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FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS -*** ECONOMETRICS REPORT FACTORS THAT AFFECT UNEMPLOYMENT RATE OF 53 COUNTRIES IN THE WORLD Lecturer : Dr Tu Thuy Anh Group members : Ha Phan Minh Anh - 1810520149 Le Thi Hong Ngoc - 1815520210 Nguyen Huong Lan - 1815520183 Hanoi, October 10th 2019 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table of Contents INTRODUCTION I OBJECTS II WHY DO WE CHOOSE THIS TOPIC? LITERATURE REVIEW I BASIC CONCEPTS OF UNEMPLOYMENT, UNEMPOYMENT RATE Definitions of Unemployment Classification II RELATED RESEARCHES The effect of real exchange rate on unemployment Effect of population growth on unemployment Effect of Foreign Direct Investment on unemployment METHODOLOGY I Model and data Model Data .7 II SUMMARY STATISTICS AND CORRELATION MATRIX Summary statistics .7 Correlation Matrix .8 III TEST AND INFERENCE Estimation Multicollinearity 11 Normality 12 Autocorrelation 13 Heteroscedasticity 13 Testing hypothesis 15 RECOMMENDATION 17 CONCLUSION .19 REFERENCES .20 APPENDIX 21 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com INTRODUCTION I OBJECTS In this day and age, unemployment has become a seriously worrying trend to the entire world It is not only the dilemma of the youth but also the major concern of each and every country in the world Unemployment leads to severe consequences, which includes people’s low income, struggling ways of life, stagnant growth of the economy, economy regression problems, increasing the rate of society’s vices… According to the report of the General Statistics Office of Vietnam, the unemployment rate of Vietnam in the third quarter of 2018 was 2.2%, which had slightly risen compared to that of the second quarter (2.17%) and the first quarter (2.1%) Nonetheless, it is expected that the unemployment rate of Vietnam is likely to experience a decrease, which is a good sign for the general economy The World Bank published statistical database of high unemployment rate of some countries such as South Africa (27.33%) or North Macedonia (22%) In contrast, some countries in the world have rather low unemployment rate which is approximately 0% such as Qatar (0.14%) or Laos (0.6%) What are the reasons that created such a huge discrepancy? The purpose of this report mainly focuses on answering this question We will provide some insights and statistical research to examine how factors such as the annual GDP growth rate, the annual population growth rate, the inflation rate… influence the unemployment rate of some countries in the world. II WHY DO WE CHOOSE THIS TOPIC? With a view to find out the factors that create massive impacts on the unemployment rate of 53 selected countries in the world as well as propose appropriate resolutions and recommendations to reduce the unemployment rate in those countries, including Vietnam, we decided to choose the topic of “Factors that affect unemployment rate of 53 countries in the world” This topic is among the widespread concern of people and nations all around the world and the practical resolutions are at issue and need to be clarified and executed, which makes it a suitable topic to research about There have been many reports analyzing this topic but our observations in the selected countries would bring about new discoveries and show the latest trends and examine possible resolutions To conduct the research, we will use quantitative methods, which requires the data of indexes of 53 countries all over the world, which was collected from the website of World Bank. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LITERATURE REVIEW I BASIC CONCEPTS OF UNEMPLOYMENT, UNEMPOYMENT RATE Definitions of Unemployment Unemployment is defined by the Bureau of Labor Statistics as people who not have a job, have actively looked for work in the past four weeks, and are currently available for work To indicate the number of unemployed people in an economy, we use the unemployment rate It is an indicator that shows the general unemployment condition of a country. To precisely calculate the unemployment rate, we need to clearly differentiate the following definitions: People in their working age are the people who have the right to work in accordance with the regulations in the Constitution Labor force is the number of people in their working age who are employed or searching for employment. Unemployed people are people who are not employed but actively looking for jobs. Other than people who are employed and unemployed, those who are in their working age are considered people who are not in the labor force including: students, housewives, disabled people who not have the ability to work and those who are not searching for employment with different reasons. The unemployment rate is defined as the percentage of unemployed workers in the total labor force unemployment rate = 100% x number of unemployed workers total labor force The natural rate of unemployment is defined as the equilibrium rate of unemployment i.e the rate of unemployment where real wages have found their free market level and where the aggregate supply of labor is in balance with the aggregate demand for labor Classification 2.1 Types of unemployment Unemployment is a burden We need to find out where this burden is, in what kind of community, occupation, gender, age… to understand the characteristics, to what extent does it influence the economy and related problems We have the following classifications: Gender (male/female) Age Region (urban/rural area) Occupation (economic, agricultural…) Ethnicity LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 2.2 Reasons of unemployment Quitting jobs (resigning from a job due to different reasons such as low wage…) Losing jobs (being fired from a job due to difficulties…) New entrant: having just encountered the labor force but not having a job yet (young adults looking for a job, graduated students waiting to start their jobs…) Returning: people who left the labor force but have just returned to search for employment It can be seen that the unemployment rate is just a temporary number It always fluctuates Continuous unemployment status usually happens in an undeveloped and stagnant economy 2.3 Sources of unemployment Frictional unemployment: happens when a worker is looking for a job or a better job (higher salary, a closer workplace) Structural unemployment: a form of involuntary unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers (also known as the skills gap) If structural unemployment is not addressed, it can increase the unemployment rate long after a recession is over and can increase the natural rate of unemployment Cyclical unemployment is the contribution of economic recessionary or expansionary conditions to the total unemployment rate Cyclical unemployment rises during recessions and falls during economic expansions and is a major focus of economic policy II RELATED RESEARCHES Based on the research that we have read, there are three main groups of researches: The effect of real exchange rate on unemployment The effect of population growth on unemployment The effect of Foreign direct Investment on unemployment The effect of real exchange rate on unemployment Name of the research: “The effect of real exchange rate on unemployment” Authors: Zahra Bakhshi, Mehrzad Ebrahimi Publish year: 13/04/2016 - AIMI Magazine Results of the research: The series of unemployment reality in many countries in the world including Iran are due to many reasons In the research, there are four independent variables which are exchange rate fluctuations, export, import and gross domestic product (GDP) The authors used the Lag model with variables which are unemployment rate, exchange rate fluctuations, export, import and GDP The results of the research proved that in the long term as well as short term, GDP had remarkably positive effects on unemployment; exchange rate had remarkably LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com negative effects on unemployment; there was no significant correlation between unemployment and other variables of the research including export and import Faults of the research: Other factors that could have a remarkable effect on unemployment were not taken into consideration in this research Besides, the effects of real exchange rate on unemployment were not specifically evaluated, which was shown in the fact that the authors did not examine if the exchange rate had direct or indirect effect on unemployment If it did have a single indirect effect, it means that the exchange rate affected other factors and those factors would then affect unemployment. Effect of population growth on unemployment Name of the research: “Impact of population growth on unemployment in Nigeria” Author: Habiba Edward Gideon Publish year: 2017 Results of the research: This research used multiple regression model and data from 2007-2016, which shows the same-dimensional relationship between the unemployment rate and population As it can be observed, almost economies which have significant population growth not have the relative growth in the ability to utilize the human resource, which leads to high unemployment rate and underdevelopment Despite this fact, the effects relating to this can be positive or negative, which depends on some factors such as firm government, which can bring out the sustainable growth and development of the country The key factors to resolute these problems might be resources, technology and capital (according to John O.Aiyedogbon, 2012) If these problems are not taken into consideration and addressed thoroughly, they might be the destructive dilemma of the country. Effect of Foreign Direct Investment on unemployment Research 1: Name of the research: “Impact of Foreign Direct Investment (FDI) on the Unemployment Rate in Malaysia” Authors: Hamidah Muhd Irpan, Rosfadzimi Mat Saad, Abu Hassan Shaari Md Nor, Abd Halim Md Noor, and Noorazilah Ibrahim Publish year: 2016, Journal of Physics: Conference Series Result of the research: This research used the data of the period of time from 1982-2012 of Malaysia, which shows the dimensional relationship between the unemployment rate and the FDI Specifically, when FDI increases in the long term, the unemployment rate decreases and this relationship is even more obvious in the short term This research also concluded that a country needs to attract FDI from foreign countries to decrease the unemployment rate The reason is that FDI can decrease the national product shortage and human resources wastes. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Research 2: Name of the research: “Impact of Foreign Direct Investment on Unemployment rate in Nigeria (1980-2015)” Authors: Nelson Johnny, Ekokeme Tamaroukro Timipere, Okoyan Krokeme, and Dumani Markjackson Publish year: 2018 - Human Resource Management Academic Research Society (www.hrmars.com) Results of the research: This research used the multiple regression model with the data of the period of time from 1980 - 2015 of Nigeria, which shows the inverse relationship between the unemployment rate and FDI Specifically, when FDI increases, unemployment rate decreases The Neo liberal school stated that via FDI, most of the economic properties can be achieved It can provide developing countries with crucial support in the process of industrial modernization The results show that to remarkably decrease the unemployment rate, the core of the policies needs some strategies to attract FDI. METHODOLOGY I Model and data Model To test the influence of factors on the unemployment rate, the team applied the theoretical basis and proposed the following mathematical model: LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (PRF): Y=β1+β2ggdp+β3gpop+β4inf+β5fdi+β6er+µi (SRF): Y^i=β^1+β^2ggdp+β^3gpop+β^4inf+β^5fdi+β^6er+ei Data a Describe the variables Name of variable Dependent variables Independent variable Unit of variable Explanatory variables une % Unemployment rate ggdp gpop % % inf fdi % % er % Annual GDP growth rate Annual population growth rate Inflation rate Foreign Direct Investment rate Exchange rate b Describe the data Collected data shows information of basic factors related to unemployment rate: unemployment rate, annual GDP growth rate, annual population growth rate, inflation rate, foreign direct investment rate and exchange rate Data collections: We use data sources on indexes of 53 countries in the world which are collected on World Bank – a verified source that is highly accurate and run model in Gretl Software II SUMMARY STATISTICS AND CORRELATION MATRIX Summary statistics Summary Statistics, using the observations – 53 Variable une ggdp gpop inf fdi er Mean 6.88 3.31 0.972 2.54 2.96 1.62e+00 Median 4.90 2.76 1.02 2.13 2.46 18.5 S.D 5.48 2.32 0.916 1.68 2.64 5.76e+00 Min 0.140 -2.07 -1.20 -0.181 -2.62 0.777 Max 27.3 8.67 2.89 7.44 9.49 3.32e+004 Comments: LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com According to the data collected from the above table, we can realize: Annual GDP growth rate Annual population growth rate Inflation rate Foreign Direct Investment rate Exchange rate Unemployment rate Min -2.07 -1.20 -0.181 -2.62 0.777 0.140 Max 8.67 2.89 7.44 9.49 3.32e+004 27.3 Median 2.76 1.02 2.13 2.46 18.5 4.9 Correlation Matrix Correlation coefficients, using the observations - 53 5% critical value (two-tailed) = 0.2706 for n = 53 une 1.0000 ggdp -0.6212 1.0000 gpop -0.3282 0.2115 1.0000 inf -0.3591 0.2765 -0.0785 1.0000 fdi -0.5049 0.5221 0.2677 0.0040 1.0000 une ggdp gpop inf fdi -0.0177 0.1059 0.0503 0.0075 0.0687 1.0000 une ggdp gpop inf fdi er er Correlation of dependent variable vs independent variables: ● Cor(une,fdi) = -0.5049 → The correlation between Unemployment rate and FDI is not at the same dimension, with the percentage of -50.49% ● Cor(une,inf) = -0.3591 → The correlation between Unemployment rate and Inflation is not at the same dimension, with the percentage of -35.91% ● Cor(une,gpop) = -0.3282 → The correlation between Unemployment rate and Annual population growth rate is not at the same dimension, with the percentage of -32.82% LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ● Cor(une,ggdp) = -0.6212 → The correlation between Unemployment rate and Annual GDP growth rate is not at the same dimension, with the percentage of 62.12% ● Cor(une,er) = -0.0177 → The correlation between Unemployment rate and Exchange rate is not at the same dimension, with the percentage of -1.77% Comments: In general, the independent variables are correlated with the dependent variable is not high, especially the “er” variable has a very low correlation coefficient, just more than 1% In addition, the independent variables have negative correlation coefficients, in the opposite dimension on the dependent variables Correlation of independent variables vs independent variables: ● Cor(fdi,inf) = 0.0040 ● Cor(fdi,gpop) = 0.2677 ● Cor(fdi,ggdp) = 0.5221 ● Cor(fdi,er) = 0.0687 ● Cor(inf,ggdp) = 0.2765 ● Cor(inf,gpop) = -0.0785 ● Cor(inf,er) = 0.0075 ● Cor(gpop,ggdp) = 0.2115 ● Cor(gpop,er) = 0.0503 ● Cor(ggdp,er) = 0.1059 Comments: Because the correlation coefficients between the independent variables are less than 0.8 and all correlation coefficients of the variables are less than 0.9, we can predict the model will not have multi-collinearity when model defects test III TEST AND INFERENCE Estimation Model 5: OLS, using observations 1-53 Dependent variable: une const ggdp gpop inf Coefficient 14.7552 −0.885627 −1.22137 −0.885313 Std Error 1.29792 0.297469 0.630978 0.349080 t-ratio 11.37 −2.977 −1.936 −2.536 p-value 37.602233) = 0.009900 Conclusion: We have p-value = 0.009900 We have enough evidence to reject Ho => B1 is statistically significant β (gpop) - Hypothesis: Ho: β 2=0 Alternative hypothesis: H 1: β 2 - From the result on Exhibit 5.b.1, we see the p-value = 0.0715 > = 0.05 => We not have enough evidence to reject Ho => β is not statistically significant β (inf) - Hypothesis: Ho: β 3=0 Alternative hypothesis: H 1: β 3 15 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - From the result on Exhibit 5.b.1, we see the p-value = 0.0054 < = 0.05 => We have enough evidence to reject Ho => β is statistically significant β (fdi) - Hypothesis: H0: β =0 Alternative hypothesis: H 1: β - From the result on Exhibit 5.b.1, we see the p-value = 0.0100 < = 0.05 => We have enough evidence to reject Ho => β is statistically significant β (er) - Hypothesis: H0: β 5=0 Alternative hypothesis: H 1: β 5 - From the result on Exhibit 5.b.1, we see the p-value = 0.0860 > = 0.05 => We have enough evidence to reject Ho => β is not statistically significant 6.2 : Testing the overall significance - Null hypothesis: H 0: β 1=β 2=β 3=β =β Alternative hypothesis: H1: β 12 + β 22 + β 32 + β + β 52 - p-value (F) = 0.000015 < 0.05 => We have enough evidence to reject Ho => The model is suitable 16 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com RECOMMENDATION Based on the surveys and research the factors that affect the unemployment rate of 53 countries in the world in 2017, we have figured out many things we did not expected from the very beginning and we would want to suggest some possible solutions to the aforementioned problems of 53 countries including Vietnam to decrease the unemployment rate: Firstly, about GDP growth rate, all the countries need to stimulate economic growth: About the fiscal year, investment on development needs to be promoted based on consolidating revenues, extension of income tax payment for enterprises and economic sectors About currency, it needs credit interest rate compensation for intermediate and long-term loans for investment in equipment and facilities in the countries’ economy and in the agriculture sector and so on Stimulate growth by stimulus In Vietnam: Give enterprises and businesses in each and every sector of the economy the support to participate in investing in projects, large scale construction, create job opportunities, support enterprises by tax reduction, tax returns with the commitment of maintaining jobs for the current labor force and attract labor if necessary, provide loan support for enterprises to maintain production and guarantee jobs for the workers Develop the multi-sector economy, attract foreign direct investment for industrial areas of economic projects to contribute to economic growth and creating job opportunities for workers Secondly, about the foreign direct investment: All countries need to have policies that increase investment funds (that mainly comes from the national saving, foreign debt) to accelerate the progress of constructing the infrastructure, irrigation, traffic system… to create job opportunities for the human resource. Temporarily, the countries need to loosen the financial policies, conduct administrative reform to attract foreign investment, which would provide employment to people. Besides, there must be encouragement to develop small and medium business, capital loans for enterprises to equip facilities and expand production scale Thirdly, about population, the countries need appropriate educational programs, human resource training, labor division reorganization, human resource level improvement Every country also needs policies that support the labour in finding jobs via job consultation centers and improve the unemployment insurance system and social security. More than that, about the inflation rate, the countries are conducting different methods and policies to control the inflation rate In Vietnam, the government needs to: Continue maintaining the strict policy of currency 17 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Enhance the management of price to keep it suitable to market mechanism; manage the price of certain products and exclusive services to keep them suitable to the regulations of international economic integration by market supervision, cost control, applying tax Motivate applying technology advancement to increase the competitiveness of the product. Stimulate the domestic production development CONCLUSION 18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Unemployment has always been an important dilemma and it has attracted concerns from many researchers High rate of unemployment will have negative influence on individual mindset, enterprise cost and economic growth Nonetheless, a moderate number of unemployment rate will encourage the employees and the employers to increase their productivity and profits This leads to the fact that every country including Vietnam are looking for the proper answer to the question: “How to keep the unemployment rate moderate?” Throughout the process of doing overview research, establishing the theoretical frame, planning and organizing the research, implementing empirical research, analyzing and processing data, proving, testing and summarizing to find out the solutions to the problems, we have achieved what we expected to when conducting this research assignment Specifically, this assignment includes following information: Firstly, we proved the interrelation between unemployment rate and determined factors via analyzing the influence with the econometric regression model We did research and concluded about the significance of factors such as Gross Domestic Product growth rate, population growth rate, inflation rate, foreign direct investment and exchange rate We have affirmed that determining if each of these factors has effects on the unemployment rate or not is completely possible using the quantitative analysis method Secondly, with the foundation of what we have figured out from the research, we have suggested some possible solutions to improve unemployment rate Despite the fact that some of the solutions have been applied in some countries in the world, we have organized the solutions in a clear and specific way especially with those that can be implemented in Vietnam. To sum up, we would like to express our gratitude to the lecturer Dr Tu Thuy Anh and the available, trustworthy and precise sources of data and researches as well as others for having supporting us during the Econometrics course and the process of writing the assignment Although we have tried our best, there must be some inevitable mistakes and misunderstanding Therefore, we will try even harder in the next research REFERENCES HabibaEdwardGideon,2017,Impactofpopulationgrowthon 19 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com unemploymentinN igeria. HamidahM uhdIrpan,RosfadzimiM atSaad,AbuH assanShaariMdNor, AbdHalimM dNoor,a ndNoorazilahIbrahim,2016,ImpactofForeign DirectInvestmentontheUnemploymentR ateinMalaysia,Journalof Physics:C onferenceSeries. NelsonJ ohnny,EkokemeTamaroukroTimipere,O koyanKrokeme,and DumaniMarkjackson,2018,ImpactofForeignDirectInvestmenton UnemploymentrateinNigeria(1980-2015),H umanR esourceM anagement AcademicResearchSociety. ZahraBakhshi,MehrzadEbrahimi,2016,Theeffectofrealexchangerateon unemployment,AIMImagazine. General Statistics Office of Vietnam, 2018, Unemployment rate of Vietnam (2018) Kimberly Amadeo, 2019, Unemployment, its causes, and its consequences, thebalance.com, https://www.thebalance.com/what-is-unemployment-3306222 Database source: WorldBank APPENDIX Database table: 20 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com lao PDR moldova mexico north macedonia myanmar montenegro malawi malaysia norway new zealand panama philippines poland qatar russian federation uruguay united state vietnam south africa 0.602999985 4.098000050 3.420000076 22.381000520 1.550999999 16.070999150 5.467999935 3.410000086 4.162000179 4.702000141 3.900000095 2.552000046 4.887000084 0.140000001 5.211999893 7.889999866 4.355000019 1.886000037 27.326999660 6.892747966310180 4.499999899796950 2.041469637144060 0.240521014001670 6.758628824262730 2.700000000000330 4.000030516530420 5.897009292699760 1.980437749386030 2.819447579566090 5.321201374589110 6.684517502766040 4.805745842037920 8.579850253303480 1.646883672695010 2.656684455856960 2.217010330034060 6.812245659639800 -1.316744860487430 1.465996286880740 -0.077677563174331 1.264395196998520 0.093843823688957 0.913623971802060 0.011247907097728 2.890290194901270 1.391483564000000 0.807673181900000 2.122962381970750 1.585434181067850 1.534683359712810 0.012480098580000 2.665037745000000 0.106871954284237 0.369351256234469 0.640458800224899 1.022289324067990 1.244878378126850 0.825486793152155 6.570229974556030 6.041457240189920 1.349839615076100 4.572727330733690 2.380235990531360 1.543393918877000 3.871201157742400 1.875100595525480 1.850787674525320 0.875585918759905 2.853187725909420 2.075935536738620 0.408824436902200 3.683330723344930 6.218093825618630 2.130110003659630 3.520256888116180 -0.181082232637430 9.490046317340050 1.978718459256890 2.791484717438830 -1.375492471127800 6.985206648456800 1.565272458145100 4.396308402251880 3.022364642020730 0.411160209224133 1.050493262005880 7.749050899743510 3.207124167752040 2.027292030993100 8.590665218393070 1.809245349330500 -1.564037870003600 1.820994740983940 6.300834951632800 0.393248235518154 8351.526074730310000 18.499034887352800 18.926516666666700 54.665458333333300 1360.358707040850000 0.887397421095650 730.272500000000000 4.300440877611240 8.271666666666670 1.407408333333330 1.000000000000000 50.403719793717700 3.779333333333330 3.640000000000000 58.342801185171900 28.676400000000000 1.000000000000000 22370.086666666700000 13.333781460636900 Summary statistics table: 21 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Summary Statistics, using the observations – 53 Variable une ggdp gpop inf fdi er Mean 6.88 3.31 0.972 2.54 2.96 1.62e+00 Median 4.90 2.76 1.02 2.13 2.46 18.5 S.D 5.48 2.32 0.916 1.68 2.64 5.76e+00 Min 0.140 -2.07 -1.20 -0.181 -2.62 0.777 Max 27.3 8.67 2.89 7.44 9.49 3.32e+004 Correlation Matrix table Correlation coefficients, using the observations - 53 5% critical value (two-tailed) = 0.2706 for n = 53 une 1.0000 ggdp -0.6212 1.0000 gpop -0.3282 0.2115 1.0000 inf -0.3591 0.2765 -0.0785 1.0000 fdi -0.5049 0.5221 0.2677 0.0040 1.0000 une ggdp gpop inf fdi -0.0177 0.1059 0.0503 0.0075 0.0687 1.0000 une ggdp gpop inf fdi er er OLS table: Model 5: OLS, using observations 1-53 22 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Dependent variable: une Coefficient Std Error 14.7552 1.29792 −0.885627 0.297469 −1.22137 0.630978 −0.885313 0.349080 −0.534428 0.251745 4.93634e-05 9.61157e-05 const ggdp gpop inf fdi er Mean dependent var Sum squared resid R-squared F(5, 47) Log-likelihood Schwarz criterion 6.883262 740.5674 0.525811 10.42333 −145.0875 313.9968 t-ratio 11.37 −2.977 −1.936 −2.536 −2.123 0.5136 S.D dependent var S.E of regression Adjusted R-squared P-value(F) Akaike criterion Hannan-Quinn p-value
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