ANALYSING UNEMPLOYMENT DETERMINANTS IN MALAYSIA USING THE VECM METHODOLOGY

Abstract

This research examines the factors influencing unemployment in Malaysia, considering both short-term and long-term perspectives through the utilization of the VECM (Vector Error Correction Model) methodology. After reviewing relevant literature, various macroeconomic indicators such as GDP growth, foreign direct investment, inflation, interest rate, and exchange rate were selected for analysis. Quarterly time series data spanning from (Q1) 2010 to (Q1) 2020 was employed for this study. Applying the VECM approach, the findings uncovered distinct relationships between these variables and unemployment. Specifically, a noteworthy positive correlation was observed between GDP and unemployment, indicating that as GDP increases, unemployment tends to rise as well. Conversely, in the short term, inflation displayed a significantly negative impact on unemployment, suggesting that higher inflation rates might be associated with lower unemployment rates temporarily. In the long run, the study identified a significantly positive relationship between GDP growth and unemployment. Intriguingly, foreign direct investment exhibited a notable increase in unemployment over the long term. Additionally, the causality test highlighted a one-way causal relationship from the identified determinants (GDP, inflation, foreign direct investment) to unemployment. Overall, this research underscores the complex interplay between key macroeconomic indicators and unemployment in Malaysia. The study's outcomes emphasize the significance of considering both short-term and long-term effects when analyzing the impact of economic variables on unemployment.