Economic Journal of Emerging Markets, 9(2) October 2017, 181-188 EJEM Econ. J. Emerg. Mark. Economic Journal of Emerging Markets Available at http://journal.uii.ac.id/index.php/jep Effect of economic growth on income inequality, labor absorption, and welfare Erni Panca Kurniasih Faculty of Economics and Business, Universitas Tanjungpura, Pontianak, Indonesia. E-mail: ernipanca@yahoo.co.id Article Info Article history: Received : 26 December 2016 Accepted : 3 August 2017 Published : 1 October 2017 Keywords: economic growth, income inequality, labor absorption, economic welfare. JEL Classification: O40, J23, N1 DOI: 10.20885/ejem.vol9.iss2.art7 Abstract This research aims to analyze the effect of economic growth on income inequality, labor absorption and economic welfare in Indonesian provinces. A 165 observations of panel data was analyzed using path analysis. The result showed that the economic growth has significant negative effect on income inequality in Indonesian provinces but it has no significant effect on both labor absorption and economic welfare. The labor absorption has significant positive effect on income inequality even though it has no significant effect on economic welfare. In addition, the economic welfare is not significantly influenced by the income inequality. Abstrak Penelitian ini bertujuan untuk menganalisis pengaruh pertumbuhan ekonomi terhadap ketimpangan pendapatan, penyerapan tenaga kerja dan kesejahteraan masyarakat provinsi-provinsi di Indonesia. Ada 165 observasi data panel yang kemudian dianalisis dengan menggunakan analisis jalur. Hasil penelitian menunjukkan bahwa pertumbuhan ekonomi berpengaruh signifikan terhadap ketimpangan pendapatan di provinsi-provinsi di Indonesia namun tidak berpengaruh signifikan terhadap penyerapan tenaga kerja dan kesejahteraan ekonomi. Sementara itu penyerapan tenaga kerja memiliki pengaruh positif signifikan terhadap ketimpangan pendapatan meskipun itu tidak berpengaruh signifikan terhadap kesejahteraan ekonomi. Selain itu kesejahteraan ekonomi juga tidak dipengaruhi secara signifikan oleh ketimpangan pendapatan. Introduction Economic growth is a macro indicator of successful development so that all countries strive to achieve high economic growth in order to create the public welfare, especially for developing countries. In fact, the rapid economic growth turned out to be followed by the widening of income inequality, both among household income and regions due to the absence of trickledown effect. Inequality of development among regions is caused by several things such as differences in potential, demographic conditions and employment, social and cultural conditions, and infrastructure (Armstrong & Taylor, 2000). These differences raise the classification of developed and underdeveloped regions. The quite large differences in economic growth between regions in the early stages of development have resulted in inequality in income distribution among regions. In the long run, since the factors of production in the regions are getting optimized in the development period, the difference in the rate of growth of outputs between regions will tend to decline. It is marked by the increasing of average per capita income (Kuznets, 1955); Williamson, 1965). The results of those studies are not consistent with studies from Bhanumurthy & Mitra (2004) in India and Panizza (2002) in America who found that the higher rate of economic growth is more often associated with lower income inequality. Inequality is a necessary condition to get economic grows faster since the beginning of development is to boost the rate of growth that concentrated in one or several areas. Increased employment indicates that economic growth has been able to create jobs either in terms of number, productivity and efficiency. Creation of high employment opportunities will have an impact on increasing people's purchasing power and ultimately the welfare of society will increase. Classical economists such as Adam Smith, David Ricardo, and Thomas Robert Malthus argued that when people get