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Does unemployment rate lead GDP growth or the other way around ? Malaysia’s case

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  • Liyana, Anis
  • Masih, Mansur

Abstract

The lead-lag relation between the unemployment rate and GDP per capita in a country remains unresolved. Okun's original work states that a one‐percentage point reduction in the unemployment rate would produce approximately 3% more output. But that may not be true at all stages of growth in an economy. The main aim of this paper is, therefore, to test the direction of Granger-causality between these two variables.Malaysia is taken as a case study. The standard time series techniques are employed for the analysis. The empirical findings tend to indicate that the unemployment variable is relatively more exogenous or leading and the GDP variable is relatively more endogenous orlagging. These findings have clear policy implications in that the pro-active policy by the Government to reduce unemployment rate at least in the context of Malaysia can help boost economic growth in order to obtain a sustainable rise in living standard.

Suggested Citation

  • Liyana, Anis & Masih, Mansur, 2018. "Does unemployment rate lead GDP growth or the other way around ? Malaysia’s case," MPRA Paper 102459, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102459
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    References listed on IDEAS

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    1. Bradley T. Ewing & William Levernier & Farooq Malik, 2002. "The Differential Effects of Output Shocks on Unemployment Rates by Race and Gender," Southern Economic Journal, Southern Economic Association, vol. 68(3), pages 584-599, January.
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    3. Mansur Masih & Ali Al-Elg & Haider Madani, 2009. "Causality between financial development and economic growth: an application of vector error correction and variance decomposition methods to Saudi Arabia," Applied Economics, Taylor & Francis Journals, vol. 41(13), pages 1691-1699.
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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