Determinants of Unemployment Rate – Evidence from Malaysia

Chan, Shuk Teng (2022) Determinants of Unemployment Rate – Evidence from Malaysia. Masters thesis, Tunku Abdul Rahman University College.

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Abstract

Nowadays, banks in Malaysia remain cautious on loan approvals. Over the past 10 years, the loan approval rate by bank is highly fluctuating in the range between 38% to 64%. Unfortunately, the loan approval rate falls to the lowest level at 37% during Covid-19 outbreak, but it quicky back to the range in the following month. As for Malaysia unemployment rate, it able to retain in between 2.7% to 3.5% over the past 10 years. It rose significantly to over 5% during COVID-19 outbreak, but it unable to back to the normal range even after months. This paper examines the determinants of unemployment rate in Malaysia with the data collected from Bank Negara Malaysia. The dependent variable in this study is unemployment rate in Malaysia, while independent variables are consumer price index, loan approval rate by bank, Bank Negara Malaysia overnight policy rate and exchange rate of MYR/USD. The study covers the period from January 2012 to April 2021. The tests use in this study include Augmented Dickey Fuller unit root test, Kwiatkowski Phillips Schmidt Shin unit root test, Johansen cointegration test, Autoregressive Distributed Lag model, Wald test, and diagnostic checking like normality test, autocorrelation test and heteroskedasticity test. The result shows consumer price index, loan approval rate by bank and Bank Negara Malaysia overnight policy rate are statistically significant to affect Malaysia unemployment rate negatively in the long run. Exchange rate of MYR/USD is statistically significant to affect Malaysia unemployment rate positively in the long run. Each of the independent variables are important to granger cause Malaysia unemployment rate in the short run.