Revisiting the Linkages of Fiscal Decentralization and Labor Absorption: A Theoretical Perspective

Abstract

Fiscal decentralization is one of the main strategies in governance reform that aims to bring budget decision-making closer to local governments. In the context of regional economic development, fiscal decentralization is believed to have great potential in encouraging labor absorption through increasing the efficiency of resource allocation, strengthening public spending based on local needs, and creating a more conducive regional investment climate. However, the literature shows differences in empirical results regarding the relationship between fiscal decentralization and employment in developing and developed countries. This article aims to compile a comprehensive theoretical study of the linkages between fiscal decentralization and labor absorption with a multi-perspective approach. Oates' theory of decentralization became the basis for explaining the argument for the efficiency of fiscal allocation. In contrast, Keynesian theory was used to analyze the influence of government spending on aggregate demand and job creation. On the other hand, the theory of endogenous growth and labor dualism is also studied to show the dynamics of interaction between regional fiscal policies and the structure of the local labor market. The study results show the importance of paying attention to regional fiscal capacity, the quality of local institutions, and the direction of public spending in determining the real impact of decentralization on employment. This article contributes to building a conceptual framework that can be used for further research, development, and the formulation of labor policies based on regional autonomy.