POLITICAL ECONOMY OF REGIONAL POLICY: THE IMPACT OF INDUSTRIAL AGGLOMERATION, PROVINCIAL MINIMUM WAGE, AND LABOR FORCE ON LOCAL GENUINCE REVENUE (SOUTHERN SUMATRA REGION)

Abstract

Political economy framework, arguing that regional revenue outcomes are not merely the product of impersonal market forces but are shaped by policy choices particularly minimum wage setting  that reflect the bargaining power of labor, capital, and local government interestsThis study analyzes the effect of industrial agglomeration (IBS), the Provincial Minimum Wage (UMP), and labor force size (JAK) on regional fiscal capacity, as proxied by Local Own-Source Revenue (PAD), in five provinces of the South Sumatra Region (Sumbagsel)—South Sumatra, Lampung, Jambi, Bangka Belitung Islands, and Bengkulu—over the period 2018–2024. Based on model specification tests (the Chow Test and the Hausman Test), the Fixed Effect Model (FEM) was selected as the best estimator, supported by the highest Adjusted R² (0.9671) among the three panel data models. The FEM estimation results indicate that industrial agglomeration and labor force size have a positive and significant effect on PAD, whereas UMP shows no significant effect once inter-regional heterogeneity is controlled for. The most notable finding is the reversal of the IBS coefficient's sign, from negative under the Common Effect Model to positive and significant under FEM, indicating that the CEM specification suffered from omitted variable bias by disregarding region-specific characteristics such as resource endowment, infrastructure readiness, and licensing governance. These findings suggest that provincial governments should accelerate downstream industrial processing and the development of integrated industrial zones to strengthen regional fiscal self-reliance, while continuing to support labor absorption as a consistently positive revenue driver.