Economics Instability Increases The Unemployment Rate in Malaysia

The number of graduates in Malaysia has increased tremendously every year and the real challenge they need to face after they are graduating are the competition to get job especially in this economy situation. There are too many graduates either from public, private and foreign institutions but the job creation and the demand for labor are very low which and it made the graduates mostly cannot get job placement and remained unemployed in duration of 6 months to a year after they graduated. Therefore, being a university graduates does not guarantee a job and it causes many youths unemployed in Malaysia. Based on some statistics facts there are about 250 000 graduates annually but one in five of them will remain unemployed 6 months after graduating and 24% from the labor force that are unemployed are a degree holder.

However, youths’ unemployment is not caused by the number of the graduates. Economically, the amount of jobs creation is depending on the economic performance of the country. According to Okun’s law, it explains the relationship between the employment and the economic growth. Dally and Hobijin (2010) said, "Economists have long known that the overall performance of the economy as measured by GDP has a direct bearing on unemployment"(p.1). So it clearly said that the economic instability of a country may influence the unemployment rates to increase. Unemployment rates is the rates to indicates how much the percentage of the labor force in the country that remain jobless and still finding for job placement in the recent year. Labor force are the group of people who are demanding for job to get income in return and also can commit for the minimum hour of working. The issues that arise here is how the economic situation give an impact to the unemployment rates in Malaysia.

Unemployment rates are very important for the developing countries to indicate the efficiency of the labor resource. According to Omar and Rajoo (2016):

Growth of a country can be found if unemployment is low. Conversely, a country with a high unemployment rate, the use of human resources do not fully utilize .For every 1% increase in the unemployment rate to fall significantly over the potential GDP of 2%.The unemployment is interrelated economic development that should be addressed in the labor market(p.367).

This means that high unemployment indicates that the country are not very efficient in managing their labor resource. The main factors are from the economic wellbeing of the country, if the country are not doing well in the economy, it might cause the issues of increasing rates of unemployment. Thus, it is believed that economic instability may increase the unemployment rates due to economic recession, foreign direct investment and income inequality.

Economic Recession

Volatile rates of economic growth have important implications on economic stability. When an economy going through a recession, there is a rise in unemployment, poverty and a rise in government borrowing. According to Katz (2010) “Labor market conditions have deteriorated dramatically since the start of the Great Recession in late 2007 making this the severest labor market downturn since the Great Depression of the 1930s. The unemployment rate more than doubled from 4.8 percent in the fourth quarter of 2007 to 10.0 percent in the fourth quarter of 2009 and remains at 9.7 percent in early 2010.” This shows that great recession causes the unemployment rate increase dramatically than the great recession during 1930s.

Other than that, Elsby, Hobjin, and Sahin (2010) mentioned that “The unemployment rate today is even higher than the 10.8 percent post-war unemployment peak in the 1982-83 recession once one adjusts for changes in the age-structure of the labor force. (p.10)” Thus it means that the unemployment rate in this era is much higher compared to the unemployment rate during post-war where the rate of unemployment is higher than the unemployment peak in 1982-1983.

As defined by Kartz (2010), “Unemployment increases in the Great Recession have disproportionately affected men, workers from goods producing industries, young workers, and non-college workers. But this downturn has been so severe that it has had adverse impacts on almost every group of workers and all regions of the country in terms of both substantial unemployment and stagnant wages. (p.2)”

Recessions can cause firms to leave the business industry, so they become more risk averse about investing. When a firm goes out of business, it will lead to rise in unemployment as they do not need to hire more employees. When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding. When demand is not high enough, businesses start to report losses and try to reduce their costs by lowering wages or keeping wages where they are and ceasing to hire new workers, which increases the unemployment rate.

During recession, young adults suffer the most than adults as the unemployment rate among young adults increased. This is because young adults are lack of experience and lack of skill that can convince the employer to hire them. As highlighted by Bell and Blanchflower (2009, 2010, 2011) “Unemployment rates increased generally during the recession. Therefore, it is reasonable to question whether the young have suffered disproportionately. We have previously argued that young workers are consistently more likely to be unemployed than adults. (p.15)”

Lastly, there are two types of policies that can overcome recession and unemployment. The first policy is monetary policy. Under monetary policy, increase in money supply can lowered the rate of interest which will encourage in private investment. When private investment increase, it will open many job opportunities to the labor market thus the aggregate demand will increase which will raise the equilibrium level of employment where recession and unemployment reduced. The second policy is fiscal policy which cause increase in government expenditure. Increase in government expenditure will increase employment and output. Thus, recession and unemployment will be cut off.

Foreign Direct Investment

Besides, the decreasing foreign direct investment affects unemployment rates significantly. Malaysia as a developing country needs support from foreign country to boost up their economic performance. This can be done by attracting the foreign investors to invest in those country where there will be and exchange of new technology and expertise. However, when instability in economic happened, the foreign direct investment will be affected and will cause rise in the unemployment rates. The decreasing in foreign direct investment may be cause by the instable situation in the economy. According to Ifpan, Saad,Nor, Noor and Ibrahim (2016):

This is affected by the economic recession and 911 incident of the US World Trade Centre which affect the Malaysian unemployment rate with the lower level of exports to the US and lower IFDI resulted in slow growth in the economy as well as increasing in unemployment rate (p.2).

Therefore it is believed that Malaysia has a high dependency in the foreign investment whether inwards FDI or outwards FDI and it has caused Malaysia to face a great impact on the unemployment rate especially during the economic recession. Foreign investment has open up a greater job opportunity for skilled and unskilled labor in the country especially developing country thus reduces the unemployment rates of the country (Irpan et al, 2016). It is agreed that FDI plays a significant role in order to reduce the unemployment rates in the country by provide a better job opportunity. Larger FDI creates a better country with high with gross domestic product or GDP thus creating more job opportunity. A high income country leads to a low unemployment rates. Therefore, all the factors are related to the unemployment rate which are GDP, job opportunity and also economic recession.

The studies of Balcerzak and Zurek (2011) mentioned that even though the FDI can play its roles to reduce unemployment rates, in long run government still need to implement policies to increase the investment. This is because every country need to have a better and stable economy in the long term, fluctuation in the economic situation can cause a huge impact in the FDI. Government policies are one of the stable tools to help the economy.

For example when the government implement policies that allows more foreign investors to invest in the country, it will create more job market for the fresh graduates and it will reduce the unemployed worker in the labour market. Eventually it will reduce the rates of unemployment, however fresh graduates need to go out and seeking for job also and stop being too demanding in order to get a job placement. It is important to get the experience first in order to secure a better job in the future. However, economic instability also play a significant role in order to keep the investors in the sectors as investors decisions are influence by the stability of the county. Investors will not invest in the country that has a poor economic performance and instable political issues. Therefore the government need to take action in order to secure those investors and the foreign capital inflows in the country. In short, FDI really have a significant impact in relation to unemployment rates.

Innovation in Technologies

Innovation in technologies can cause unemployment rate to increase. This is because technologies not only reshaping the labor markets but also improvements in technology have changed the nature of work and destroyed some types of jobs in the process. Forbes magazine January 2018 edition mentioned that technology has already taken over 90 percent of the jobs humans used to do. For example, in local transportation, before the innovation of technology, horse-drawn carriages were use as the main mode of local transportation which created jobs in building carriages, manufacturing buggy whips and raising horses but then with innovation of technologies, human no longer use horse-drawn carriages as they using cars as the main mode of transportation and this lead to job destruction of previous local transportation.

Other than that, due to advance in technologies, demand for labor will decrease. For example, an artificial robot that can replace human in a workplace. According Pham et. al (2018) “The number of robots in factories has been rising quickly, and robotics technologies have been introduced into many sectors beyond manufacturing, e.g., surgical or rehabilitation robots in hospitals, service robots, self-driving cars, and so on.” (p.12). This means that the author agree that there are factories using robots to replace human and it is increasing tremendously which will lead to job destruction. Others argue that technological innovations will lead to more middle-skill jobs that combine routine technical tasks and nonroutine tasks that require interpersonal interaction, problem solving, and adaptability, as they replace the traditional labor-intensive, solely routine tasks (Autor 2015). Because of the artificial robots that can replace human being in a workplace, demand for labor started to decrease and unemployment rate started to increase.

Furthermore, rise in labor wages especially in Asian cause the employers shift to advanced technologies as it is much cheaper and efficient which will lead to efficient productivity compared to hiring labor. World Economic Forum (June,2015) stated that “as Asian wages rise, factory managers are already looking for opportunities to replace employees with robots, even in China. (p.3)” The author believes that rise in wages is one of the factors why employers switch to use advanced technologies instead of labor as it helps to minimize production cost, maximize the production profit and increase in efficiency.

To conclude, the past few years has been rich with new technological breakthroughs. One of the most prominent examples is the development of autonomous vehicles. A stream of companies including Uber and Google has attained their permits to test autonomous vehicles on public roads. It is projected that by 2020, there will be 10 million self-driving cars on the road, replacing the traditional human-driving cars to be the new norm (Garret 2017). Advanced in technologies have impact on unemployment which were cause instability in economic.

All in all, instability in economy cause increase in unemployment rate. Unemployment is the second major macroeconomic problem. When unemployment occurs, it shows that there is no efficiency and the resources is not fully utilized. Natural unemployment exists when output is at full employment. It results from rigidities in the structure of the labour market. Cyclical unemployment is unemployment in the excess of natural unemployment. It occurs when output is below its full-employment level. Based on the teaching taken from quranic verse Surah Al Ju’muah verse 10, Allay says

Then when the prayer is ended, you may desperse through the land and seek the bounty of Allah (by working) and remember Allah much, that you may be successful

In this ayah, Allah wants us to seek for job and get the earning to live, thus Muslim should do as Allah has command and need to find job. Allah does not like people without job or being unemployed. Indirectly human should believe that by working for their live hood, they can reduce the unemployment. In an Islamic economy, moderate fluctuations can exist in the output level, so that cyclical unemployment will be negligible. Furthermore, there exist no labor market rigidities due to the social organization of work where power relations are substituted by principles of mutual backing and the principle of charity replaces the institutional unemployment benefits. Natural unemployment is therefore also non-existent. Unemployment in Islamic economies is due to external shocks like war, immigration or natural calamities.