INDUSTRIAL EMPLOYMENT DYNAMICS AND STRUCTURAL DECOUPLING IN CENTRAL JAVA'S SECONDARY SECTOR

Abstract

Whether industrial expansion continues to generate employment remains a critical question in the structural transformation process of developing economies. Although the growing contribution of the secondary sector is expected to facilitate labor reallocation toward more productive activities, output growth is not always accompanied by proportional employment growth, suggesting a potential decoupling between economic expansion and labor absorption. This study examines the determinants of industrial employment dynamics in Central Java, Indonesia, using balanced panel data from 35 regencies and municipalities during 2019–2024. The analysis employs a Fixed Effects Model with cluster-robust standard errors to estimate the effects of industrial output share, agricultural output share, industrial productivity, agricultural productivity, investment, and a dummy variable capturing the COVID-19 period on industrial employment share. The results indicate that industrial and agricultural output shares exert positive and statistically significant effects on industrial employment 
share, indicating that the process of structural transformation remains evident at the regional level. In contrast, industrial productivity exhibits a significant negative effect, suggesting that productivity gains 
are increasingly driven by efficiency improvements rather than labor expansion. Agricultural productivity and investment are not statistically significant, whereas the COVID-19 period is associated with a decline in industrial employment share. The findings contribute to the growing literature on structural transformation by demonstrating that industrial growth and employment expansion do not necessarily progress in parallel, while underscoring the need for industrial policies that balance productivity enhancement with employment creation.