3.

Cointegration and Granger Causality Test

To see the relation between economic growth and income inequality among
sub-districts in Medan City thus tested by the Granger causality test. Before being
tested by the Granger causality test, first, it must be tested by Unit Roots Test with
using Augmented Dickey Fuller (ADF) test and Phillips Perron (PP) test. The
following are the results of unit roots test for the variables of economic growth and
income inequality with the value of Gini Ratio (GR).

Table 4. The results of ADF test and PP test with Trend & Intercept
Level ADF PP Level of Integration
Economic Growth -3,9537 ** -4,8163 *** I (0)
Income Inequality -4,6173 *** -4,6859 *** I (0)
Note: *** Significant at = 1 % ; ** Significant at = 5 %

Based table 4 shows that the test results of unit roots test for the variables of
economic growth and income inequality has been stationary on the level of
integration of zero or one. This means the two variables used in this study, namely
economic growth and income inequality have been stationary at the data level.
Meanwhile, to see the balance in the long term relation between economic
growth and income inequality among sub-districts in Medan City, then tested with
Cointegration test and the requirements to use Cointegration test is all variables must
be stationary at the same level. For this study, both stationary variables on the level of
integration is zero or stationary at the data level so that Cointegration test can be
tested. The following is the results of Cointegration test for both variables as shown in
the following table.
Table 5. Johansen Cointegration Test Results
Trace test:
Null Alternative Trace Statistic 5% critical Prob.
value
r=0 r1 18,2042 ** 15,4947 0,0191
r1 r=2 7,5965 *** 3,8415 0,0058
Maximum Eigenvalue test:
Null Alternative Max-Eigen 5% critical Prob.
Statistic value
r=0 r1 10,6077 14,2646 0,1750
r1 r=2 7,5965 *** 3,8415 0,0058
Note : *** Significant at = 1 % ; ** Significant at = 5 %
 From the results of cointegration test above, it can be seen that tracer statistic
value and max-eigen statistic is greater than the critical value at = 0.05. This
indicates that the two variables, i.e economic growth and income inequality have a
balance in the long term relation during the period of the study.
The empirical results are in line with studies conducted Adeli and Ranjbaraki
(2002), and Risso, Adrian and Sanchez (2010). Thus it can be concluded, there is a
balance in the long-term relation between economic growth and income inequality
among sub-districts in Medan during the period of the study.
Furthermore, the Granger Causality test is used to see which direction the
relation between the variables of economic growth and income inequality. As for the
direction of the relation in the form of economic growth Granger-cause income
inequality, income inequality Granger-cause economic growth, Causality goes in both
directions, and finally economic growth and income inequality are independent. The
following are the estimated of granger causality test as in the table below.
Tabel 6. Granger Causality test

Null Hypothesis: Obs F-Statistic Probability

GR does not Granger Cause PE 15 0.67612 0.69952

PE does not Granger Cause GR 33.0129 0.02969

Based on Table 6 above shows the relation between economic growth and
income inequality have a unidirectional relation, namely economic growth causing
income inequality. This is indicated by the probability of significant value statistically
at = 0.05. From these research, greatly strengthen the study of Samarjit, Gouranga
and Mitra (2014). This condition indicates that the uneven economic growth will
cause income inequality between sub-districts in the Medan City during the period of
the study.