Applied Econometrics

Running head: APPLIED ECONOMETRICS
Applied Econometrics
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1APPLIED ECONOMETRICS
Table of Contents
1. Introduction..................................................................................................................................2
1.1 Background of the study........................................................................................................2
1.2 Problem statement.................................................................................................................2
1.3 Research aim..........................................................................................................................2
1.4 Data source............................................................................................................................2
1.5 Research question..................................................................................................................2
2. Literature Review........................................................................................................................2
2.1 Relation between unemployment and GDP growth..............................................................2
2.2 Relation between unemployment and FDI............................................................................3
2.3 Relation between unemployment and export........................................................................3
2.4 Relation between unemployment and inflation.....................................................................4
2.5 Hypotheses.............................................................................................................................4
Hypothesis 1............................................................................................................................4
Hypothesis 2............................................................................................................................4
Hypothesis 3............................................................................................................................4
Hypothesis 4............................................................................................................................4
3. Estimation Result.........................................................................................................................5
3.1 Descriptive statistics..............................................................................................................5
3.2 Correlation coefficient...........................................................................................................6
3.3 Regression analysis................................................................................................................7
3.4 Multicollinearity....................................................................................................................8
4. Conclusion...................................................................................................................................9
5. References..................................................................................................................................10

2APPLIED ECONOMETRICS
1. Introduction
1.1 Background of the study
Unemployment refers to a state of joblessness in an economy where people though is
willing to work but are unable to find any suitable job. People remain unemployed for various
reasons. Based on different causes of unemployment, unemployment is broadly classified into
three groups – structural unemployment, frictional unemployment and cyclical unemployment
(Goodwin et al. 2015). Persistently higher unemployment rate hampers productivity and
economic growth. Various factors influence rate of unemployment in an economy. When an
economy accounts a steady economic growth for a considerably long period, productivity
increases. This affects labor demand and unemployment in the economy. Inflow of foreign
capital is helpful in expansion of productivity if used effectively. This in turn affects
unemployment rate. Phillips relation explains the relation between unemployment and inflation
(Mitchell 2019). Another factor that can affect unemployment rate in the economy is the export
of goods or services.
1.2 Problem statement
Unemployment is considered as one significant problem of an economy. The research
paper addresses unemployment problem in Japan considering some factors likely to have a
potential impact on unemployment. The likely factors affecting unemployment include GDP
growth, inflation, FDI and export. The objective is to find factors significantly influencing
unemployment rate of Japan.
1.3 Research aim
The paper aims to evaluate relation between rate of unemployment rate and GDP growth,
inflation, export and FDI.
1.4 Data source
All the data relevant for the study has been collected from World Bank data dictionary.
1.5 Research question
The specific research questions that the study addresses are as follows
 How GDP growth in Japan influence unemployment rate of the economy?
 How flow of FDI in Japan influence unemployment rate of the economy?
 How inflation rate in Japan influence unemployment rate of the economy?
 How export in Japan influence unemployment rate of the economy?
2. Literature Review
Different studies have been conducted to determine significant factors affecting
unemployment rate of an economy. The past studies give useful implications for the current
study by indicating proposed relationship between unemployment rate and the targeted variables.
2.1 Relation between unemployment and GDP growth
Okun’s law indicates the theoretical relation between unemployment and economic
growth of United State. The law states that with a decline in unemployment by 1 percent, GDP

3APPLIED ECONOMETRICS
growth increase by 3 percent. Various research papers examined causality between the rate of
unemployment and economic growth of a nation. A research study conducted in 2013 computed
the Okun’s coefficient and examined validity of Okun’s proposition in Nigeria using annual time
series data for the period ranged from 1980 to 2008. In order to examine the relation between
unemployment and economic growth they employed statistical techniques of OLS regression and
Engel Granger causality test (Schubert and Kroll 2016). The empirical evidences of this paper
found a positive regression coefficient meaning that for Nigeria Okun’s law is not applicable.
The paper therefore recommended that policy makers should design policies that can address
structural reforms and associated changes in the labor market. In a paper published in 2012, the
authors tested Okun’ law using time series data of United States and other advanced countries.
The paper concluded that for most countries Okun’s law holds a strong and stable relation
(Lewis et al. 2019). The relation even did not even change in times of great recession.
2.2 Relation between unemployment and FDI
Foreign Direct Investment (FDI) refers to the investments that individual or firm of one
country makes into the business located in another country. In general, FDI is expected to have a
positive impact on the economy contributing to economic prosperity and a lowers
unemployment. Both inward foreign direct investment and outward foreign direct investment
play an important role in economic development of a nation (Irpan et al. 2016). Investment in
projects funded by foreign investors increases demand for skilled and unskilled labors. Foreign
investment thus likely to lower unemployment rate in the economy. Foreign direct investments
that is flowed outward also uses many labors, both domestic and foreign workers for carrying out
production to be exported (Iamsiraroj and Ulubaşoglu 2015). Large-scale foreign direct
investment helps to produce more jobs and improves the state of gross domestic product. GDP is
a representative measure of income of a nation. As income grows due to FDI, unemployment
decrease and vice-versa. A study conducted on unemployment rate in Malaysia found that FDI
plays a supportive role in lowering unemployment rate of the nation (Rahman 2015). Between
1982 and 1991, unemployment rate in Malaysia reached to a high level of 7.5 percent. Rapid
inward foreign investment during this time lowered the unemployment rate indicating a positive
is significant influence of FDI on unemployment (Agrawal 2015).
2.3 Relation between unemployment and export
Exports refer to the goods and services that are first produced in a country and then are
sold to overseas market. Export activity of a nation is inspired by excess supply and excess
demand of a nation with other country (Uribe and Schmitt-Grohe 2017). Expansion of a
country’s export has an effect on state of unemployment in the economy. Research conducted
using data of Malaysia found that unemployment stated an asymmetric integration exists
between the dynamics of unemployment and trade balance in Malaysia. The results found an
inverse relation between trade balance and unemployment. A subsequent paper developed in
2014 concluded that unemployment has a positive and negative influence on the unemployment
rate. Some paper contradicted the findings and concluded that there is no direct impact of trade
balance on unemployment rate of the economy (Alamro 2017). One paper in this field stated that
export of manufacturing has additional effect in terms of a greater employment absorption both
directly and indirectly.