The determinants of unemployment in Malaysia: VECM model

• Main Author: Ng, Kuang Yong
• Format: Thesis
• Language: English; English
• Published: 2020
• Subjects: HB Economic Theory
• Online Access: https://etd.uum.edu.my/10343/1/permission%20to%20use-%20ALLOWED.pdf; https://etd.uum.edu.my/10343/2/s825934_01.pdf; https://etd.uum.edu.my/10343/

The objective of this research is to identify the determinants which influence the unemployment in Malaysia. Besides that, this research also investigates the relationships between the determinants and the unemployment during short-run and long run. In this study, the dependent variable is the unemployment while the selected determinants which including the GDP growth, foreign direct investment, inflation, interest rate and exchange rate. The quarterly time series data which from first quarter (Q1) 2010 to first quarter (Q1) 2020 are employed in this study. The data are obtained from Bank Negara Malaysia and Ministry of Finance. Regarding the estimation, this study applied the Vector Error Correction Model (VECM) and the Fully Modified Ordinary Least Square (FMOLS). The short run results reveal that all the variables except foreign direct investment have a positive relationship with unemployment. Meanwhile, foreign direct investment will reduce the unemployment during short run. However, only the positive relationship from the GDP growth and the negative relationship from the foreign direct investment are significant. In term of long run, the VECM result portrays that there is a significant negative relationship from the GDP growth to unemployment. Furthermore, foreign direct investment and interest rate have a significant positive long-run relationship with unemployment. Regarding the inflation, the positive relationship from inflation to unemployment is not significant. Subsequently, FMOLS results demonstrate that exchange rate has a significant positive long-run relationship with unemployment. Apart from that, the Granger causality test claims that there is a unidirectional causality from selected determinants to unemployment except exchange rate. Hence, government should implement some effective policies including the expansionary fiscal policy and monetary policy, protective policy and exchange rate control in purpose to reduce the unemployment in Malaysia, especially during this post-Covid-19 pandemic period