International Journal of Economics and Empirical Research

http://www.tesdo.org/Publication.aspx

Interactions between Economic Growth and Unemployment Condition in Asian Region

Syh Han Ang a, Nanthakumar Loganathan a

a
Faculty of Management and Economics, Universiti Malaysia Terengganu, 21030 Kuala Terengganu, Malaysia

Highlights
The Okuns law is investigated in Asian region.
The ARDL bounds testing approach to cointegration is applied.
Economic growth affects unemployment.
Abstract
Purpose: This study is aimed to examine the relationship between GDP growth and unemployment rate for developed and
developing Asian countries over the period 1980-2010. Methodology: This study has applied the Okuns law framework
to estimate the co-integration dynamic and weak or strong Granger-causality for relationship between GDP growth and
unemployment rate with ARDL approach. Findings: The results found that developed and developing Asian countries
have achieved the negative sign for the long run coefficient as well as the short run coefficient between Unemployment
rate and GDP growth. Hence, some developed and developing Asian countries still robust in the theory Okun but the
coefficient values are higher than original Okuns law. Recommendations: Therefore, the new Okuns framework in the
Asian macroeconomics performance is being existed in the developed and developing Asian countries.

Keywords: Cointegration, Granger causality, Okuns law

JEL Classification: C32, C39, E24, O47, R11.

Corresponding Author: kumar@umt.edu.my

Citation: Ang, S. H. and Loganathan, N. (2013). Interactions between Economic Growth and Unemployment
Condition in Asian Region. International Journal of Economics and Empirical Research. 1(12), 135-146.

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 International Journal of Economics and Empirical Research. 2013, 1(12), 135-146.

I. Introduction
From the period post world war-II, the issues of output regarding the growth and unemployment have been
discussed by the policy-maker in the United States. Okun (1962) has observed the problem related to how much
output can the economy produce under the conditions of full employments. Okun (1962) used 4% of unemployment
rate as the hypothesis which considers as full employment for the targeted labor market conditions. This research
found that each extra percentage point on the unemployment rate above the target rate of 4% has been associated
with about 3% decrement in output growth which also known as Okuns law. Okuns law is not just simply
developed the economic theory for the academic purposes but also helped in translating the macroeconomic
discussions into a suitable form for actual policy-making in order to alleviate pressing social and economic problems
(Phelps, 1981). Moreover, this theory is potentially providing the significant guidance in the governmental decision-
making (Lodewijks, 1988). This economists work was made the interest in the relationship between output growth
and unemployment for the macroeconomic performance. Therefore, this study has focused by the researchers for
these several decades.

From the past literature, the empirical studies on the relationship between output growth and unemployment have
been focused on the United States. Gordon (1984) used the quarterly data to re-examine the Okuns law in the
United States over the period 1949-1984. The results found that the coefficient values are higher than the value of
Okuns law original framework which is 0.23 % point for the short run and 0.5 % point for the long run in the
United States. It is a negative sign of the relationship between output growth and unemployment in the United States.
Blackley (1991), Moosa (1999), Freeman (2000), Holmes and Silverstone (2006), Huang and Lin (2008), and
Beaton (2010) also found that the negative sign in the relationship between output growth and unemployment in the
United States. Hence, the robustness of Okuns law is still maintaining for United States. Paldam (1987) also
investigated the fact regarding how much the percentage of change in term of unemployment rates for each percent
growth in the 17 OECD countries. There was negative relationship between GDP growth and unemployment which
is average -0.15 % change to each point on 17 OECD countries. Kaufman (1988) and Lee (2000) also found the
evidence of robustness to the Okuns law in the OECD countries. On the other hand, Moosa (1997), Malley and
Molana (2008) found that there is a significant level of the relationship between GDP growth and the unemployment
ratein G7 countries. The Okuns law has revealed the significant evidence of the European Union such as the United
Kingdom (Attfield and Silverstone, 1998), Romanian (Caraiani, 2008), Spain (Villaverde and Maza, 2009), and 15
EU countries as well as four Mediterranean countries which are Greece, Italy, Spain, Portugal (Dritsaki and
Dritsakis, 2009).

For the Asian countries, Hamada and Kurosaka (1984) used the annual data over the period 1953-1982 to examine
the Okuns law for the Japaneses economy. Okuns coefficient is unstable for the post-war Japanese economy.
Zaleha et al (2007) found that the Okuns law is also existed in Malaysia. Lal et al. (2010) used the annual data to
test the Okuns law in some Asian countries such as Pakistan, India, China, Sri Lanka, and Bangladesh over the
period 1980-2006. The empirical results found that Okuns law may not apply in those Asian countries. Lastly,
Moosa (2008) also applied the Okuns law in several Arab countries such as Algeria, Egypt, Morocco, and Tunisia.
The empirical results showed that the Okuns law is not valid in the Arab countries. Hence, the empirical studies of
the relationship between output growth and unemployment have triggered the distinction results in the several
countries. Therefore, the Okuns law is proved to be lack of the evidence in the developed and developing Asian
countries.

The main objective of this paper is to examine the relationship between GDP growth and the unemployment rate in
the developed and developing Asian countries. This study only focused on developed Asian countries such as Japan,
South Korea, Singapore, and developing Asian countries such as Indonesia, Malaysia, and Thailand. This study used
the application of cointegration dynamic approach and Granger causality approach in the relationship between GDP
growth and the unemployment rate.

I.I Scenarios on GDP growth and unemployment on some developed and developing Asian countries
This section reviews the scenarios on GDP growth and unemployment on some developed and developing Asian
Countries. Asian economy has used the classification system to determine the economic development performance
(Asian Development Bank, 2012). The main criteria adopted to classify developed or developing countries is Gross
National Income (GNI) per capita. The GNI per capita is performed by using the calculated of World Banks Atlas

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 Interactions between Economic Growth and Unemployment Condition in Asian Region

method for the classification estimation. The group of high income ($12,476 or more) is classified in the category of
developed countries. The group of middle income which included lower middle income ($1,026-$4,035) upper
middle income ($4,036-$12,475) is classified in the category of developing countries (World Bank, 2013). Asian
countries also took part in the classification process and graduation of developing member countries policy (Asian
Development Bank, 2013). Some Asian countries are reaching the developed countries in the classification system
since those countries have been graduated in the process of developing member countrys policy. For instance,
Japan, South Korea, Singapore has reached the status of the developed countries and Indonesia, Malaysia, Thailand
still proceeding in status of the developing countries (FTSE, 2012). Therefore, Asian developed and developing
countries have revealed the gap of the economic performance for these several decades. From the early 1980s, the
sluggish Asian economic growth has affected by the two incidents of a global oil crisis of 1970s. The Organization
of Arab Petroleum Exporting Countries (OAPEC) embargos oils effect has been forced to decrease the production
of the output (Yergin, 1991). In the mid-1980s to mid-1990s, Asian economy has contributed to the miracle of rapid
growth (Krugman, 1994). The industrialization experiences of Japan and the Asian tigers (Singapore, Taiwan,
Hong Kong, and South Korea) have propelled the rapid growth for the East Asian development. The Southeast
Asian economies such as Malaysia, Indonesia, and Thailand also achieved the rapid growth. Unfortunately, Asian
finance crisis leads the serious recession for Asian economic performance for the period 1997. The Southeast Asian
currency markets were seriously attacked by this financial crisis. The Thai Baht, Malaysia Ringgit, Indonesian
rupiah and the Philippine peso have suffered the devaluations in the Asian currency markets for the period 1997 and
Korean Won and Hong Kong Dollar also have devaluated in the period 1998. At the beginning of the quarterly 1998,
South Korea, Malaysia and Thailand had suffered the fallen of 35%-55% and Indonesia faced the fallen of 80% for
the currency devaluations (Asian Development Bank, 1998). Japan and Singapore were less affected by the crisis
but also suffered the slight devaluations. Hence, Asian financial crisis had a rapid recovery in the period 1999.
Therefore, the economic growth and unemployment have undergone the structural change during Asian financial
crisis.

On the 21st century, Asian economy has confronted several challenges to the GDP growth and unemployment rate.
The post-Asian finance crisis, developed and developing Asian countries have been rapidly recovered but slightly
slow down during the tragedy of terrorist attack in the United States in the period 2001 and Severe Acute
Respiratory Syndrome (SARS) virus attack in the period 2003. Developed and developing Asian countries have
reached the stable economic growth for the period 2004-2008. Unfortunately, Global financial crisis of 2008 has led
the growth became slow down for the developed and developing Asian countries for the period 2009. Asian
economics especially developing Asian countries has rapidly growth recovery from the global financial crisis due to
the ability of developing countries in the East Asian to implement the economic policy efficiently since East Asia
had the experiences in overcoming the financial crisis. Hence, the Asian region has increased rapidly to 8.4 % on the
average of the GDP growth with a strong recovery in the period 2010 (Asian Development Bank, 2011). Finally,
Asian economies were playing the important roles in the recovery of global economic performance.

Figure-1 is shown that the scenario economics trend in developed and developing Asian countries over the period
1980-2010. This study used Japan, South Korea, and Singapore as the group of developed countries and Indonesia,
Malaysia, and Thailand as the group of developing countries. For the aspect Asian Developed countries, Japaneses
economy has achieved the peak in the period 1987/1988 which is 7% of GDP growth and 2.50% of unemployment
rate but also fallen into the trough in the period 2008/2009 which is -6% of GDP growth and 5% of unemployment
rate. South Koreas economy has achieved the peak in the period 1986/1987 which is 11.10% of GDP growth and
3.10% of unemployment rate but also fallen into the trough in the period 1997/1998 which is -6.85% of GDP growth
and 7% of unemployment rate. Singapores economy has achieved the peak in the period 2009/2010 which is 14.47%
of GDP growth and 5.90% of unemployment rate but also fallen into the trough in the period 1997/1998 which is -
2.11% of GDP growth and 2.70% of unemployment rate. For the aspect Asian developing countries, Indonesias
economy has achieved the peak in the period 1988/1989 which is 9.08% of GDP growth and 2.80% of
unemployment rate but also fallen into the trough in the period 1997/1998 which is -13.13% of GDP growth and 5%
of unemployment rate. Malaysias economy has achieved the peak in the period 1995/1996 which is 10% of GDP
growth and 2.50% of unemployment rate but also fallen into the trough in the period 1997/1998 which is -7.36% of
GDP growth and 3.20% of unemployment rate. Thailands economy has achieved the peak in the period 1987/1988
which is 13.29% of GDP growth and 3% of unemployment rate but also fallen into the trough in the period
1997/1998 which is -10.51% of GDP growth and 3.40% of unemployment rate. Therefore, the relationship between
GDP growth and unemployment may differ with the Okuns original framework.

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 International Journal of Economics and Empirical Research. 2013, 1(12), 135-151.

Figure-1. GDP Growth and Unemployment for Asian Countries

Japan Indonesia
8 15

6
10
4
5
2

0 0

-2
-5
-4
-10
-6

-8 -15
1980 1985 1990 1995 2000 2005 2010 1980 1985 1990 1995 2000 2005 2010

UE GDP UE GDP

South Korea Malaysia

12 12

8 8

4 4

0 0

-4 -4

-8 -8
1980 1985 1990 1995 2000 2005 2010 1980 1985 1990 1995 2000 2005 2010

UE GDP UE GDP

Singapore Thailand

16 15

10
12

5
8
0

4
-5

0 -10

-4 -15
1980 1985 1990 1995 2000 2005 2010 1980 1985 1990 1995 2000 2005 2010

UE GDP UE GDP

Source: Data from World Bank (2012).

II. Data and Methodology

This study used the indicators of gross domestic product growth (GDP growth) and annual unemployment rates as
the estimation of output growth and unemployment variables. This study has used the rate of percentage (%) to
measure the relationship between GDP growth (GDPt) and unemployment (UEt). This study also adopted the annual
time series data over the period 1980-2010. The data of this study are obtained from the Database World Bank. This
study has chosen Japan, South Korea, and Singapore which represented the developed Asian countries, and

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 Interactions between Economic Growth and Unemployment Condition in Asian Region

Indonesia, Malaysia, Thailand which represented the developing Asian countries. Hence, this study applied the
Okuns law model which is UEt = f(GDPt) to the empirical analysis of the study. This study employed several unit
root tests to check the stationary of single integration for the GDPt and UEt variables so that the regression can avoid
the problem of spurious regression. The annual series of GDPt and UEt are transformed to the natural logarithm
formation before start the estimation of unit root test. The unit root test such as Augmented Dickey-Fuller (ADF),
Kwiatkowski-Phillips-Schmidt-Shin (KPSS), and Dickey-Fuller-Generalized Least Squares (DF-GLS) are used to
determine the order lag in the stationary level. The ADF test and DF-GLS have provided the unit root level (non-
stationary) in hypothesis null against the stationary level in hypothesis alternative. The KPSS provided the stationary
level in hypothesis null against with non-stationary in hypothesis alternative. Hence, this study used the model
constant and trend to entire process unit root test. The lags length is based on Akaike Information Criteria (AIC).

This study used the cointegration dynamic test for the relationship between UEt and GDPt variables after the lag
level in unit root test has been determined. This study applied the Auto regression Distributed Lags (ARDL)
approach to the estimation of the cointegration dynamic which is developed from Pesaran and Shin (1999). The
ARDL approach has advantages to solve the several problems of the cointegration analysis compare with other
approaches. First, ARDL approach can solve the problem of spurious regression during transfer the both variables in
the co integration dynamic test. Second, the ARDL approach can handle the non-stationary level even changing the
order lags level such as purely I(0) or purely I(1) or mutually both lags level. Third, the ARDL approach is suitable
to be used for the small sample size of the series. Furthermore, the ARDL approach can simultaneously obtain the
long run and the short run relationship between both variables. Last but not the least, the ARDL approach can
determine the right position for the connection causal between both variables.

Basically, the ARDL approach has three stages to implement in the analytical process of cointegration dynamic
which are the ARDL bounds test, the Error Correction mechanism (ARDL-ECM) test, and the Granger causality test.
In the first stage, the ARDL framework is unrestricted to the error correction model (ECM) for the long run
relationship between both variables. Pesaran and Shin (1999) suggested that the ARDL test is suitable to use with
maximum 2 lag lengths and minimum lag length is selected based on Schwarz Bayesian Criteria (SBC). The ARDL
unrestricted model can be written as the equation below:

m m
UE t 0 1UE t 1 2 GDPt 1 i UE t i j GDPt j i (1)
i 1 j 0

Where UEt and GDPt are represented dependent variable and independent variable, m is denoted the optimal lag
length, and et is white noise error term. The F-statistic of the ARDL unrestricted model is used to estimate the
existence of the long run relationship and the order lags level in ARDL bounds tests. Pesaran et al. (2001) have
developed the bounds test base on the ARDL approach to examine the level of the dependent variables and
independent variables whether both variables are underlying purely I(0) or purely I(1) or mutually both level. The
hypothesis null of bounds test is non-cointegration in long run relationship which is H0: 1=2=0 against with
hypothesis alternative is cointegration in long run relationship which is H1: 1 2 0. Two sets of critical values
bounds are provided to classify the level of the cointegration which are lower bound I(0) and upper bound I(1) of
critical values. This study used the Narayan, (2004) bounds critical values to determine the significant level. It is
because Narayan (2005) is provided the bound critical values for smaller sample sizes within the range 30 to 80
observations. This study applied the Narayan bounds critical value base on model restricted intercept and no trend. If
the F-statistic is greater than upper bound I(1) of critical values then the hypothesis null will be rejected then there is
existence of long run relationship between both variables. If the F-statistic is greater than lower bound I(0) of critical
values then the hypothesis null can also be reject. Hence, if the F-statistic falls in the middle of lower bound and
upper bound critical values, it means that the inference cannot be conclusive without providing the lags level of both
variables. The second stage, the ARDL framework adds on to the restricted version to estimate the coefficient level
of long run relationship between variables. The ARDL framework is restricted (p, q) model for the long run
relationship between UEt and GDPt variables. The ARDL restricted model can be written as the equation below:

m m
UE t 0 i UE t i j GDPt j i (2)
i 1 j 0

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 International Journal of Economics and Empirical Research. 2013, 1(12), 135-151.

Where, UEt and GDPt are dependent variable and independent variable, 1 and 2 are represented long run
coefficient between variables, (p, q) is denoted optimal lag length selected by Schwarz Bayesian Criteria. The
hypothesis null is no significant in a long run coefficient level against with hypothesis alternative that is significant
in the long run coefficient level. Hence, the ARDL restricted model also can determine the positive sign or negative
sign in the coefficient level for the long run relationship between UEt and GDPt. Moreover, the ARDL model can be
proceed for restricted the error correction mechanism (ECM) at the simultaneously. The ECM-ARDL model is used
to determine the short run coefficient for relationship between UEt and GDPt variables. The ECM-ARDL can be
written as the equation below:

m m
(3)
UE t 1
i 1
2 UE t i 3 GDP t j 3 ECM
j0
t 1 i

Where, UEt and GDPt are dependent variable and independent variable, 2is represented the short run coefficient
between variables, ecmt-1 are represented the speed of adjustment to long run equilibrium in response to the
disequilibrium due to the short run shocks of the previous period. The estimation of ecmt-1term should have a
negative sign and statistically significant in the short run relationship between UEt and GDPt variables. Last stage,
this study also used the ECM-ARDL model to examine the weak and strong Granger-causality for the direction
between UEt and GDPt variables. The Chi-squares (X2) statistics are used to estimates weak and strong granger
causality. Strong granger causality is combined the variables with error correction term (ECTt) to estimate the
significant causal level. The hypothesis null is a non-causal relationship between UEt and GDPt. Hence, ECM-
ARDL Granger causality can identify the direction arrows relationship between UEt and GDPt variables which is
UEtGDPt or GDPtUEt. Finally, this study adopted the Cumulative Sum of Recursive Residuals (CUSUM)
and the Cumulative Sum of Squares Recursive Residuals (CUSUMQ) which is developed from Brown et al. (1975)
to check the stability of cointegration between UEt and GDPt variables in the ARDL approach. The CUSUM lines
and CUSUMQ lines should fall between straight line critical bounds area at the 5 percent level; it means that the
result is significantly stable in ARDL test.

III. Empirical Findings

Table-1 shows the unit root tests results for the unemployment rate (UEt) and GDP growth (GDPt) for developed
Asian countries (Japan, South Korea, Singapore) and developing Asian countries (Indonesia, Malaysia, Thailand).
To avoid the bias problems and spurious regression, the Augmented Dickey-Fuller (ADF) test, Kwiatkowski-
Phillips-Schmidt-Shin (KPSS), and Dickey-Fuller-Generalized Least Squares (DF-GLS) used the model constant
and trend to check the stationary at 1% and 5% significant level for single integration of UEt and GDPt variables. In
the aspect of Developed Asian Countries, this study found that Japan, South Korea and Singapore are stationary at
order lag I(1) level for the UEt variable and GDPt variable base on ADF test and DF-GLS test except Japan is non-
stationary for the UEt variable base on ADF test. Besides that, Japan, South Korea and Singapore are also stationary
in order lag I(0) level for the UEt variable and GDPt variable base on KPSS test. In the aspect of Developing Asian
Countries, this study found that Indonesia, Malaysia, and Thailand are stationary in order lag I(1) level for the UEt
variable and GDPt variable base on ADF test and DF-GLS test. Besides, Indonesia, Malaysia, and Thailand are also
stationary in order lag I(0) level for the UEt variable and GDPt variable base on KPSS test.

This study used Autoregressive distributed lag (ARDL) approach to examine the relationship between output growth
and unemployment for developed and developing Asian countries. This study implements the three stage process to
the estimation of co integration dynamic between the unemployment rate (UEt) and GDP growth (GDPt) which
included Bounds tests, Error correction mechanism (ECM), and Granger Causality. Table-2 shows the ARDL
optimal lag length for the model UEt=f(GDPt) for the beginning of the process of ARDL approach. This study has
chosen 2 as the maximum lag and the optimal minimum lag length is selected based on Schwarz Bayesian Criterion
(SBC). Hence, the results of optimal lag length are (2,0) in Japan, (2,1) in South Korea, (1,1) in Singapore, (1,0) in
Indonesia, Malaysia, and Thailand.

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 Interactions between Economic Growth and Unemployment Condition in Asian Region

Table-1. Unit Root Test Analysis

ADF KPSS DF-GLS
Variables I(0) I(1) I(0) I(1) I(0) I(1)
Developed Asian countiries
Panel 1: Japan
UEt -3.31(3) -3.56(0) 0.14(1)** 0.08(1) -2.34(1) -3.54(0)**
GDPt -3.57(0) -3.75(0)** 0.17(10)** 0.05(0) -2.11(0) -3.23(0)**
Panel 2: South Korea
UEt -3.01(1) -4.59(1)* 0.17(1)** 0.05(1) -2.90(1) -4.38(0)*
GDPt -2.00(5) -4.82(6)** 0.16(3)** 0.06(1) -2.71(2) -5.65(0)*
Panel 3: Singapore
UEt -2.70(0) -5.43(0)* 0.16(1)** 0.04(1) -2.81(0) -5.63(0)*
**
GDPt 0.23(4) -4.48(0) 0.18(12)* 0.06(1) -2.35(4) -3.38(0)**
Developing Asian countries
Panel 4: Indonesia
UEt -1.68(0) -4.99(0)* 0.24(1)* 0.13(4) -1.51(0) -5.18(0)*
GDPt -2.33(4) 8.72(0)* 0.15(12)** 0.04(1) -2.01(4) -7.92(0)*
Panel 5: Malaysia
UEt -1.14(0) -5.14(7)* 0.17(2)* 0.11(2) -1.28(0) -4.41(0)*
GDPt -3.27(1) -4.02(2)** 0.17(12)** 0.05(1) -1.34(5) -5.72(1)*
Panel 6: Thailand
UEt -3.52(0) -5.13(1)* 0.16(10)* 0.08(1) -2.92(0) -5.78(0)*
GDPt -2.12(0) -4.15(1)** 0.16(1)** 0.04(1) -2.53(1) -4.58(1)*
Note: *, ** is denoted 1% and 5% significant level.

Table-2. The Lag Length Selection

Asian Developed countries Developing countries
ARDL Japan South Singapore Indonesia Malaysia Thailand
Optimal lag Korea
length
UEt=f(GDPt) (2,0) (2, 1) (1, 1) (1, 0) (1, 0) (1, 0)
Note: ARDL ( ) selected based on Schwarz Bayesian Criterion (SBC)

By having the results of optimal lag length, this study proceeds to the first stage in the ARDL bounds testing. The F-
test is used to examine the existence of the long run relationship between UEt and GDPt for developed and
developing Asian countries. Table-3 shows that the ARDL bound test results for developed and developing Asian
countries. The Asian developed countries could find the evidence to reject the hypothesis null at the 1% significance
level on the upper bound I(1) critical value. Japan, South Korea, Singapore are exist the long run relationship
between the unemployment rate and GDP growth for the developed Asian countries.Besides that, Asian developing
countries also could find the evidence to reject the hypothesisnull at the 1% significance level on the upper bound
I(1) critical value. Indonesia, Malaysia, Thailand are exist the long run relationship between the unemployment rate
and GDP growth for the developing Asian countries.

Table-3. The ARDL Bounds Test Analysis

Asian Developed Developing
Japan South Singapore Indonesia Malaysia Thailand
Korea
UEt=f(GDPt) 410.73* 30.77* 19.66* 235.46* 159.87* 9.31*
Critical value I(0) I(1)
1% 6.03 6.76
5% 4.09 4.66
10% 3.30 3.79
Note: * and ** indicate 1% and 5% significance respectively. Narayan, (2005) critical value base on k=1,n=30.

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 International Journal of Economics and Empirical Research. 2013, 1(12), 135-151.

The second stage of the ARDL approach adds on to a restricted version with error correction mechanism (ECM) to
define the coefficient level of a long run and the short run relationship between the unemployment rate and GDP
growth. Table-4 shows the ECM-ARDL results for developed and developing Asian countries. In the previous
bound test result, this study clearly showed the evidence in the long run relationship for developed and developing
Asian countries. Thus, the ECM-ARDL results found that negative sign is existed in the long run relationship
between the unemployment rate and GDP growth in developed and developing Asian countries which meant that
economic performance that increased in 1% of GDP growth in developed Asian countries could lead to the decline
0.78% of unemployment rate in Japan, decline 0.47% of unemployment rate in South Korea, and decline 0.49% of
unemployment rate for Singapore. Moreover, economic performance that increased in 1% of GDP growth in
developing Asian countries also could lead to the decline 1.24% of unemployment rate in Indonesia, decline 2.22%
of unemployment rate in Malaysia, and decline 0.23% of unemployment rate in Thailand.

After ARDL model restricted with error correction mechanism (ECM) in Table-4, this study found that only
developed Asian countries can find the evidence for the short run relationship between the unemployment rate and
GDP growth. It is also a negative sign in short run relationship between the unemployment rate and GDP growth for
developed and developing Asian countries. If the economic performance that increased in 1% of GDP growth in
developed Asian countries could lead to the decline 0.11% of unemployment rate in Japan, decline 0.22% of
unemployment rate in South Korea, and decline 0.05% of unemployment rate in Singapore. Moreover, economic
performance that increased in 1% of GDP growth in developing Asian countries also could lead to the decline 0.04%
of unemployment rate in Indonesia, decline 0.10 % of unemployment rate in Malaysia, and decline 0.07% of
unemployment rate in Thailand. Hence, Developed Asian such as Japan, South Korea, Singapore are significantly
reached 0.14%, 0.24%, 0.50%, and developing Asian such as Indonesia, Malaysia, Thailand reached 0.03%, 0.04%,
and 0.30%to the speed of adjustment to long run equilibrium in response to the disequilibrium due to short run
shocks of the previous period. The diagnostic test is stability for ECM-ARDL test for developed and developing
Asian countries except South Korea and Malaysia are significant in the heteroscedasticity problems.

Table-4. The ECM-ARDL Test Analysis

Asian Developed Developing
Japan South Singapore Indonesia Malaysia Thailand
Korea
Dependent Variables : UEt
Panel A: Long run estimates
GDPt -0.78 -0.47 -0.49 -1.24 -2.22 -0.23
[-4.52]* [-1.99] [-3.27]* [-0.68] [-0.77] [-1.03]
Panel B: Short run estimates
GDPt -0.11 -0.22 -0.05 -0.04 -0.10 -0.07
[-8.65]* [-7.28]* [-1.27] [-1.26] [-4.42]* [-1.60]
ECM t-1 -0.14 -0.24 -0.50 -0.03 -0.04 -0.30
[-4.43]* [-2.45]** [-4.18]* [-0.74] [-0.80] [-1.84]
Panel C : Diagnostic Test
Serial 0.28 2.10 0.07 1.25 1.34 0.20
(0.60) (0.16) (0.79) (0.27) (0.26) (0.66)
Function 0.15 0.52 1.24 3.27 0.05 1.79
(0.71) (0.48) (0.28) (0.08) (0.83) (0.19)
Heteros 0.02 6.73 3.20 2.37 14.77 1.16
(0.88) (0.02)** (0.09) (0.14) (0.00)* (0.29)
Note: * and ** indicate 1% and 5% significance respectively. [ ] denoted t-statistic, ( ) denoted probability value.

The last stage, the ECM-ARDL model examines the Granger causality between unemployment rate and GDP
growth for developed and developing Asian countries. Table-6 shows ECM-ARDL weak and strong Granger
causality results for developed and developing Asian countries. This study found that only Japan, South Korea and
Malaysia could find the evidence to reject hypothesis null for the bidirectional causal between UEt GDPt and
GDPt UEt at the weak Granger causality test.

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 Interactions between Economic Growth and Unemployment Condition in Asian Region

Table-6: The ECM-ARDL Weak and Strong Granger Causality Results

Dependent ARDL Weak Causality Strong Causality
Variables Optimal (X2 statistics) (X2 statistics)
lag Short Run Granger Causality ECT UEt GDPt
length UEt GDPt (t-statistics) &ECT &ECT
Panel 1: Japan
UEt (2, 0) - 74.78 -4.44 - 78.83
(0.00)* (0.00)* (0.00)*
GDPt (0, 2) 74.93 - N.A N.A -
(0.00)*
Panel 2: South Korea
UEt (2, 1) - 53.01 -2.44 - 86.95
(0.00)* (0.02)** (0.00)*
GDPt (1, 2) 67.09 - -2.64 98.70 -
(0.00)* (0.01)* (0.00)*
Panel 3: Singapore
UEt (1, 1) - 1.62 -4.18 - 21.74
(0.20) (0.00)* (0.00)*
GDPt (0, 0) 0.37 - N.A N.A -
(0.55)
Panel 4: Indonesia
UEt (1, 0) - 1.59 -0.74 - 1.93
(0.21) (0.47) (0.38)
GDPt (0, 0) 0.94 - N.A N.A -
(0.33)
Panel 5: Malaysia
UEt (1, 0) - 19.55 -0.80 - 21.69
(0.00)* (0.43) (0.00)
GDPt (0, 1) 19.55 - N.A N.A -
(0.00)*
Panel 6: Thailand
UEt (1, 0) - 2.56 -1.84 - 9.62
(0.11) (0.08) (0.01)*
GDPt (1, 1) 1.31 - -3.38 11.63 -
(0.25) (0.00)* (0.00)*
Notes: (*) and (**) indicate 1%, 5% and 10% significance respectively.

Apart from that, the strong Granger causality test has combined the variables and error correction term to enhance
the evidence in the Granger causality test. This study found that only South Korea and Thailand could find the
evidence to reject hypothesis null for the bidirectional causal betweenUEt GDPt and GDPt UEt at the
strong Granger causality test. Japan and Singapore canonlyfind the evidence to reject hypothesis null for the one
direction causal between UEt GDPt at the strong Granger causality test.

Finally, this study also usedthe cumulative sum of recursive residual test (CUSUM ) and the cumulative sum of
squares of recursive residuals (CUSUMSQ) to check the stability of the long run and short run cointegration
dynamic between unemployment rate and GDP growth for developed and developing Asian countries. Figure-
2shows that Model UEt = f(GDPt) is a stable of CUSUM for developed and developing Asian countries except South
Korea and Thailand. Apart from that, figure 3shows that Model UEt = f(GDPt) is not stable of CUSUMSQ for
developed and developing Asian countries except Japan. Hence, CUSUM test is more stable in the long run and
short run cointegration dynamic between unemployment rate and GDP growth for developed and developing Asian
countries.

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 International Journal of Economics and Empirical Research. 2013, 1(12), 135-151.

Figure-2. Plot of Cumulative Sum of Recursive Residuals

Figure-3. Plot of Cumulative Sum of Squares of Recursive Residuals

VI. Conclusion and Policy Implications

This study has focused the relationship between GDP growth and the unemployment rate on developed Asian
countries such as Japan, South Korea, Singapore, and developing Asian countries such as Indonesia, Malaysia, and
Thailand over the period 1980-2010.This study applies the Okuns law framework to the developed and developing
countries. The empirical results found that all developed and developing Asian countries are able to achieve the
significant level to the long run relationship between unemployment rate and GDP growth. Besides that, Japan,
South Korea, and Malaysia also found the evidence in the short run relationship between unemployment rate and
GDP growth. Hence, the developed and developing Asian countries are negative sign in the long run coefficient and
the short run coefficient between unemployment and GDP growth. Apart from that, the Granger Causality test
shows the Japan, South Korea and Malaysia are found the evidence of bidirectional in weak causal between
Unemployment rate and GDP growth. Moreover, South Korea, Thailand also found evidence of bidirectional in
strong causal between unemployment and GDP growth. Japan and Singapore also found evidence on one directional
in strong causal between unemployment and GDP growth.

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 Interactions between Economic Growth and Unemployment Condition in Asian Region

The theory of Okuns law has shown the relationship between unemployment and output growth to the policy maker
for the data period world war and post-world war era. It has been solve the problems of the output growth and
unemployment for that critical period. Nowadays, the developed and developing Asian countries except Indonesia
are still able achieves the robust of theory Okuns law for macroeconomic performance. However, the developed
and developing Asian countries are high coefficient values compare with the Okuns original framework. That
means this study has developed the new Okuns framework for developed and developing Asian countries in
macroeconomic performance. On the new century, the global macroeconomic performances have been changes
rapidly compared with the post-world war era. Especially, developed and developing Asian countries obtain the
largest population has brought the distinguish results in the macroeconomic performance. Hence, the policy-maker
should be also considering the issue of labor participants rate, working hour, and technology factor for
microeconomic development. It is because largest population has involved in the labor force so that labor can
substitute for capital in the producing a given of output (Kenjiro, 1961). If the allocation economic resources are
inefficient in microeconomics side, it will automatically make the trouble for the macroeconomic development.
Therefore, the policy maker has to focus on allocate and the efficient of the labor force so that developed and
developing Asian countries can be achieve the sustainability for the macroeconomics performance.

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