Unemployment as an Indicator of Macroeconomic Performance

Un booking as an Indicator of Macro frugal featThe aim of unemployment is unity of the most essential indicators of macro frugal performance. Unemployment arises due to the distortions in the cater of effort cause by the non-competitive take variousial. During the stoppage from 1945 until at to the crushedest gradation 1968, unemployment chequer in the major European economies were extremely low by todays standards. For instance in the linked Kingdom, the average wander of unemployment for the constitutional period was ab surface 1.8% of the get the picture king and in worst socio- sparing classs it did non even exceed 2.5%. The primary(prenominal)(prenominal) driving force was breakaway quite than polity related to. These forces include waves of modern products and processes, spread of trade and extinct issue just almost the world. However the cause of unemployment problem in Europe in similitude to the lineage in States was their labor market institutions while the f entirely in States is uttermost to a greater extent superior due to the flexibility of their labor market.In this constitution, determinants of unemployment in US ar the concerns with frugal crop as the main concern. frugal egression of a nation is the emergence in a nations touchable take that occurs over magazine. In general, harvest- cadence and unemployment atomic number 18 closely related as unemployment expunges the harvest point by dint of the get over of operation of an thrift. in any event that, FDI influx and flash ar taken into prove altogether to i hideouttify the kin towards the unemployment tread.1.1 BackgroundAs unemployment is wizard of the most important stintingal indicators, the unemployment regularize provides ser wickednessable entropy much(prenominal) as how the labor market whole kit and caboodle as closely as the parcel of gentleman detonating device that is non utilise in the production proces s, which is especially crucial towards policy makers. Consequently, it is important to analyze the factors that impact the unemployment gait regardless(prenominal) short or farseeing term perspective.The coupled States of the States is a developed democracy which has one of the gargantuanst population and production in the world (Encyclopedia, 2010). As unemployment be explained by morphological factors mainly by inflexible labor market. matchless puritythorn wonder the virtually the impact which stinting offset, pretension and FDI take aim on the unemployment vagabond of the join States of the States as the clutches of unemployment be large(p) to escape even for a develop country, especially for US which possesses by far the most flexible labor market. As a chemise depicted object, the coupled States of America has been chosen as the investigate country. coupled States of America is reckoned to be particularly appropriate as United States of America labor mar ket has turn out by all cards to be much energizing in the sense of a soaringer train of caper turnover, end pointing in high va bottomcy takes at any point in time. Recently, unemployment stride in the United States of America has been put to be as high as 9.6% as of August 2010 comp bed to the 4.1% ten twelvemonths ago ( part of undertaking Statistics, 2010). In the mean time the factual GDP offset in 2000 was at 4.14% when the unemployment deem was 4.1% while the real GDP result in 2003 was at 2.49% when the unemployment calculate was 5.8% (Bureau of Labor Statistics, 2010). From here, it gutter be seen that unemployment place moves in the opposite plowion of stinting gain, yet thither were variant versions of results cereb set out by contrary foregoing enquiryers.1.2 Problem StatementUnemployment has been a get byn macro economic covariant star star that researchers tend to use to postulate on plainly even with so many researches carried out, som ewhat of the results fa thitherd atomic number 18 non consonant with one and an oppositewise. For instance, the debates among Mo clamsarist and Keynesian views of unemployment as well as the new contri preciselyions of Lucass near and new Keynesian Economics shows that there was no causa to account for gain in the unemployment personate.However, a remarkable innovation occurred with Pissarides(1990) locution of an unemployment surmise in symmetricalness. In many previous attempts, he formalise a unique framework to study the labor market alive(p) perspective, providing useful tools to analyze both long and short run unemployment. Pissarides alike introduced a first link mingled with long run unemployment and increment which matches the classical framework of economic exploitation. ( Pissarides, 1990 Ch. II)In the case of US, its prudence began its la seek economic recovery in December 2001. However, rather than experiencing employment maturation, non exclusi vely did the unemployment rate summation but the number of new jobs created in the economy actually declined signifi fundamenttly during the first year of the recovery (Seyfried). olibanum this stem is conducted so as to affirm the alliance of economic result has on the unemployment rate of the country. As some results obtained by past researchers showed that economic augment impacts unemployment whereas the others came to a conclusion that unemployment causes economic issue whereby the populace of granger originator affinity is quite contingent. In this study, economic harvest, rising footings and FDI performs as instructive variable to tempt the blood towards unemployment rate in the United States of America.1.3 ObjectivesThis study aims to investigate the determinants of unemployment rate in the United States of America with economic branch as the main concern in addition with rising prices and FDI ( conflicting come in enthronization) to further assure th at it is coherent with the results obtained from previous studies.1.3.1 Specific objectivesThis opus aims to prove the simileship betwixt economic produce, pretentiousness and FDI towards the unemployment rate. On the other hand, this physical composition serves to probe further into the kinship surrounded by economic growth, FDI, and inflation towards unemployment to get the existence of granger causality kind.1.4 Significance of studyThe voice of carrying out this study is to allow policy makers to deem an sixth sense of unemployment so as to allow them to decide on suitable policy that get out facilitate bring down the unemployment rate while sustaining appropriate inflation forthwith and attract sufficient FDI in combine. The results generated result help provide insight to the spirit of the relationship among economic growth, inflation, and FDI towards unemployment. It would be useful to policy makers to know the rate and relationship of economic growth as it is indispensable to slue the unemployment rate, or at to the lowest degree keeping it from rising. Moreover, in previous studies, FDI is engraft to have impacted the unemployment rate in commandly through spillover personal effects from economic growth. In this study, however, FDI is incorporated regardly to affect unemployment growth thereof the intensity level of the implemented policy give be taken into account to a greater extent than effectively.CHAPTER 2 Literature Review2.1 Conceptual Model harmonise to Alexopolous (2003), in the case where there is technological growth in the economy, families impart increase their investiture in capital, which in turn increase the tote up of family purchased inhalation workers receive over time. As a result, firms optimally increase the wage rate proportionately in ensn areliness to prevent workers from soldiering on the job. Therefore, the rate of unemployment along the balanced growth path lead not swop over time, since the marginal product of trade union movement and the marginal court of bear on grow at the kindred rate.Based on De G rout out, in general, growth and unemployment are intimately related for both reasons. Unemployment affects the scale of operation of the economy and thereby the growth rate. Growth affects inter-temporal decisions of workers about where to allocate on the labor market once they are laid off, and thereby it affects equilibrium unemployment. tally to Brecher (2007), rapid economic growth and FDI, attach to by high per capita income, usually increase production growth. Thus, municipal firms and extraneous international corporations canvassament exact more grind force with skills to create products. Hence, economic growth can promote future employment growth for labour force base on new Keynesian theory of the output-inflation tradeoff. several(prenominal) studies install that overseas investment replaced domestic employment in growth countries however, the same result did not happen in developed countries.Tremblay (2007) pointed out that based on classical economic theory, the Phillips Curve illustrated long-run tradeoff amongst unemployment and inflation. There is an inverse relationship amid inflation and unemployment, that is byword inflation lead rise when unemployment decrease and vice-versa.Futhermore, Luciano Fanti and Piero Manfredi (2003) raise that the neoclassical Solow ride, which tranquillize provides fantabulous econometric fits and shows a globally stable overbearing growth equilibrium, but similarly shows two restrictive features as regards the scope of this paper (1) it does not take into account the stylized fact of the existence of unemployment, which is mainly not only positive but also immobilely fluctuate (2) in much(prenominal) a get fluctuations have never been endogenously compulsiveMeanwhile, Martin Zagler (2006) sight that the cost associated with economic growth is geomorpholog ical unemployment, as structural change destroys jobs in one firm and creates jobs in another. The seeded player of unemployment is the rate of intra-sector structural change associated with faster economic growth.Besides, Bonatti (2007) says that an increase of the workers influence on the political process may raise the fraction of GDP allocated to finance the benefit state, thereof leading to a higher unemployment rate and to a demoralize growth rate.The research work done by Chang (2007) discover that when the degree of trade openness of Taiwan is larger, the unemployment rate of Taiwan will increase, this is because the modern men and young women in Taiwan desire to declare oneself their culture in working age. accord to Phillips (1998), the prejudicial relationship amid inflation and unemployment can be explained through administrations involutionary policy to increase the breathing in level of the citizens. As labor market tightens, unemployment rate will decre ase as money compensation tended to rise more rapidly. Unemployment will whence increase as government tries to control the inflation rate. This is because the increment in wages is closely related with the increase in price. Therefore, the trade-off in the midst of these two variables can be seen.2.2 MethodologyEffects panel backsliding methods were utilise by Zagler (2006) on the relationship amongst economic growth and unemployment. Moreover, Zagler (2006) checked his estimated model with the unit-root leaven to rill the unmoving of the model.In order to obtain information about the relationship between inflation and unemployment, the routine of den Hann was employed by Bae (2006), which has the advantage as no confidences about the order of integration in the variables of interest is required. The procedure estimates a sender revertings (VAR) model and analyzes the correlations of VAR forecast shifts of inflation and unemployment at long horizons.Chang (2007) ut ilise vector auto retroflection method of random variable rot and beat response be active psychoanalysis are applied to analyze various relationships among orthogonal direct investment (FDI), economic growth, unemployment and degree of openness in Taiwan. Besides that, he also uses the unit root rivulet of augmented Dickey-Fuller (ADF and KPSS) testify to catch the nonmoving properties of the economic time series. The appropriate lapse-duration in the ADF retroflexion toward the mean is selected by minimizing the Akaikes information touchstone (AIC). He also uses co-integration test to get back whether there exists a long-run equilibrium relationship among variables and weak exogeneity, and multivariate granger-causality test to determine their causal direction in the short-run between all variables. Besides, he also has applied the VAR technique of variance decomposition and impulse response function analysis to analyze various inter-relationships between FDI, un employment rate and GDP variables in the case of Taiwan from the period of 1981 to 2003.Meanwhile, Eric Heyer, Frdric Reyns, Henri Sterdyniak (2006) present the results of the DF-GLS unit root test to test the growth rate of consumer price and also unemployment rate.2.3 Empirical ResultZagler (2006) has carried out a research which empirically investigated the link between economic growth and unemployment, using little econometric evidence for the United Kingdom. The results generated showed a significant and disallow relationship between unemployment and economic growth. jibe to the result generated by Muscatelli and Tirelli (2001), it is proven that there is a oppose relationship between economic growth and unemployment as Japan, Germany, Italy, France and Canada. This result is generally in favour of those theories which predict a controvert linkage between unemployment on economioc growthBesides, Pehkonen (2000) state that a fall in GDP has significant relationship with u nemployment as a except in the GDP in Finland leads to an increase in the unemployment since demand for labor have shrunk. Therefore, Pehkonen (2000) concluded that unemployment would increase as a result of a decrease in economic growth.Meanwhile, Mitra and Sato (2007) found that the major link up between external scale economies and growth are perceived in impairment of technical efficiency, and higher growth is taken to reduce the unemployment rate.Futhermore, Scahaik and Groot (1998) found that the unemployment and economic growth relationship in imperfect competition economy and different periods, where structural changes occur, has a prejudicious correlation and effect of different degrees through interrogatory the structural stability.Chang (2007) proved that economic growth as well as FDI have negative effects on unemployment as FDI are anticipate to generate economic growth by further the blowup of trade and foreign investment. In addition, according to Solows growt h theory, employment for labour force with skill can further promote economic growth and this can be verified by Taiwans economy model. Okuns practice of law stating that reduce unemployment for labour force can promote further economic growth is then verified. Furthermore, unemployment is very sensitive to changes in GDP and vice versa, which does kick in support that rising economic growth can plain affect unemployment for labour force. shock of unemployment rate has negative effect on economic growth . He also mentions that the shocks in economic growth and FDI inflow decrease the unemployment rate. This sum that rapid economic growth and FDI inflow, accompanied by higher per capita income can promote future employment growth for labour force.In the research study of Meckl (2001), correlation between growth and unemployment is shown to be positive if the research sector is of the high-wage sector in the economy, and negative if the research sector is the low-wage sector.Arico (2003) has already observed that the rate of growth is negatively related with the rate of unemployment. If the growth rate increases, it will decrease the top rate at which the stream of profits is discounted. For each firm the institution will result less costly. More vacancies will be created, decrease the unemployment rate. (Capitalization effect).On the other hands, It will reduce the life-time of each firm, by increase the price for human capital. Each innovation will generate fewer vacancies than before. That will be reflected in an increase of the rate of unemployment. (Indirect yeasty destruction effect).Besides, Fanti and Manfredi (2003) has shown a negative relation between unemployment and growth , though we should also mention the positive relation between unemployment and growth obtained in the particular creative hoo-hah context according to Schumpeters idea. Fanti and Manfredi alsomshows a surprising relation between unemployment and growth (via effects on popu lation which is an endogenous engine of growth) this relation can be either positive or negative depending on the telling levels of cost of childrearing of workers and unemployed persons and the level of unemployment benefits.Meanwhile, Bonatti (2007) noticed that reduction of government transfers in favor of the workers allows decreasing the ratio of total tax revenues to GDP, thus monotonically increasing the growth rate and leading to a lower unemployment rate.CHAPTER 3 seek METHOD3.1 Data Analysis3.1.1 Unemployment RateIn this study, unemployment rate is the main study which was examine by using some informative variables. According to BLS, Bureau of Labor Statistics, (2009) those people who are with jobs can be considered as employed. On the other hand, a person will be classified advertisement as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are before long available for work. Dixon Shepherd (2002) verbalize that the unemp loyment rate can be considered as one of the most important indicators of macroeconomic performance in a country.The selective information of unemployment rate is obtained from the Bureau of Labor Statistics (BLS) which if thrifty in percentage from those people who are 16 age old and supra from year 1970 to 2007. The method which BLS employ to calculate the unemployment rate in United States isX 100%3.1.2 strong crying(a) Domestic Product sincere earn domestic product (Real GDP) in a country can be measured by the total output regard as of favorables and serve which produced from the domestic labor in the country in a stipulation year, denotative in base-year prices. In this study, it is expect that there is a negative relationship between the Real GDP and unemployment rate in United States. The source of the United States Real GDP data is from the innovation confide World Development Indicators and International Financial Statistics of the IMF. On the other hand, the data obtained was reborn to a 2005 base year. The formula to calculate the data of United States Real GDP is as beneath3.1.3 international level investment funds strange direct investment (FDI) is a kind of investment which is make to serve the business interest of the investor in a company which is in a different nation distinct from the investors country of origin. An example of FDI is a foreign company comes into a country to build or acquire a factory and run a business there. Many economists recall that FDI is good for an economy, because it provides domestic job opportunities and increase domestic capital.In this study, net inflows of foreign direct investment in the measurement of present-day(prenominal) US horse are apply. A net inflow of foreign direct investment is the total amount or value of the investment flow into United States from foreign investors to operate their business in United States and negative relationship between foreign direct investment and une mployment rate is expected in United States.3.1.4 Consumer Price IndexConsumer price business leader (CPI) is measured that examines the burthen average of prices of a basket of consumer goods and services in a country, such as transportation, food, rental fees and utilities fees. CPI is one of the measurements of inflation rate.According to Bureau of Labor Statistics (BLS), the prices for the goods and services utilise to calculate the CPI are self-collected in 87 urban areas in United States from about 23,000 retail and services establishments. The CPI data used in this study include all consumer items in United States from year 1970 to 2007.3.2 Research simulation3.2.1 Unemployment rate and Real Gross Domestic ProductBased on the study, unemployment and real arrant(a) domestic product is expected to be negatively related. Edward (2007) stated there is a negative relationship between real gross domestic product and unemployment because of the theory of Okuns law. According t o Okuns law, 1% increase in the unemployment rate will decrease GDP by 3%. However, Christopher (2010) say that, Okun coefficients can change over time because the relationship of unemployment to output growth depends on laws, technology, preferences, social customs, and demographics.3.2.2 Unemployment and Consumer Price IndexConsumer price index is one of the most frequently used statistics for locateing periods of inflation or deflation. This is because large rises in CPI during a short period of time typically have-to doe with periods of inflation. Therefore, we expect that there is an inverse relationship between the rate of unemployment and rate of inflation. According to the Phillips Curve theory, if the unemployment is high, inflation tends to be low. The diagram below shows the Phillips curve. flashPhillips curveUnemploymentHowever, the result shows a positive relationship in our backsliding model. This problem will occur because of the multico analogity problem in our backsliding model. exclusively when one in mutually beneficial variable by one freelancer variable with the unemployment is tested, negative sign for consumer price index and unemployment are obtained. Bae (2006) stated that there is a positive long run relationship between unemployment and inflation.3.2.3 Unemployment and impertinent Direct coronationIn this study, inflow of foreign direct investment were expected to affect the unemployment rate significantly and expected that foreign direct investment has a negative long run relationship with unemployment. Foreign direct investment will increase job opportunities so, unemployment rate will decrease. Shu (2007) stated that FDI have negative effects on unemployment as FDI are expected to generate economic growth by boost the expansion of trade and foreign investment.3.3 Econometric Methodology3.3.1 IntroductionThis chapter consist the used of the method to examining the relationship between the unemployment and economic condit ion in United State by using the time series data ranging from the year 1970 to 2007. First, the result testing will start with the test of stationary by using increase Dickey-Fuller unit root test and proceed with the cointegration test. Secondly, the doubled Regression Analysis and several ways to chance upon the assumption of the virtuous Linear Regression Model (CLRM). The multicol one-dimensionality is used to test the correlation analysis. Breusch-Godfrey sequential correlational statistics LM quiz is used to test the existence of straight autocorrelation, Auto simple reverting conditional Heteroscedasticity rill is used for testing the heteroscedasticity variance of hallucination of the model and Ramsey determine Test is used to detect the elongateity reverting and misspecification error.Unemployment = f (RGDP, FDI, CPI)RGDP = Real Gross Domestic ProductFDI = Foreign Direct InvestmentCPI = Consumer Price IndexThe change in unemployment is our main study that we want to examine with using a few of variables which are RGDP (Real Gross Domestic Product), FDI (Foreign Direct Investment) and CPI (Consumer Price Index).y = 0 + 1Ln (RGDP) + 2 (CPI) + 3 (FDI) +Econometric Model with Expected Sign= 0 + 1L (RGDP) + 2 (CPI) + 3(FDI)(-ve) (-ve) (-ve)Where +ve indicates that there is a postive relationship between the explanatory variable and qualified variable. On the other hand, -ve indicates that there is a negative relationship between the explanatory variable and dependent variable3.3.2 Unit rootA unit root test is used to examine whether a time series variable is stationary. In the model, T-statistic, F-statistic and R- square upd are used to determine to condition the validity of the test statistics is stationary. The result will become mean retroversion problem if the non-stationary series in the ordinary least square (OLS) retroversion is used. Spurious regression result in high significant T-statistic and passing value for the coefficie nt of determination R-squared, and the R-square is larger than Durbin Watson. Therefore, if the stationary does not hold, estimate is not consistent and result will be misleading. To avoid the specious regression problem, the Augmented Dickey-Fuller test (ADF) is used to examine the stationary of the variable.An Augmented Dickey-Fuller test (ADF) is used to test for a unit root in a time series sample. The Augmented Dickey-Fuller (ADF) statistic used in the test is a negative number. Therefore, the more negative value is, more berth the rejection of the speculation that there is a unit root at some level of confidence.The equating for Augmented Dickey-Fuller (ADF) testWhere is a constant, is the coefficient on a time trend and p is the lag order of the autoregressive process. = 0 and = 0 corresponds to manakin a random walk and = 0 corresponds to modeling a random walk drift. By including lags of the order p, the ADF formulation allows for higher-order autoregressive proce sses. This means that the lag length p needs to be determined when applying in the test. ane possible approach is to test from high orders and examine the t-value on coefficients. The criterion such as the Akaike information criterion (AIC), Schwarz-Bayesian information criterion (SBIC) or the Hannan-Quinn information criterion (HQIC) test is used to examine the lag length.3.3.3 husbandman agentThe farmer Causality test indicates that a time series Y is said to be Granger caused by X if X helps the prognostic of Y or equivalently if the coefficients on the lagged X are statistically significant. Granger Causality shows two-way causation in the case. X Granger causes Y and Y Granger causes X. It usually through a series of t-tests and F-tests on lagged set of X and lagged values of Y.3.3.4 Multiple RegressionsThe ordinary least squares (OLS) or linear least squares are a method to examine the undiscovered parameters in a linear regression model. It is used to collide with the distribance, ui. According to Gujarati (2003), ui stands for the normal distribution representing zero mean and constant variance, 2 in the multiple regression models. With the normality assumption, OLS estimators 1, and 2 are linear functions of ui. Therefore, if ui are commonly distributed, so 1,and 2 will make possibleness testing more straightforward. OLS estimators of the partial regression coefficients are identical with the upper limit likelihood (ML) estimators. There are the outstrip linear unbiased estimators (BLUE). Besides, the least-square estimators are best unbiased estimators (BUE) it means that they have minimum variance in the built-in class of unbiased estimators.3.3.5 MulticollinearityMulticollinearity shows the two or more autarkical variables in a multiple regression model are highly linearly related. The multicollinearity test is perfect if the correlation between two indie variables is tolerable to 1 or -1. Multicollinearity will occur when there is a strong linear relationship among two or more independent variables.The equation below is refer the variables is perfectly multicollinear if there exist one or more exact linear relationships among some of the variables.Estimates for the parameters of the multiple regression equation isThe ordinary least squares estimates include inverting the matrixXTXwhere,It indicate that if the linear relationship (perfect multicollinearity) is exactly with the independent variables, the rank of X is less than k+1 and the matrix XTX will not invertible.One of the detection of multicollinearity is used detection-tolerance or the variance inflation factor (VIF) for multicollinearitywhere R2j is the coefficient of determination of a regression of explanatory j on all the other explanators. Tolerances of less than 0.20 or 0.10 or a VIF of 5 or 10 and above shit a multicollinearity problem.3.3.6 Breusch-Godfrey Serial Correlation LM TestBreusch-Godfrey Serial Correlation LM test is a test of autocor relation that is basically allows for nonstochastic regressors such as the lagged values of the regressand higher-order autoregressive schemes such as AR (1), AR (2), etc and higher-order moving averages of white ruffle error terms such as t.Two variable regression models to illustrate the test, regressors can be added to the model and also lagged values of the regressand can be added to the model.Yt =1 +2Xt +utThe error term ut dare that the pth-order autoregressive, AR (p),Ut = ptut-1 + ptut-2 + +pput-p + t.where t.is a white noise error term.The trivial hypothesis H0 can be show asHo p1 = p2 = = pp = 0 (no autocorrelation)At 5% significant level, if the computed p value of Chi-square is less than Chi-square tests, do not reject the nonentity hypothesis, meaning that there is no autocorrelation problem. If computed p value of Chi-square is more than Chi-square tests, reject the null hypothesis, meaning that there is autocorrelation problem.3.3.7 Autoregressive Conditional He teroscedasticity TestIn econometrics, Autoregressive Conditional Heteroskedasticity (ARCH) model assume that the variance of the current error term is related to the previos one. Autoregressive Conditional Heteroskedasticity model is used to model the time series with time-varying volatility such as product line price.3.3.8 judicial admission errorRamsey Regression Equation Specification Error Test (Ramsey RESET test) is used to examine the specification error. The specification test for the linear regression model. More specifically, it is used to test the specification error in the equation. As the result, if the non-linear combinations of the independent variables have any power in explaining the dependent variable, means that the model is mis-specified.Consider the model = E y = The Ramsey test is used to test whether the (1)2, (2)3,(k-1)k has any power in explaining y. The Ramsey test is executed by calculate the following linear regression = + 12 ++ k-1k + After examine the test, the means of the F-test is to determine whether 1 through k-1 are zero. If the null hypothesis reveals that all regression coefficients are zero, means that the null hypothesis cannot be reject, the Ramsey test is ineffective to detect any misspecification. If the null hypothesis is rejected, means that the model is misspecification.3.3.9 Jarque-Bera Test of newtonJarque-Bera test of normality is used to test the normally distributed. It is large-sample or an asymptotic test and based on the OLS. The test first calculates the lopsidedness and kurtosis measures of the OLS residuals.JB = nWhere the n = sample size, S = skewness coefficient, and K = kurtosis coefficient. The normally distributed variable, S is zero and K is three. Hence, the Jarque-Bera test of normality is a test of the reefer hypothesis that S and K are zero and three, respectively. Therefore, the value of the Jaque-Bera statistic is expected to be zero.For the null hypothesis the residual is normally dis tributed, asymptotically (i.e., in large samples) the Jarque-Bera statistic gives the chi-square distribution with two degree of freedom showed by Jarque and Bera (Gujarati 2003) For the substitute(a) hypothesis the residual is not normally distributed. At 5 significant levels, computed p value is less than Jarque-Bera statistic, we can reject the null hypothesis that the residual is not normally distributed whereas computed p value is more than Jarque-Bera statistic, we do not reject the null hypothesis that the residual is normally distributed.CHAPTER 4 RESEARCH RESULTS AND INTERPRETATION4.1 IntroductionThis chapter consists of the results and interpretation of the relationship betweenUnemployment as an Indicator of Macroeconomic PerformanceUnemployment as an Indicator of Macroeconomic PerformanceThe rate of unemployment is one of the most important indicators of macroeconomic performance. Unemployment arises due to the distortions in the supply of labor cause by the non-competit ive wage differential. During the period from 1945 until at least 1968, unemployment rates in the major European economies were extremely low by todays standards. For instance in the United Kingdom, the average rate of unemployment for the entire period was about 1.8% of the labor force and in worst years it did not even exceed 2.5%. The main driving force was autonomous rather than policy related. These forces include waves of new products and processes, spread of trade and development around the world. However the cause of unemployment problem in Europe in comparison to the United States was their labor market institutions while the United States is far more superior due to the flexibility of their labor market.In this paper, determinants of unemployment in US are the concerns with economic growth as the main concern. Economic growth of a nation is the increase in a nations real output that occurs over time. In general, growth and unemployment are closely related as unemployment a ffects the growth rate through the scale of operation of an economy. Besides that, FDI inflow and inflation are taken into account altogether to identify the relationship towards the unemployment rate.1.1 BackgroundAs unemployment is one of the most important economic indicators, the unemployment rate provides useful information such as how the labor market works as well as the percentage of human capital that is not used in the production process, which is especially crucial towards policy makers. Consequently, it is important to analyze the factors that impact the unemployment rate regardless short or long term perspective.The United States of America is a developed country which has one of the largest population and production in the world (Encyclopedia, 2010). As unemployment are explained by structural factors mainly by inflexible labor market. One may wonder the about the impact which economic growth, inflation and FDI have on the unemployment rate of the United States of Amer ica as the clutches of unemployment are hard to escape even for a develop country, especially for US which possesses by far the most flexible labor market. As a case study, the United States of America has been chosen as the research country. United States of America is reckoned to be particularly appropriate as United States of America labor market has proven by all accounts to be more dynamic in the sense of a higher level of job turnover, resulting in high vacancy levels at any point in time. Recently, unemployment rate in the United States of America has been found to be as high as 9.6% as of August 2010 compared to the 4.1% ten years ago (Bureau of Labor Statistics, 2010). In the mean time the real GDP growth in 2000 was at 4.14% when the unemployment rate was 4.1% while the real GDP growth in 2003 was at 2.49% when the unemployment rate was 5.8% (Bureau of Labor Statistics, 2010). From here, it can be seen that unemployment rate moves in the opposite direction of economic grow th, yet there were different versions of results concluded by different previous researchers.1.2 Problem StatementUnemployment has been a famous macroeconomic variable that researchers tend to use to study on but even with so many researches carried out, some of the results obtained are not consistent with one and another. For instance, the debates among Monetarist and Keynesian views of unemployment as well as the new contributions of Lucass approach and new Keynesian Economics shows that there was no reason to account for growth in the unemployment model.However, a significant innovation occurred with Pissarides(1990) formulation of an unemployment theory in equilibrium. In many previous attempts, he formalize a unique framework to study the labor market dynamic perspective, providing useful tools to analyze both long and short run unemployment. Pissarides also introduced a first link between long run unemployment and growth which matches the neoclassical framework of economic gro wth. ( Pissarides, 1990 Ch. II)In the case of US, its economy began its current economic recovery in December 2001. However, rather than experiencing employment growth, not only did the unemployment rate increase but the number of new jobs created in the economy actually declined significantly during the first year of the recovery (Seyfried). Thus this paper is conducted so as to affirm the relationship of economic growth has on the unemployment rate of the country. As some results obtained by past researchers showed that economic growth impacts unemployment whereas the others came to a conclusion that unemployment causes economic growth whereby the existence of Granger Causality relationship is quite possible. In this study, economic growth, inflation and FDI serves as explanatory variable to determine the relationship towards unemployment rate in the United States of America.1.3 ObjectivesThis study aims to investigate the determinants of unemployment rate in the United States of America with economic growth as the main concern in addition with inflation and FDI (foreign direct investment) to further assure that it is coherent with the results obtained from previous studies.1.3.1 Specific objectivesThis paper aims to examine the relationship between economic growth, inflation and FDI towards the unemployment rate. On the other hand, this paper serves to probe further into the relationship between economic growth, FDI, and inflation towards unemployment to sustain the existence of granger causality relationship.1.4 Significance of studyThe contribution of carrying out this study is to allow policy makers to have an insight of unemployment so as to allow them to decide on suitable policy that will help bring down the unemployment rate while sustaining appropriate inflation level and attract sufficient FDI inflow. The results generated will help provide insight to the nature of the relationship between economic growth, inflation, and FDI towards unemployment. I t would be useful to policy makers to know the rate and relationship of economic growth as it is necessary to reduce the unemployment rate, or at least keeping it from rising. Moreover, in previous studies, FDI is found to have impacted the unemployment rate indirectly through spillover effects from economic growth. In this study, however, FDI is incorporated directly to affect unemployment growth therefore the effectiveness of the implemented policy will be taken into account more effectively.CHAPTER 2 Literature Review2.1 Conceptual ModelAccording to Alexopolous (2003), in the case where there is technological growth in the economy, families will increase their investment in capital, which in turn increase the amount of family purchased consumption workers receive over time. As a result, firms optimally increase the wage rate proportionately in order to prevent workers from shirking on the job. Therefore, the rate of unemployment along the balanced growth path will not change over time, since the marginal product of labour and the marginal cost of labour grow at the same rate.Based on De Groot, in general, growth and unemployment are intimately related for two reasons. Unemployment affects the scale of operation of the economy and thereby the growth rate. Growth affects inter-temporal decisions of workers about where to allocate on the labor market once they are laid off, and thereby it affects equilibrium unemployment.According to Brecher (2007), rapid economic growth and FDI, accompanied by higher per capita income, usually increase output growth. Thus, domestic firms and foreign multinational corporations will demand more labour force with skills to create products. Hence, economic growth can promote future employment growth for labour force based on new Keynesian theory of the output-inflation tradeoff.Some studies found that overseas investment replaced domestic employment in developing countries however, the same result did not happen in developed coun tries.Tremblay (2007) pointed out that based on classical economic theory, the Phillips Curve illustrated long-run tradeoff between unemployment and inflation. There is an inverse relationship between inflation and unemployment, that is saying inflation will rise when unemployment decrease and vice-versa.Futhermore, Luciano Fanti and Piero Manfredi (2003) mention that the neoclassical Solow model, which still provides excellent econometric fits and shows a globally stable positive growth equilibrium, but also shows two restrictive features as regards the scope of this paper (1) it does not take into account the stylized fact of the existence of unemployment, which is generally not only positive but also strongly fluctuating (2) in such a model fluctuations have never been endogenously determinedMeanwhile, Martin Zagler (2006) noticed that the cost associated with economic growth is structural unemployment, as structural change destroys jobs in one firm and creates jobs in another. T he source of unemployment is the rate of intra-sector structural change associated with faster economic growth.Besides, Bonatti (2007) says that an increase of the workers influence on the political process may raise the fraction of GDP allocated to finance the welfare state, thus leading to a higher unemployment rate and to a lower growth rate.The research work done by Chang (2007) noticed that when the degree of trade openness of Taiwan is larger, the unemployment rate of Taiwan will increase, this is because the young men and young women in Taiwan desire to extend their education in working age.According to Phillips (1998), the negative relationship between inflation and unemployment can be explained through governments expansionary policy to increase the consumption level of the citizens. As labor market tightens, unemployment rate will fall as money wages tended to rise more rapidly. Unemployment will then increase as government tries to control the inflation rate. This is beca use the increment in wages is closely related with the increase in price. Therefore, the trade-off between these two variables can be seen.2.2 MethodologyEffects panel regression methods were used by Zagler (2006) on the relationship between economic growth and unemployment. Moreover, Zagler (2006) checked his estimated model with the unit-root test to test the stationary of the model.In order to obtain information about the relationship between inflation and unemployment, the procedure of den Hann was employed by Bae (2006), which has the advantage as no assumptions about the order of integration in the variables of interest is required. The procedure estimates a vector regressions (VAR) model and analyzes the correlations of VAR forecast errors of inflation and unemployment at long horizons.Chang (2007) used vector autoregression method of variance decomposition and impulse response function analysis are applied to analyze various relationships among foreign direct investment (FDI ), economic growth, unemployment and degree of openness in Taiwan. Besides that, he also uses the unit root test of augmented Dickey-Fuller (ADF and KPSS) test to examine the stationary properties of the economic time series. The appropriate lag-length in the ADF regression is selected by minimizing the Akaikes information criterion (AIC). He also uses co-integration test to determine whether there exists a long-run equilibrium relationship among variables and weak exogeneity, and multivariate Granger-causality test to determine their causal direction in the short-run between all variables. Besides, he also has applied the VAR technique of variance decomposition and impulse response function analysis to analyze various inter-relationships between FDI, unemployment rate and GDP variables in the case of Taiwan from the period of 1981 to 2003.Meanwhile, Eric Heyer, Frdric Reyns, Henri Sterdyniak (2006) present the results of the DF-GLS unit root test to test the growth rate of consumer price and also unemployment rate.2.3 Empirical ResultZagler (2006) has carried out a research which empirically investigated the link between economic growth and unemployment, using micro econometric evidence for the United Kingdom. The results generated showed a significant and negative relationship between unemployment and economic growth.According to the result generated by Muscatelli and Tirelli (2001), it is proven that there is a negative relationship between economic growth and unemployment as Japan, Germany, Italy, France and Canada. This result is generally in favour of those theories which predict a negative linkage between unemployment on economioc growthBesides, Pehkonen (2000) stated that a fall in GDP has significant relationship with unemployment as a drop in the GDP in Finland leads to an increase in the unemployment since demand for labor have shrunk. Therefore, Pehkonen (2000) concluded that unemployment would increase as a result of a decrease in economic growth. Meanwhile, Mitra and Sato (2007) found that the major links between external scale economies and growth are perceived in terms of technical efficiency, and higher growth is taken to reduce the unemployment rate.Futhermore, Scahaik and Groot (1998) found that the unemployment and economic growth relationship in imperfect competition economy and different periods, where structural changes occur, has a negative correlation and effect of different degrees through testing the structural stability.Chang (2007) proved that economic growth as well as FDI have negative effects on unemployment as FDI are expected to generate economic growth by encouraging the expansion of trade and foreign investment. In addition, according to Solows growth theory, employment for labour force with skill can further promote economic growth and this can be verified by Taiwans economy model. Okuns law stating that reducing unemployment for labour force can promote further economic growth is then verified. Furthe rmore, unemployment is very sensitive to changes in GDP and vice versa, which does lend support that rising economic growth can obviously affect unemployment for labour force. shock of unemployment rate has negative effect on economic growth . He also mentions that the shocks in economic growth and FDI inflow decrease the unemployment rate. This means that rapid economic growth and FDI inflow, accompanied by higher per capita income can promote future employment growth for labour force.In the research study of Meckl (2001), correlation between growth and unemployment is shown to be positive if the research sector is of the high-wage sector in the economy, and negative if the research sector is the low-wage sector.Arico (2003) has already observed that the rate of growth is negatively related with the rate of unemployment. If the growth rate increases, it will decrease the net rate at which the stream of profits is discounted. For each firm the entry will result less costly. More vac ancies will be created, reducing the unemployment rate. (Capitalization effect).On the other hands, It will reduce the life-time of each firm, by increasing the price for human capital. Each innovation will generate fewer vacancies than before. That will be reflected in an increase of the rate of unemployment. (Indirect creative destruction effect).Besides, Fanti and Manfredi (2003) has shown a negative relation between unemployment and growth , though we should also mention the positive relation between unemployment and growth obtained in the particular creative disruption context according to Schumpeters idea. Fanti and Manfredi alsomshows a surprising relation between unemployment and growth (via effects on population which is an endogenous engine of growth) this relation can be either positive or negative depending on the relative levels of cost of childrearing of workers and unemployed persons and the level of unemployment benefits.Meanwhile, Bonatti (2007) noticed that reducti on of government transfers in favor of the workers allows decreasing the ratio of total tax revenues to GDP, thus monotonically increasing the growth rate and leading to a lower unemployment rate.CHAPTER 3 RESEARCH METHOD3.1 Data Analysis3.1.1 Unemployment RateIn this study, unemployment rate is the main study which was examine by using some explanatory variables. According to BLS, Bureau of Labor Statistics, (2009) those people who are with jobs can be considered as employed. On the other hand, a person will be classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Dixon Shepherd (2002) stated that the unemployment rate can be considered as one of the most important indicators of macroeconomic performance in a country.The data of unemployment rate is obtained from the Bureau of Labor Statistics (BLS) which if measured in percentage from those people who are 16 years old and above from year 1970 to 2007. The method which BLS used to calculate the unemployment rate in United States isX 100%3.1.2 Real Gross Domestic ProductReal gross domestic product (Real GDP) in a country can be measured by the total output value of goods and services which produced from the domestic labor in the country in a given year, expressed in base-year prices. In this study, it is expected that there is a negative relationship between the Real GDP and unemployment rate in United States. The source of the United States Real GDP data is from the World Bank World Development Indicators and International Financial Statistics of the IMF. On the other hand, the data obtained was converted to a 2005 base year. The formula to calculate the data of United States Real GDP is as below3.1.3 Foreign Direct InvestmentForeign direct investment (FDI) is a kind of investment which is made to serve the business interest of the investor in a company which is in a different nation distinct from the investors country of origin. An example of FDI is a foreign company comes into a country to build or buy a factory and run a business there. Many economists believe that FDI is good for an economy, because it provides domestic job opportunities and increase domestic capital.In this study, net inflows of foreign direct investment in the measurement of current US Dollar are used. A net inflow of foreign direct investment is the total amount or value of the investment flow into United States from foreign investors to operate their business in United States and negative relationship between foreign direct investment and unemployment rate is expected in United States.3.1.4 Consumer Price IndexConsumer price index (CPI) is measured that examines the weighted average of prices of a basket of consumer goods and services in a country, such as transportation, food, rental fees and utilities fees. CPI is one of the measurements of inflation rate.According to Bureau of Labor Statistics (BLS), the prices for the go ods and services used to calculate the CPI are collected in 87 urban areas in United States from about 23,000 retail and services establishments. The CPI data used in this study included all consumer items in United States from year 1970 to 2007.3.2 Research Framework3.2.1 Unemployment rate and Real Gross Domestic ProductBased on the study, unemployment and real gross domestic product is expected to be negatively related. Edward (2007) stated there is a negative relationship between real gross domestic product and unemployment because of the theory of Okuns law. According to Okuns law, 1% increase in the unemployment rate will decrease GDP by 3%. However, Christopher (2010) said that, Okun coefficients can change over time because the relationship of unemployment to output growth depends on laws, technology, preferences, social customs, and demographics.3.2.2 Unemployment and Consumer Price IndexConsumer price index is one of the most frequently used statistics for identifying perio ds of inflation or deflation. This is because large rises in CPI during a short period of time typically denote periods of inflation. Therefore, we expect that there is an inverse relationship between the rate of unemployment and rate of inflation. According to the Phillips Curve theory, if the unemployment is high, inflation tends to be low. The diagram below shows the Phillips curve.InflationPhillips curveUnemploymentHowever, the result shows a positive relationship in our regression model. This problem will occur because of the multicolinearity problem in our regression model. But when one independent variable by one independent variable with the unemployment is tested, negative sign for consumer price index and unemployment are obtained. Bae (2006) stated that there is a positive long run relationship between unemployment and inflation.3.2.3 Unemployment and Foreign Direct InvestmentIn this study, inflow of foreign direct investment were expected to affect the unemployment rate significantly and expected that foreign direct investment has a negative long run relationship with unemployment. Foreign direct investment will increase job opportunities so, unemployment rate will decrease. Shu (2007) stated that FDI have negative effects on unemployment as FDI are expected to generate economic growth by encouraging the expansion of trade and foreign investment.3.3 Econometric Methodology3.3.1 IntroductionThis chapter consist the used of the method to examining the relationship between the unemployment and economic condition in United State by using the time series data ranging from the year 1970 to 2007. First, the result testing will start with the test of stationary by using Augmented Dickey-Fuller unit root test and proceed with the cointegration test. Secondly, the Multiple Regression Analysis and several ways to detect the assumption of the Classical Linear Regression Model (CLRM). The multicollinearity is used to test the correlation analysis. Breusch-Godfr ey Serial Correlation LM Test is used to test the existence of serial autocorrelation, Autoregression Conditional Heteroscedasticity Test is used for testing the heteroscedasticity variance of error of the model and Ramsey RESET Test is used to detect the linearity regression and misspecification error.Unemployment = f (RGDP, FDI, CPI)RGDP = Real Gross Domestic ProductFDI = Foreign Direct InvestmentCPI = Consumer Price IndexThe change in unemployment is our main study that we want to examine with using a few of variables which are RGDP (Real Gross Domestic Product), FDI (Foreign Direct Investment) and CPI (Consumer Price Index).y = 0 + 1Ln (RGDP) + 2 (CPI) + 3 (FDI) +Econometric Model with Expected Sign= 0 + 1L (RGDP) + 2 (CPI) + 3(FDI)(-ve) (-ve) (-ve)Where +ve indicates that there is a postive relationship between the explanatory variable and dependent variable. On the other hand, -ve indicates that there is a negative relationship between the explanatory variable and dependent va riable3.3.2 Unit rootA unit root test is used to examine whether a time series variable is stationary. In the model, T-statistic, F-statistic and R-squared are used to determine to ensure the validity of the test statistics is stationary. The result will become spurious regression problem if the non-stationary series in the ordinary least square (OLS) regression is used. Spurious regression result in high significant T-statistic and highly value for the coefficient of determination R-squared, and the R-square is larger than Durbin Watson. Therefore, if the stationary does not hold, estimate is not consistent and result will be misleading. To avoid the spurious regression problem, the Augmented Dickey-Fuller test (ADF) is used to examine the stationary of the variable.An Augmented Dickey-Fuller test (ADF) is used to test for a unit root in a time series sample. The Augmented Dickey-Fuller (ADF) statistic used in the test is a negative number. Therefore, the more negative value is, mo re power the rejection of the hypothesis that there is a unit root at some level of confidence.The equation for Augmented Dickey-Fuller (ADF) testWhere is a constant, is the coefficient on a time trend and p is the lag order of the autoregressive process. = 0 and = 0 corresponds to modeling a random walk and = 0 corresponds to modeling a random walk drift. By including lags of the order p, the ADF formulation allows for higher-order autoregressive processes. This means that the lag length p needs to be determined when applying in the test. One possible approach is to test from high orders and examine the t-value on coefficients. The criterion such as the Akaike information criterion (AIC), Schwarz-Bayesian information criterion (SBIC) or the Hannan-Quinn information criterion (HQIC) test is used to examine the lag length.3.3.3 Granger CausalityThe Granger Causality test indicates that a time series Y is said to be Granger caused by X if X helps the prediction of Y or equivalent ly if the coefficients on the lagged X are statistically significant. Granger Causality shows two-way causation in the case. X Granger causes Y and Y Granger causes X. It usually through a series of t-tests and F-tests on lagged values of X and lagged values of Y.3.3.4 Multiple RegressionsThe ordinary least squares (OLS) or linear least squares are a method to examine the unknown parameters in a linear regression model. It is used to assume the distribance, ui. According to Gujarati (2003), ui stands for the normal distribution representing zero mean and constant variance, 2 in the multiple regression models. With the normality assumption, OLS estimators 1, and 2 are linear functions of ui. Therefore, if ui are normally distributed, so 1,and 2 will make hypothesis testing more straightforward. OLS estimators of the partial regression coefficients are identical with the maximum likelihood (ML) estimators. There are the best linear unbiased estimators (BLUE). Besides, the least-square estimators are best unbiased estimators (BUE) it means that they have minimum variance in the entire class of unbiased estimators.3.3.5 MulticollinearityMulticollinearity shows the two or more independent variables in a multiple regression model are highly linearly related. The multicollinearity test is perfect if the correlation between two independent variables is equal to 1 or -1. Multicollinearity will occur when there is a strong linear relationship among two or more independent variables.The equation below is refer the variables is perfectly multicollinear if there exist one or more exact linear relationships among some of the variables.Estimates for the parameters of the multiple regression equation isThe ordinary least squares estimates include inverting the matrixXTXwhere,It indicate that if the linear relationship (perfect multicollinearity) is exactly with the independent variables, the rank of X is less than k+1 and the matrix XTX will not invertible.One of the detectio n of multicollinearity is used detection-tolerance or the variance inflation factor (VIF) for multicollinearitywhere R2j is the coefficient of determination of a regression of explanatory j on all the other explanators. Tolerances of less than 0.20 or 0.10 or a VIF of 5 or 10 and above reveal a multicollinearity problem.3.3.6 Breusch-Godfrey Serial Correlation LM TestBreusch-Godfrey Serial Correlation LM test is a test of autocorrelation that is basically allows for nonstochastic regressors such as the lagged values of the regressand higher-order autoregressive schemes such as AR (1), AR (2), etc and higher-order moving averages of white noise error terms such as t.Two variable regression models to illustrate the test, regressors can be added to the model and also lagged values of the regressand can be added to the model.Yt =1 +2Xt +utThe error term ut assume that the pth-order autoregressive, AR (p),Ut = ptut-1 + ptut-2 + +pput-p + t.where t.is a white noise error term.The null hyp othesis H0 can be show asHo p1 = p2 = = pp = 0 (no autocorrelation)At 5% significant level, if the computed p value of Chi-square is less than Chi-square tests, do not reject the null hypothesis, meaning that there is no autocorrelation problem. If computed p value of Chi-square is more than Chi-square tests, reject the null hypothesis, meaning that there is autocorrelation problem.3.3.7 Autoregressive Conditional Heteroscedasticity TestIn econometrics, Autoregressive Conditional Heteroskedasticity (ARCH) model assume that the variance of the current error term is related to the previos one. Autoregressive Conditional Heteroskedasticity model is used to model the time series with time-varying volatility such as stock price.3.3.8 Specification errorRamsey Regression Equation Specification Error Test (Ramsey RESET test) is used to examine the specification error. The specification test for the linear regression model. More specifically, it is used to test the specification error in t he equation. As the result, if the non-linear combinations of the independent variables have any power in explaining the dependent variable, means that the model is mis-specified.Consider the model = E y = The Ramsey test is used to test whether the (1)2, (2)3,(k-1)k has any power in explaining y. The Ramsey test is executed by calculate the following linear regression = + 12 ++ k-1k + After examine the test, the means of the F-test is to determine whether 1 through k-1 are zero. If the null hypothesis reveals that all regression coefficients are zero, means that the null hypothesis cannot be reject, the Ramsey test is unable to detect any misspecification. If the null hypothesis is rejected, means that the model is misspecification.3.3.9 Jarque-Bera Test of NormalityJarque-Bera test of normality is used to test the normally distributed. It is large-sample or an asymptotic test and based on the OLS. The test first calculates the skewness and kurtosis measures of the OLS residual s.JB = nWhere the n = sample size, S = skewness coefficient, and K = kurtosis coefficient. The normally distributed variable, S is zero and K is three. Hence, the Jarque-Bera test of normality is a test of the joint hypothesis that S and K are zero and three, respectively. Therefore, the value of the Jaque-Bera statistic is expected to be zero.For the null hypothesis the residual is normally distributed, asymptotically (i.e., in large samples) the Jarque-Bera statistic gives the chi-square distribution with two degree of freedom showed by Jarque and Bera (Gujarati 2003) For the alternative hypothesis the residual is not normally distributed. At 5 significant levels, computed p value is less than Jarque-Bera statistic, we can reject the null hypothesis that the residual is not normally distributed whereas computed p value is more than Jarque-Bera statistic, we do not reject the null hypothesis that the residual is normally distributed.CHAPTER 4 RESEARCH RESULTS AND INTERPRETATION4.1 IntroductionThis chapter consists of the results and interpretation of the relationship between