not really poor because they may be part of household with middle to upper
income. Not only that, there are also many disguised workers who are not
registered, i.e. commercial sex workers, illegal goods seller, beggars, etc, who
during the survey claimed jobless (unemployed). Their incomes are generally
above the poverty line.
Oshima statement can be understood considering in developing countries
like Indonesia there are no social security for unemployed, so in order to
survive, the poor have to work, whether they like or not, even only a few hours
a week. This is consistent with who said that the poor are those who do not
work regularly or continuously, or who working parttime. Streeten, et all
explicitly stated that unemployment was not a satisfactory measure of poverty,
because generally people who are unemployed have a better condition, while
most people who are really poor it is not idle.
5. Conclusions
Percentage of poverty is in quadratic curve and rise in the stage when
open unemployment rate is less than 3.87, and will be declined when the open
unemployment rate moved between 3.87 and 4.24. But after the open
unemployment rate reached 4.24, the percentage of poverty repatterned
quadratically

but

decreased

slowly.So,for

the

case

in

Indonesia,

unidirectionalrelationship between poverty and unemployment in the region

only partially occurred, while some are actually spinning. In order to see the
effect of unemployment on poverty, we also need to look at characteristics of

each region. It also needs to look at other actors related to the employment, i.e.
field of business where he worked,business status (formal / informal), and hours
worked per week. So for further research can use the Bayesian Multivariate
Spline approach.

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