Munich Personal RePEc Archive

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

Liyana, Anis and Masih, Mansur (2018): Does unemployment rate lead GDP growth or the other way around ? Malaysia’s case.

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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.

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