The Dynamic Link Between Economic Growth and Unemployment in Malaysia

Soo, Wai How (2026) The Dynamic Link Between Economic Growth and Unemployment in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study examines the dynamic relationship between unemployment and economic growth in Malaysia over the period 1982 to 2024, incorporating key macroeconomic control variables including inflation, foreign direct investment (FDI), and exports of goods and services. While traditional economic theories, such as Okun’s Law, suggest that economic growth reduces unemployment, this study adopts a reverse perspective by investigating how unemployment may influence economic performance. This approach addresses a significant gap in the literature, particularly within the Malaysian context where periods of economic expansion have not consistently translated into lower unemployment. The study employs time-series econometric techniques, including the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests, Johansen cointegration test, Vector Error Correction Model (VECM), and Granger causality analysis. The empirical results reveal the existence of a long-run equilibrium relationship among GDP, unemployment, inflation, FDI, and exports. In the long run, unemployment and inflation are found to exert a negative and statistically significant impact on economic growth, while exports contribute positively. However, foreign direct investment shows a negative effect, suggesting potential inefficiencies or structural limitations in the domestic economy. The VECM results indicate that approximately 15% of short-run disequilibrium is corrected annually, confirming a relatively slow adjustment towards long-run equilibrium. Additionally, the causality analysis suggests limited short-run interactions among variables, while long-run dynamics are more pronounced. Overall, the findings highlight the importance of labour market conditions and macroeconomic stability in influencing Malaysia’s economic performance. The study provides important policy implications, suggesting that policymakers should focus on reducing unemployment, maintaining price stability, improving the effectiveness of FDI, and strengthening export performance to achieve sustainable economic growth