The Determinants of Unemployment in Malaysia

Chai, Nan Zhou (2024) The Determinants of Unemployment in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This paper investigates the relationship between unemployment rate, Gross Domestic Product (GDP), inflation (CPI), and Foreign Direct Investment (FDI) in Malaysia. This paper examines the relationship between unemployment rate, Gross Domestic Product (GDP), inflation, and Foreign Direct Investment (FDI) in Malaysia from year 1983 to year 2022 which consists of 40 observations. This research employed several analysis tools such as Augmented Dickey-Fuller (ADF) and Kwiatkowski Phillips Schmidt Shin (KPSS) Unit Root Test, Johansen-Juselius (JJ) Cointegration Test, and Vector Error Correction Model (VECM) to evaluate the relationships. ADF and KPSS Unit Root Test were adopted to identify whether the data is stationary. The Johansen-Juselius Cointegration Test, and Vector Error Correction Model (VECM) were used to identify whether the independent variables have long run and short run relationship with unemployment rate in Malaysia. The results reveal that inflation is negatively significant related to unemployment rate while the GDP is shown to be positively related to unemployment rate in Malaysia. Based on the findings in this study, it is suggested that the government should reduce dependence on a single industry and diversify its source of income in various sectors. Besides, the government and central bank can make use of fiscal and monetary policy to stimulate the economic in order to reduce the unemployment rate while maintaining mild inflation rate.