The Linkage Between Higher Education Budget, College Enrollment, and Economic Growth in Indonesia: A Simultaneous Equation System Approach

Abstract

This study analyzes the linkage between the higher education budget, college enrollment, and economic growth in Indonesia. Using a simultaneous equation model estimated with Three-Stage Least Squares (3SLS) over the 1974–2024 period, this study explores the sectoral dynamics of macroeconomic interdependencies. The results indicate an anomaly: increased higher education budgets are not significantly associated with higher college enrollment rates. However, higher education is significantly associated with improvements in labor productivity and has become one of the primary drivers of national output growth. Furthermore, a structural transformation pattern is observed, in which higher education is associated with labor mobility out of the primary sector into more productive sectors, a pattern that is consistent with, though not conclusive evidence of, the structural dynamics. This study recommends reorienting the budget toward reducing education costs and synchronizing investment policies to better accommodate skilled labor.