Increasing inequality is a growing concern is many parts of the world. This paper provides empirical evidence of the impact of inequality on economic growth and unemployment in the Indonesian context. Indonesia has experienced a significant and continuing increase in inequality since early 2000s. Using kabupaten (district)-level data for the period of 2000–2012, this study is able to overcome the empirical analysis problems faced by multicountry studies. Overall, the findings indicate that consumption inequality affects growth, while education inequality seems to be more important for unemployment. In general, the impact of inequality is nonlinear in the form of inverted U-shape for growth and U-shape for unemployment. Similarly, horizontal inequality across ethnic groups is also found to have nonlinear inverted U-shape relationship with growth. Meanwhile, horizontal inequality across religious groups has a nonlinear U-shape relationship with unemployment. These findings suggest that initially inequality may not be harmful for growth and employment; however, after reaching a threshold, it will have an adverse impact. This implies that it is important to put in place policies to address increasing inequality to mitigate its harmful impact.
Keywords: inequality and growth, unemployment, district panel, Indonesia