FOREIGN TRADE UNIVERSITY

FACULTY OF INTERNATIONAL ECONOMICS



ECONOMETRICS 2 REPORT

THE IMPACT OF SOME MACROECONOMIC FACTORS

ON UNEMPLOYMENT IN ASEAN COUNTRIES
DURING 2000-2018

Group 1: 1. Duong Dai Hai – ID: 1814450033

2. Tuong The Phong – ID: 1814450062
3. Nguyen Anh Tu – ID: 1814450071
4. Pham Duc Nam – ID: 1814450057
5. Pham Thu Ha – ID: 1814450031
Class: KTEE318(2-1920).1_LT
Instructors: Ph.D. Dinh Thi Thanh Binh

Hanoi, May 2020

 FOREIGN TRADE UNIVERSITY
FACULTY OF INTERNATIONAL ECONOMICS


ECONOMETRICS 2 REPORT

THE IMPACT OF SOME MACROECONOMIC FACTORS

ON UNEMPLOYMENT IN ASEAN COUNTRIES
DURING 2000-2018

Group 1: 1. Duong Dai Hai – ID: 1814450033

2. Tuong The Phong – ID: 1814450062
3. Nguyen Anh Tu – ID: 1814450071
4. Pham Duc Nam – ID: 1814450057
5. Pham Thu Ha – ID: 1814450031

Class: KTEE318(2-1920).1_LT
Instructors: Ph.D. Dinh Thi Thanh Binh

Hanoi, May 2020

 INDIVIDUAL ASSESSMENT
The individual assessment is based on each member’s attitude towards the group
work.

Member ID number Contribution

Duong Dai Hai 1814450033 18%

Tuong The Phong 1814450062 18%

Nguyen Anh Tu 1814450071 18%

Pham Duc Nam 1814450057 18%

Pham Thu Ha 1814450031 28%

 TABLE OF CONTENTS
ABSTRACT .......................................................................................................... 4
INTRODUCTION ................................................................................................ 5
SECTION 1. OVERVIEW OF THE TOPIC ................................................. 7
1.1. Unemployment and related terms ................................................................7
1.2. Economic theories ........................................................................................8
1.2.1. The effect of Population on Unemployment............................................8
1.2.2. The effect of Inflation rate on Unemployment ........................................9
1.2.3. The effect of Foreign Direct Investment on Unemployment ...................9
1.2.4. The effect of Gross Domestic Product on Unemployment ....................10
1.3. Related published researches .....................................................................10
SECTION 2. MODEL SPECIFICATION .................................................... 12
2.1. Methodology in the study ...........................................................................12
2.1.1. Method to collect and analyze the data ................................................12
2.1.2. Method to derive the model ..................................................................12
2.2. Theoretical model specification .................................................................12
2.2.1. Specification of the model .....................................................................12
2.2.2. Explanation of the variables .................................................................13
2.2.3. Description of the data .........................................................................14
SECTION 3. PANEL DATA ANALYSIS .................................................... 16
3.1. Choosing the most suitable model..............................................................16
3.1.1. Breusch-Pagan Lagrange Multiplier Test (LM) ...................................16
3.1.2. Hausman Test .......................................................................................16
3.2. Diagnostic testing the problems of the model ............................................17
3.2.1. Diagnosing the problem of Multicollinearity .......................................17
3.2.2. Diagnosing the problem of Heteroskedasticity.....................................18
3.2.3. Diagnosing the problem of Autocorrelation .........................................18

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SECTION 4. ESTIMATED FIXED EFFECTS MODEL AND
STATISTICAL INFERENCE .......................................................................... 20
4.1. Correcting the model ..................................................................................20
4.2. The estimated results of fixed effects model ..............................................20
4.3. Meanings of estimated results ....................................................................21
4.4. Hypothesis Testing ......................................................................................22
4.4.1. Testing the significance of an individual regression coefficient 𝜷𝒋 .....22
4.4.2. Testing the significance of the model....................................................24
4.5. Recommendations .......................................................................................26
CONCLUSION ................................................................................................... 27
REFERENCES ................................................................................................... 28
APPENDIX ......................................................................................................... 29
5.1. The dataset of ten ASEAN countries during 2000 – 2018 ........................29
5.2. Do-file ..........................................................................................................34
5.3. The STATA command’s outputs ................................................................34

2
 TABLE OF FIGURES
Figure 1. Panel dataset declared result ......................................................................34
Figure 2. Data description .........................................................................................35
Figure 3. Correlation matrix between variables ........................................................35
Figure 4. Random Effects regression result ..............................................................36
Figure 5. Breusch-Pagan Lagrange Multiplier Test result ........................................36
Figure 6. Fixed Effects regression result ..................................................................37
Figure 7. Hausman Test result ..................................................................................37
Figure 8. Results of variance inflation factors ..........................................................37
Figure 9. Modified Wald Test result .........................................................................38
Figure 10. Wooldridge Test result for autocorrelation .............................................38
Figure 11. Breusch-Pagan LM Test for cross-sectional correlation .........................38
Figure 12. Fixed Effects regression result using clustered standard errors ..............39

3
 ABSTRACT
Unemployment, or joblessness, is a situation in which able-bodied people who
are looking for a job cannot find a job. We can decide that a country’s economic is
growing efficiently or not just by looking at its unemployment rate, keeping the
unemployment rate at an acceptable rate is very important for economic growth.
In hope of providing a deeper insight, scrutinizing a specific case, our group
would like to take the topic “The Impact of some Macroeconomic factors on
Unemployment in ASEAN countries during 2000 – 2018” in thorough consideration.
This report investigates the determinants of unemployment in 10 ASEAN countries:
Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar,
Philippines, Singapore, Thailand and Vietnam, employing the methods of panel data
analysis. Specifically, we aim to provide deeper analysis on the determinants of
unemployment in each country. Due to the limited of data resouces, we can only pick
up a few prominent factors of those countries during 2000 – 2018, which are
population, inflation rate, Gross Domestic Product (GDP) and Foreign Direct
Investment (FDI). Our research indicates that the relationship of unemployment rate
on all of four factors including population, inflation rate, GDP and FDI is negative.

4
 INTRODUCTION
Econometrics is the quantitative application of statistical and mathematical
models using data to develop theories or test existing hypothesis in economics and to
forecast future trends from historical data. It subjects real-world data to statistical
trials and then compares and contrasts the results against the theory or theories being
tested.
Depending on whether you are interested in testing an existing theory or in using
existing data to develop a new hypothesis based on those observations, econometrics
can be subdivided into two major categories: theoretical and applied. Those who
routinely engage in this practice are commonly known as econometricians.
Unemployment is a problem that every country has to face, it has a negative
impact on social and economic growth of the country. Keeping it at an acceptable rate
is really important and that’s also the reason why our group decided to choose this
topic, to understand more about unemployment as well as reaching some solutions to
minimize unemployment rate.
In the report, we will use the econometric model to find out the relationship
among Population, Inflation rate, GDP, FDI and Unemployment rate by using
collected data from world bank and others sources, whether they have positive or
negative relationship. And from the result, we may have some solutions to minimize
the unemployment rate.
As Economics students, we recognize the important of econometrics in social
economics. In order to understand how the econometrics works in real life and to
apply econometrics effectively and correctly, our group would like to develop a report
under the guidance of PhD. Dinh Thi Thanh Binh. In this report, we used the
econometrics analysis tool STATA to analyze the topic “The Impact of some
Macroeconomic factors on Unemployment in ASEAN countries during 2000 –
2018”.
The report contains the following contents:
 SECTION 1: OVERVIEW OF THE TOPIC
 SECTION 2: MODEL SPECIFICATION
 SECTION 3: PANEL DATA ANALYSIS

5
  SECTION 4: ESTIMATED FIXED EFFECTS MODEL AND
STATISTICAL INFERENCES
 CONCLUSION
 REFERENCES
 APPENDIX
During the process of making this report, due to the limited amount of time as
well as some certain limits in understanding and data collecting, despite all the efforts,
the report may hardly avoid mistakes. We are always willing to receive your
comments so that our group can improve and complete this report.
Many thanks!

6
 SECTION 1. OVERVIEW OF THE TOPIC
1.1. Unemployment and related terms
Unemployment occurs when a person who is actively searching for employment
is unable to find work. Unemployment is often used as a measure of the health of the
economy. The most frequent measure of unemployment is the unemployment rate,
which is the number of unemployed people divided by the number of people in the
labor force. Symbolically:
Unemployed people
Unemployed rate =
Labor force
Unemployment is a key economic indicator because it signals the ability of
workers to readily obtain gainful work to contribute to the productive output of the
economy. More unemployed workers mean less total economic production will take
place than might have otherwise. And unlike idle capital, unemployed workers will
still need to maintain at least subsistence consumption during their period of
unemployment. This means the economy with high unemployment has lower output
without a proportional decline in the need for basic consumption. Persistence of high
unemployment can signal serious distress in an economy and even lead to social and
political upheaval.
Unemployment is classified into two fundamental types, which are Cyclical
unemployment and Natural unemployment.
Cyclical unemployment is a type of unemployment which is related to the
cyclical trends in the industry or the business cycle. It occurs when there is not enough
aggregate demand in the economy to provide jobs for everyone who wants to work.
Due to the decrease in aggregate demand, less production and consequently fewer
workers are needed. If an economy is doing well, cyclical unemployment will be at
its lowest, and will be the highest if the economy growth starts to falter.
Natural unemployment is another type of unemployment which exists even at
the equilibrium of labor market, or in other words, when the economic reaches its
potential output by objective reasons. There are four categories of natural
unemployment:

7
 + Frictional unemployment occurs when it takes time for workers to search for
the jobs that best suit their tastes and skills
+ Structural unemployment focuses on structural problems in the economy and
inefficiencies such as a mismatch between the skills of the unemployed workers and
the skills needed for the available jobs
+ Seasonal unemployment occurs at seasonal jobs which require working in
certain moments of a year
+ Classical unemployment occurs when real wages for a job are set above
the market-clearing level, causing the number of job-seekers to exceed the number of
vacancies.
1.2. Economic theories
The main purpose of our group’s research is to determine the factors which
affect the fluctuation of unemployment rate. However, we will mainly focus on the
long-term relationship between those factors and unemployment. According to
previous published researches, some long-term factors substantially affecting
unemployment rate are population (POP), inflation rate (INF), Gross Domestic
Product (GDP) and Foreign Direct Investment (FDI).
1.2.1. The effect of Population on Unemployment
The quantity and quality of human resources are affected by the size, structure
and quality of the population. Countries with large population size have large human
resources, vice versa. On the other hand, the age structure of the population has a
decisive influence on the size and the structure of labor resources. Although the
population is the basis of labor force, the relationship between them does not depend
directly on each other at the same time but the fluctuation of the population growth
during period of time. Due to a rapid increase in population growth, as a result of
direct correlation between these two factors, the unemployment rate also tends to
increase.
The story is different in ASEAN countries due to the fact that almost every
country in ASEAN have population aging trend. So when the population grows
because of the rising life expectancy, the median age of the countries will increase.
When population rises, it is number of elderly increasing. Therefore, the employment

8
force is not changed making the correlation between unemployment rate and
population to be zero or even negative.
1.2.2. The effect of Inflation rate on Unemployment
In 1958, Sir A. W. Phillips originated the Phillips Curve plotted the data of UK
wage inflation against unemployment in 95 years from 1861 to 1957. It seemed to
suggest a short-run trade-off between unemployment and inflation. The theory behind
this was fairly straightforward. Falling unemployment might cause rising inflation
and a fall in inflation might only be possible by allowing unemployment to rise. If
the government wanted to reduce the unemployment rate, it could increase aggregate
demand but, although this might temporarily increase employment, it could also have
inflationary implications in labor and the product markets. In fact, Phillips
conjectured that the lower the unemployment rate, the tighter the labor market and
therefore, the faster firms must raise wages to attract scarce labor. At higher rates of
unemployment, the pressure abated. The Phillips Curve represented the average
relationship between unemployment and wage behavior over the business cycle,
which showed the rate of wage inflation that would result if a particular level of
unemployment persisted for some time.
1.2.3. The effect of Foreign Direct Investment on Unemployment
Foreign Direct Investment (FDI) is an investment made by a firm or individual
in one country into business interests located in another country. Generally, FDI
takes place when an investor establishes foreign business operations or acquires
foreign business assets, including establishing ownership or controlling interest in a
foreign company. One of the main purposes of FDI is to reduce the production costs
by hiring local workers. Therefore, the FDI enterprises have more incentive to
increase the number of jobs and workeforce training. This is a causation relationship
because skillful workforce is also an important factor to attract FDI of any country.
Local residents have easier accesses to find a job, which decreases the unemployment
rate. This has strengthened the affirmations on the relationship between FDI and
unemployment.

9
1.2.4. The effect of Gross Domestic Product on Unemployment
Gross Domestic Product (GDP) or national output is one of the most significant
indicators to determine economic performance of a country. One of the relationships
to be tested in the econometric model to be used in this paper is that between
unemployment and GDP which economists can associate with the Okun’s Law. They
found that an inverse relationship between unemployment and GDP growth holds for
most of the regions and for the whole country. However, the quantitative values of
Okun’s coefficients are quite different, a result that is partially explained by regional
disparities in productivity growth. These differences imply that, when it comes to
policy issues, conventional aggregate demand or supply management policies should
be combined with region specific policies.
1.3. Related published researches
In 2004, Cashell did a research about the relationship between inflation and
unemployment. The data was used from mid-1997 to September 2001. Her
conclusion was the result of inflation to the changes in unemployment rate is very
slow, and almost estimates of prolonged natural unemployment indicated that
unemployment below 5% will eventually lead to an increase in inflation.
In 2006, Shu-Chen Chang also applied variance decomposition and impulse
response function analysis for studying relationships among economic growth, trade,
foreign direct investment, and unemployment in Taiwan. The result showed that
export and economic growth affect FDI inflow positively however export expansion
has negative impacts on FDI outflow. The study confirmed that there is no
relationship between FDI and unemployment whereas a negative relationship
between unemployment and economic growth was confirmed.
In another study in 2009, Ozturk and Aktar took a comprehensive approach to
unemployment by using variance decomposition and impulse response function
analysis. They were interested in studying the interrelationship among foreign direct
investment, export, gross domestic product and unemployment in Turkey for the
period of 2000-2007. They found only two counteracting vectors in the system,
showing the long run relationship and concluded that foreign direct investment did
not lead to reduce unemployment in Turkey.

10
 In 2010, El-Agrody and his colleagues did an economic research on
unemployment and its impact on GDP in Egypt. The data were collected from 1994
to 2007. They applied the single linear regression and multiple linear regression
analysis methods in their research. The variables used in the study were privatization,
population, consumption expenditure, interest rates, exchange rates, technology,
domestic agricultural products, real wages and agricultural investment. The result
showed the positive effect of the national unemployment rate, national investment,
exchange rate on total GDP and highlighted privatization and population growth as
the main reason for an increase in unemployment. Their recommendation was to
revise the privatization policies and reduce the interest rates to lower agricultural
unemployment.
Thus, based on the stated economic theories and the results of previous
published researches, this report aims to answer the question: What impact have
Population, Inflation rate, GDP and FDI had on the Unemployment rate of ASEAN
countries during 2000 – 2018? Do those factors significantly affect the
Unemployment rate according to the economic theories? Moreover, what can we do
to solve the problems of unemployment in ASEAN?

11
 SECTION 2. MODEL SPECIFICATION
2.1. Methodology in the study
2.1.1. Method to collect and analyze the data
The data are secondary data, in the form of panel data and was collected from
World Bank, which has a very high level of precision. It comprises various
macroeconomic variables from the following ten ASEAN countries: Brunei
Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines,
Singapore, Thailand and Vietnam in 19 years during the period from 2000 to 2018.
Those macroeconomic variables are unemployment rate, inflation rate, population,
GDP and FDI.
Our group has used STATA to analyze the dataset and interpret the correlation
matrix between the dependent variable and other explanatory variables.
2.1.2. Method to derive the model
The process using in this research is the OLS regression for panel data. This is
an approach to modeling the statistical relationship of a dependent variable on one or
more explanatory variables of the panel dataset. Specificially, in our research, it is
the statistically dependent relationship of unemployment rate on inflation rate,
population, GDP and FDI.
There are three types of panel regression models that are commonly used, which
are Pooled OLS (POLS) model, Fixed Effects (FE) model and Random Effects (RE)
model.
In the next section, we will follow the regression method to analyze our panel
data by using those three types of model: POLS, FE and RE model, and choose the
most suitable model for interpretation.
2.2. Theoretical model specification
2.2.1. Specification of the model
According to previous published researches, our group has established a
function to analyze the relationships between unemployment rate and some
macroeconomics variables as well as the effects of those variables toward the
dependent variable:
𝐔𝐄𝐌 = 𝐟(𝐏𝐎𝐏, 𝐈𝐍𝐅, 𝐆𝐃𝐏, 𝐅𝐃𝐈)

12
 In which:
 UEM: Unemployment rate (%)
 POP: Population (People)
 INF: Inflation rate (%)
 GDP: Gross Domestic Product (Current USD)
 FDI: Foreign Direct Investment net inflows (Current USD)
2.2.2. Explanation of the variables

Variable Meaning Logarithmic Expected sign of

transformation regression coefficient
UEM Unemployment rate

POP Population −

INF Inflation rate (measured by the CPI) −

GDP Gross Domestic Product  −

FDI Foreign Direct Investment  −

In this report, we are interested in how a percentage change in GDP and FDI of
a country affects the change in its unemployment rate. In order to interpret our data
with that purpose, we will transform two independent variables: GDP and FDI by
taking the natural logarithm.
Thus, according to the economic theories, in order to analyze the effects of those
macroeconomic factors on the unemployment rate, our group has discussed and
decided to choose the regression analysis model:
𝐔𝐄𝐌𝐢𝐭 = 𝛃𝟏 + 𝛃𝟐 𝐏𝐎𝐏𝐢𝐭 + 𝛃𝟑 𝐈𝐍𝐅𝐢𝐭 + 𝛃𝟒 𝐥𝐨𝐠𝐆𝐃𝐏𝐢𝐭 + 𝛃𝟓 𝐥𝐨𝐠𝐅𝐃𝐈𝐢𝐭 + 𝐚𝐢 + 𝐮𝐢𝐭
In which:
 𝛃𝟏 : the intercept term of the model
 𝛃𝟐 : the regression coefficient of “population” 𝐏𝐎𝐏𝐢𝐭
 𝛃𝟑 : the regression coefficient of “inflation rate” 𝐈𝐍𝐅𝐢𝐭
 𝛃𝟒 : the regression coefficient of “natural logarithm of GDP” 𝐥𝐨𝐠𝐆𝐃𝐏𝐢𝐭
 𝛃𝟓 : the regression coefficient of “natural logarithm of FDI” 𝐥𝐨𝐠𝐅𝐃𝐈𝐢𝐭
 𝐚𝐢 : all unobserved and time-constant factors that affect 𝐔𝐄𝐌𝐢𝐭
 𝐮𝐢𝐭 : unobserved factors that change over time and affect 𝐔𝐄𝐌𝐢𝐭

13
2.2.3. Description of the data
a. Data sources
The panel dataset was collected from the official website of World Bank,
includes 190 observations of ten Asean countries: Brunei Darussalam, Cambodia,
Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and
Vietnam in 19 years during the period from 2000 to 2018.
b. Statistical description of the variables
First of all, before using the other xt commands, we run the command xtset
country year to tell STATA which variable is cross-sectional (country, n = 10) and
which one is time-series (year, T = 19) and declare the data to be a panel dataset. The
dataset is strongly balanced that all 10 ASEAN countries have measurements in all
19 time periods from 2000 to 2018.
Next, we run the command xtsum UEM POP INF logGDP logFDI to interpret
the dataset, the result obtained including the number of observations (Obs), the
average value (Mean), the standard deviation (Std. Dev.) as well as the minimum
(Min) and maximum (Max) values as the table belows:

Variable Mean Std. Dev. Min Max Obs

overall 2.959126 2.148455 0.393 9.316 N = 190
UEM between 2.130332 0.8705263 6.640526 n = 10
within 0.7139758 1.180442 5.6346 T = 19
overall 5.89E+07 6.88E+07 333165 2.68E+08 N = 190
POP between 7.20E+07 383685.8 2.39E+08 n = 10
within 6441199 3.13E+07 8.74E+07 T = 19
overall 4.850346 6.917394 -2.314972 57.07451 N = 190
INF between 3.935656 0.3280127 13.9202 n = 10
within 5.816883 -9.179019 48.00466 T = 19
overall 24.90271 1.642864 21.27208 27.67233 N = 190
logGDP between 1.599855 22.46288 26.93039 n = 10
within 0.6190561 23.45635 26.05089 T = 19
overall 21.51932 1.904104 15.30871 25.30585 N = 190
logFDI between 1.642618 19.02659 24.28045 n = 10
within 1.088296 17.69944 23.74255 T = 19

14
 There are three different types of statistics: overall, between, and within, in
which “overall” statistics are ordinary statistics that are based on 190 observations;
“between” statistics are calculated on the basis of summary statistics of 10 countries
regardless of time period, while “within” statistics by summary statistics of 19 time
periods regardless of country.
c. Correlation matrix between variables
Run the command corr UEM POP INF logGDP logFDI to analyze the
correlation between the variables, we have the result is the table of correlation matrix
between variables:

UEM POP INF logGDP logFDI

UEM 1.0000
POP 0.2549 1.0000

INF −0.2241 0.1398 1.0000

logGDP 0.2151 0.5983 −0.1856 1.0000
logFDI 0.0902 0.3073 −0.2228 0.8485 1.0000

According to the Correlation matrix between variables:

 The correlation coefficient between POP and UEM is 0.2549, which is positive
and not so high. Therefore, POP has an effect on UEM, any change in the
population will lead to a covariate change in the unemployment rate.
 The correlation coefficient between INF and UEM is −0.2241, which is
negative and pretty low. Therefore, INF has aneffect on UEM, any change in the
inflation rate will just lead to a slight inverted change in the unemployment rate.
 The correlation coefficient between logGDP and UEM is 0.2151, which is
positive and pretty low. Therefore, logGDP has an effect on UEM, which means
any change in the GDP will lead to a slight covariate change in the unemployment
rate.
 The correlation coefficient between logFDI and UEM is 0.0902 , which is
negative and extremely low. Therefore, logFDI has an effect on UEM, which
means the FDI has an extremely small influence on unemployment, any change
in the FDI will lead to a little covariate fluctuation in the unemployment rate.

15
 SECTION 3. PANEL DATA ANALYSIS
3.1. Choosing the most suitable model
3.1.1. Breusch-Pagan Lagrange Multiplier Test (LM)
In order to choose whether Pooled OLS model or Random Effects/Fixed Effects
model should be used, we will check with the the Breusch – Pagan test for the
significant difference across units (panel effect) or the existence of ai .
H0 : ai does not exist or Var(ai ) = 0
State the Hypotheses: {
H1 : ai does exist or Var(ai ) ≠ 0
To perform the Breusch – Pagan test on STATA, we will run these two
following commands:
xtreg UEM POP INF logGDP logFDI, re
xttest0
We have the result: chibar2(01) = 1060.10
Prob > chibar2 = 0.0000
The p-value obtained from the test is (Prob > chibar2) = 0.0000 < 0.05, we
can reject H0, accept H1. Then ai does exist, we should choose RE/FE model rather
than using POLS model.
3.1.2. Hausman Test
We will check if the Random Effects model or the Fixed Effects model is more
efficient for the panel data collected by using the Hausman test. The RE model will
be chosen if ai are correlated with xit : cov(ai , xit ) = 0, otherwise, if ai are not
correlated with xit , the FE model is more efficient to choose.
H0 : cov(ai , xit ) = 0
State the Hypotheses: {
H1 : cov(ai , xit ) ≠ 0
To perform the Hausman test on STATA, we will run these following
commands:
xtreg UEM POP INF logGDP logFDI, fe
est sto fe
xtreg UEM POP INF logGDP logFDI, re
hausman fe
We have the result: chi2(3) = 53.43

16
 Prob > chi2 = 0.0000
The p-value obtained from the test is (Prob > chi2) = 0.0000 < 0.05, we can
reject H0, accept H1. Then ai are correlated with xit , the Fixed Effects model is the
most suitable model should be used.
3.2. Diagnostic testing the problems of the model
3.2.1. Diagnosing the problem of Multicollinearity
The problem of multicollinearity is a phenomenon is which one independent
variable in a regression model can be linearity predicted from the others with a
substantial degree of accuracy. In other words, multicollinearity occurs when there is
a strong correlated relation between explanatory variables.
To detect the existence of multicollinearity in our model, we use the command
corr UEM POP INF logGDP logFDI to conduct the correlation matrix between
variables, the result as following:

UEM POP INF logGDP logFDI

UEM 1.0000
POP 0.2549 1.0000
INF −0.2241 0.1398 1.0000
logGDP 0.2151 0.5983 −0.1856 1.0000
logFDI 0.0902 0.3073 −0.2228 0.8485 1.0000

According to the correlation matrix, we can see that the coefficient of

correlation between logFDI and logGDP is 0.8485 > 0.8, which means there might
be multicollinearity in our model.
To make sure if the multicollinearity is existing in our model, we will use
variance inflation factors (VIF) to help detect multicollinearity by using these
following commands:
reg UEM POP INF logGDP logFDI
vif

17
 The result obtained as following:

Variable VIF
POP 6.75
INF 4.60
logGDP 2.20
logFDI 1.15
Mean VIF 3.68

The results of variance inflation factors of each explanatory variable and the
mean VIF in the table are all smaller than 10, so that we can temporarily conclude
that our model is not facing the problem of multicollinearity.
3.2.2. Diagnosing the problem of Heteroskedasticity
The most likely deviation from homoskedastic errors in the context of a panel
data is likely to be error variances specific to the cross-sectional unit. We will use the
Wald test to calculates a modified Wald statistic for groupwise heteroskedasticity in
the residuals of the Fixed Effects regression model.
H0 : Homoskedasticity
State the Hypotheses: {
H1 : Heteroskedasticity
To perform the Wald test on STATA, we will run these following commands:
xtreg UEM POP INF logGDP logFDI, fe
xttest3
We have the result: chi2(10) = 1285.94
Prob > chi2 = 0.0000
The p-value obtained from the test is (Prob > chi2) = 0.0000 < 0.05, we can
reject H0 and temporarily accept H1. We can conclude that our model is
heteroskedastic at a significance level of 5%.
3.2.3. Diagnosing the problem of Autocorrelation
a. Testing for serial correlation with the Wooldridge’s test
Serial correlation (also called autocorrelation) is where error terms in a time
series transfer from one period to another. The most common form of autocorrelation
is first-order serial correlation, which can either be positive or negative.

18
 H0 : no first − order autocorrelation
State the Hypotheses: {
H1 : first − order autocorrelation
To implement the Wooldridge test for serial correlation in the panel data, we
use the following command:
xtserial UEM POP INF logGDP logFDI
We have the result: F (1, 9) = 21.404
Prob > F = 0.0012
The p-value obtained from the test is (Prob > F) = 0.0012 < 0.05, we can reject
H0 and temporarily accept H1 at a significance level of 5%. Therefore, our panel
dataset is having the problem of serial correlation or autocorrelation.
b. Testing for cross-sectional correlation with Breusch – Pagan LM test
A standard assumption in panel data models (xtreg) is that the error terms are
independent across cross-sections. This assumption is employed for identification
purposes rather than descriptive accuracy. In the context of large T and small N like
our data (T = 19, N = 10), the LM test statistic proposed by Breusch and Pagan
(1980) can be used to test for cross-sectional dependence.
H0 : cross sectional dependence
State the Hypotheses: {
H1 : cross sectional independence
We use the command xttest2 to perform the Breusch – Pagan LM test in
STATA with the null hypothesis of having dependence between the residuals. This
is a test for contemporaneous correlation. Rejecting the null hypothesis means that
the test did not detect any cross-sectional dependence in your residuals.
xtreg UEM POP INF logGDP logFDI, fe
xttest2
We have the result: chi2(45) = 157.506
Pr = 0.0000
The p-value obtained from the test is Pr = 0.0000 < 0.05, we can reject H0 and
accept H1 at a significance level of 5%. Therefore, our panel dataset is having no
dependence between the residuals, or there is no problem of cross-sectional
correlation.
In conclusion, our model is having two problems of heteroskedasticity and serial
correlation (or autocorrelation).

19
 SECTION 4. ESTIMATED FIXED EFFECTS MODEL
AND STATISTICAL INFERENCE
4.1. Correcting the model
Our model is facing two problems of heteroskedasticity and serial correlation
(or autocorrelation). Therefore, clustered standard errors tend to be more trustworthy.
The use of clustered standard errors does not change coefficient estimates, but the t-
statistics will be change (because the standard errors are changed). Hence, this
method gives reasonably accurate p-values for the model.
We will use the following command for the cluster option in STATA:
xtreg UEM POP INF logGDP logFDI, fe cluster(country)
4.2. The estimated results of fixed effects model
We have the estimated result of Fixed Effects regression and Fixed Effects
regression using clustered standard errors as the table belows:

Explanatory variables FE model FE cluster(country) model

−4.72e−08*** −4.72e−08***
POP
(−5.26) (−4.03)
−0.0055513 −0.0055513
INF
(−0.66) (−0.86)
−0.0608111 −0.0608111
logGDP
(−0.41) (−0.28)
−0.0640177 −0.0640177
logFDI
(−0.86) (−0.86)
8.65802*** 8.65802*
constant
(3.55) (2.01)
Number of obs 190 190
R2 (within) 0.2615 0.2615
R2 (between) 0.0844 0.0844
R2 (overall) 0.0645 0.0645
Prob > F 0.0000 0.0000
Rho 0.981256 0.981256
* siginificant at 𝛼 = 10%, ** siginificant at 𝛼 = 5%, *** siginificant at 𝛼 = 1%
The values of t are in parentheses

20
 According to the estimated result from Fixed Effects regression using clustered
standard errors, we obtained the SRF of the FE model as below:
𝐔𝐄𝐌 = 𝟖. 𝟔𝟓𝟖𝟎𝟐 − (𝟒. 𝟕𝟐𝐞 − 𝟎𝟖)𝐏𝐎𝐏 − 𝟎. 𝟎𝟎𝟓𝟓𝟓𝟏𝟑𝐈𝐍𝐅
− 𝟎. 𝟎𝟔𝟎𝟖𝟏𝟏𝟏𝐥𝐨𝐠𝐆𝐃𝐏 − 𝟎. 𝟎𝟔𝟒𝟎𝟏𝟕𝟕𝐥𝐨𝐠𝐅𝐃𝐈 + 𝐚̂𝐢 + 𝐮
̂ 𝐢𝐭

4.3. Meanings of estimated results

 The regression coefficient of POP is estimated to be 𝛃
̂𝟐 = −4.72e − 08:
Holding other explanatory variables unchanged, if the population (POP)
increases by 1000 people, the expected value of unemployment rate (UEM)
will decrease by 0.0000472%.
 The regression coefficient of INF is estimated to be 𝛃
̂𝟑 = −0.0055513:
Holding other explanatory variables unchanged, if the inflation rate (INF)
increases by 1%, the expected value of unemployment rate (UEM) will
decrease by −0.0055513%.
 The regression coefficient of logGDP is estimated to be 𝛃
̂𝟒 = −0.0608111:
Holding other explanatory variables unchanged, if GDP increases by 1%, the
expected value of unemployment rate (UEM) will decrease by
0.000608111%.
 The regression coefficient of logFDI is estimated to be 𝛃
̂𝟓 = −0.0640177:
Holding other explanatory variables unchanged, if FDI increases by 1%, the
expected value of unemployment rate (UEM) will decrease by
0.000640177%.
 R2 (within) = 0.2615 means 26.15% of the total variation in the dependent
variable, which is unemployment rate (UEM), within a country is explained
by the explanatory variables, which are population (POP), inflation rate
(INF), GDP (logGDP) and FDI (logFDI).
 R2 (between) = 0.0844 means 8.44% the total variation in the dependent
variable between household units is explained by the explanatory variables.
 R2 (overall) = 0.0645 means 6.45% of the total variation in the dependent
variable is explained by the explanatory variables.

21
  In the case of Fixed Effects model, Rho is the fraction of variance due to the
individual term and shows the proportion of variation explained by the
individual-specific term (the constant term that does not vary over time). So
1.87% is being explained by the error term and the other 98.13% by the
constant term.
4.4. Hypothesis Testing
̂𝒋
4.4.1. Testing the significance of an individual regression coefficient 𝜷
H0 : βj = 0
State the Hypotheses: {
H1 : βj ≠ 0
a. The confidence interval approach
According to the results from STATA using the Fixed Effect regression, we
obtained the confidence interval for the regression coefficients of each variable at a
significance level of 5% as below:
No. Variable Confidence interval
1 POP [ −7.37e − 08; −2.07e − 08]

2 INF [ −0.0201308; 0.0090283]

3 logGDP [ −0.5435903; 0.4219681]

4 logFDI [−0.2325889; 0.1045536]

For the variable POP, the value of 0 doesn’t belong to the confidence interval
[ −7.37e − 08; −2.07e − 08], we can reject H0 and accept H1 . Therefore, the
regression coefficient of POP is statistically significant at a significance level of 5%.
For the remaining variables, which are INF, logGDP and logFDI, the value of
0 does belong to the confidence interval of each variable, which means we don’t have
enough evidence to reject H0 . Therefore, the regression coefficients of these variables
aren’t statistically significant at a significance level of 5%.
b. The T-distribution approach

Specify the critical t-value t c = t n−k 185

α⁄ = t 0.025 ≈ 1.972, where:
2

 n: the number of observations or sample size, n = 190

 k: the number of variables, k = 5

22
  α: the significance level, α = 0.05, for the two-tailed test, α⁄2 = 0.025
̂j −0
β
According to the test statistic t s = ̂j ) of each variable at the significance
SE(β

level of 5% obtained from the results, we have:

For the variable POP, its absolute value is |t s | = 4.03 > 1.972, we can reject
H0 . Therefore, the regression coefficient of POP is statistically significant at a
significance level of 5%.
For the variable INF, its absolute value is |t s | = 0.86 < 1.972, we don’t have
enough evidence to reject H0 . Therefore, the regression coefficient of INF isn’t
statistically significant at a significance level of 5%.
For the variable logGDP, its absolute value is |t s | = 0.28 < 1.972, we don’t
have enough evidence to reject H0 . Therefore, the regression coefficient of logGDP
isn’t statistically significant at a significance level of 5%.
For the variable logFDI, its absolute value is |t s | = 0.86 < 1.972, we don’t
have enough evidence to reject H0 . Therefore, the regression coefficient of logFDI
isn’t statistically significant at a significance level of 5%.
c. The p-value approach
The p-value is the lowest significance level at which the Null Hypothesis H0
can be reject.
For the variable POP, its p-value is approximately equal to 0.003, which is less
than 0.01. Therefore, the regression coefficient of POP is statistically significant at
a significance level of 1%.
For the variable INF, its p-value is approximately equal to 0.411, which is more
than 0.10. Therefore, the regression coefficient of INF isn’t statistically significant
at a significance level of 10%.
For the variable logGDP, its p-value is approximately equal to 0.782, which is
more than 0.10. Therefore, the regression coefficient of logGDP isn’t statistically
significant at a significance level of 10%.
For the variable logFDI, its p-value is approximately equal to 0.413, which is
more than 0.10. Therefore, the regression coefficient of logFDI isn’t statistically
significant at a significance level of 10%.

23
 In conclusion, by approaching three methods to test the significance of
individual regression coefficients, we can conclude that only the regression
coefficient of POP is statistically significant at a significance level of 1%, while the
regression coefficients of other variables are not statistically significant even at a
significance level of 10%.
4.4.2. Testing the significance of the overall model
H0 : β2 = β3 = β4 = β5 = 0
State the Hypotheses: {
H1 : β2 2 + β3 2 + β4 2 + β5 2 ≠ 0

H0 : R2 = 0
Equivalent Hypotheses: {
H1 : R2 ≠ 0
a. The F-test of significance approach
The F-test of overall significance indicates whether your
linear regression model provides a better fit to the data than a model that contains
no explanatory variables.
k−1 4
Specify the critical F-value Fc = Fn−k = F185 ≈ 2.42, where:
 n: the number of observations or sample size, n = 190
 k: the number of variables, k = 5
R2 (n−k) 0.0645×185
Calculate the test statistic Fs = 2 = (5−1)(1−0.0645) = 3.19 > 2.42,
(k−1)(1−R )

we can reject H0 and accept H1 . Therefore, the overall model is statistically

significant at a significance level of 5%.
b. The p-value approach
According to the result obtained from the Fixed Effect model by STATA, we
have the P-value that P(Fs > Fc ) = 0.0000 < 0.05. As a result, we can reject H0 ,
accept H1 and conclude that the overall model is statistically significant at a
significance level of 5%.
In conclusion, after testing the significance of the whole model, we can
conclude that the overall model is statistically fitted at a significance level of 5%.
Theoretically, it is shown that:

24
  When the population increases, the unemployment rate is expected to remain
unchanged or even decrease, and vice versa, holding other variables remain
unchanged.
 When the inflation rate increases, the unemployment rate is expected to
decrease, and vice versa, holding other variables remain unchanged.
 When the GDP increases, the unemployment rate is expected to decrease,
and vice versa, holding other variables remain unchanged.
 When the FDI increases, the unemployment rate is expected to decrease, and
vice versa, holding other variables remain unchanged.
Meanwhile, the estimated coefficients of each explanatory variable are:
 The estimated coefficient of population 𝛃
̂ 𝟐 = − 𝟒. 𝟕𝟐𝐞 − 𝟎𝟖, which is less
than 0.
 The estimated coefficient of inflation rate 𝛃
̂ 𝟑 = −𝟎. 𝟎𝟎𝟓𝟓𝟓𝟏𝟑, which is less
than 0.
 The estimated coefficient of natural logarithm of GDP 𝛃
̂𝟒 = −𝟎. 𝟎𝟔𝟎𝟖𝟏𝟏,
which is less than 0.
 The estimated coefficient of natural logarithm of FDI 𝛃
̂𝟓 = −𝟎. 𝟎𝟔𝟒𝟎𝟏𝟕𝟕,
which is less than 0.
Therefore, all the results of the regression model are consistant with the
economic theories. However, only the regression coefficient of POP is statistically
significant at a significance level of 1%, while the regression coefficients of other
variables are not statistically significant even at a significance level of 10%. We will
still keep all of the explanatory variables in our model.
In fact, an increase in population does have an impact on unemployment rate,
which tends to remain unchanged or decrease in the case of ASEAN countries. When
the population grows because of the rising life expectancy, the median age of the
countries will increase. When population rises, it is number of elderly increasing.
Therefore, the employment force is not changed making the correlation between
unemployment rate and population to be zero or even negative.
In addition, there is always a trade-off between inflation and economic growth.
When a country experienced higher inflation but still in an acceptable number, this

25
leads to economic growth. It is conventionally measured as the increase in real GDP.
As the scale of the production rises, firms will employ more workers leading to a fall
in unemployment.
Last but not least, FDI also has a negative impact on the unemployment rate.
Specificially, when foreign investors invest more in one country, the local residents
will have easier accesses to find jobs, which decreases the unemployment rate.
For example, in Vietnam from 2017 to 2018, the simultaneous increases of all
four factors population, inflation rate, GDP and FDI lead to a decrease in
unemployment rate from 2.05% to 1.99%.
4.5. Recommendations
Unemployment is inevitable, we can not delete it but only reduce it.
Our group has discussed and recommended some solutions to solve the problems
of unemployment in some ASEAN countries.
Increase Foreign Direct Investment by developing new technology and
improving local workers’ skills to attract more foreign investors. When the FDI
increases, local residents can have easier access to find a job, which decreases the
unemployment rate.
Otherwise, we may have to accept the inflation in order to reduce unemployment
rate, as output increases, unemployment decreases and with more people employed
in the workforce, spending within the economy increases, and demand-pull inflation
occurs, raising price levels. This’s a trade-off and we will need to consider it
carefully.

26
 CONCLUSION
Our research examined the statistically dependent relationship of
Unemployment rate on Population, Inflation rate, Gross Domestic Product (GDP) and
Foreign Direct Investment (FDI). The results obtained after this research are
consistent with the economic theories and some previous published researches.
Specificially, there’s a negative impact of population, inflation rate, GDP and FDI on
unemployment rate. As those factors increase, unemployment rate would decrease
followingly.
The report was completed by the whole group’s effort and the knowledge that
we have studied at class. Despite of our lack in knowledge and collecting data, we
have tried our best and gained more knowledge along with understanding about the
process of running the econometrics model, analyzing the model and learning the
relationship between variables in the model, even though there are still lots of
variables that needed to be analyzed to have a more overall look.
We would like to thank Ph.D. Dinh Thi Thanh Binh once again for your guidance
and suggestions to help us finish the report in the right direction. We still have many
omissions and mistakes so that we would like to receive your comments to improve
our report to the fullest.

27
 REFERENCES
Documents:
1. Cashell, W. B., 2004, “Inflation and unemployment: What is the connection?”,
Federal Publications.
2. Damodar N. Gujarati, and Dawn C. Porter, “Basic Econometrics”, 5th
Edition.
3. El-Agrody, N. M., Othman, A. Z., & Hassan, M. B.-D., 2010, “Economic
Study of Unemployment in Egypt and Impacts on GDP”.
4. Lui, L. Q., 2009, “Inflation and Unemployment: The roles of goos and labor
market institution”.
5. Shu-Chen Chang, 2006, “The dynamic interactions among foreign direct
investment, economic growth, exports and unemployment: Evidence from Taiwan”.
6. Marjetka Troha, 2015, “Impact of Population ageing on Unemployment and
Entrepreneurial activity: The case of Slovenia”
7. M. Palát, 2011, “The impact of Foreign direct investment on Unemployment
in Japan”.
8. N. Gregory Mankiw, “Principles of Macroeconomics”, 6th Edition.

Websites:
1. Elvis Picardo, May 2019, “How Inflation and Unemployment are related”.
https://www.investopedia.com/articles/markets/081515/how-inflation-and-
unemployment-are-related.asp
2. Jim Chappelow, May 2019, “Unemployment”.
https://www.investopedia.com/terms/u/unemployment.asp
3. Ryan Furhmann, May 2019, “Okun's Law: Economic Growth and
Unemployment”.
https://www.investopedia.com/articles/economics/12/okuns-law.asp
4. Tejvan Pettinger, May 2017, “Trade off between unemployment and
inflation”.
https://www.economicshelp.org/blog/571/unemployment/trade-off-between-
unemployment-and-inflation/

28
 APPENDIX
5.1. The dataset of ten ASEAN countries during 2000 – 2018
Obs Country Year UEM INF POP GDP FDI
1 Brunei 2000 5.653 1.558152 333165 6.001E+09 549607251
2 Brunei 2001 5.752 0.59589 340034 5.601E+09 606946z44
3 Brunei 2002 5.925 -2.31497 346782 5.843E+09 229671956
4 Brunei 2003 5.98 0.3 353293 6.557E+09 123820911
5 Brunei 2004 5.84 0.814224 359433 7.872E+09 113205867
6 Brunei 2005 5.663 1.244437 365114 9.531E+09 175068517
7 Brunei 2006 5.392 0.159888 370263 1.147E+10 87839128
8 Brunei 2007 5.151 0.967774 374965 1.225E+10 257635717
9 Brunei 2008 5.158 2.08498 379421 1.439E+10 222184549
10 Brunei 2009 6.42 1.035718 383906 1.073E+10 325586828
11 Brunei 2010 6.743 0.356869 388646 1.371E+10 480722547
12 Brunei 2011 6.694 0.137912 393688 1.853E+10 691170275
13 Brunei 2012 6.905 0.111766 398989 1.905E+10 864905528
14 Brunei 2013 7.126 0.389205 404421 1.809E+10 775644684
15 Brunei 2014 6.965 -0.20711 409769 1.71E+10 567889727
16 Brunei 2015 7.914 -0.48835 414907 1.293E+10 171289168
17 Brunei 2016 8.711 -0.27869 419800 1.14E+10 150550827
18 Brunei 2017 9.316 -1.26051 424473 1.213E+10 467927550
19 Brunei 2018 8.862 1.025052 428962 1.357E+10 511497138
20 Cambodia 2000 1.072 -0.79199 12155239 3.678E+09 118308566
21 Cambodia 2001 1.131 -0.60065 12405408 3.984E+09 146481995
22 Cambodia 2002 1.231 3.225084 12637727 4.284E+09 130956364
23 Cambodia 2003 1.303 1.210011 12856163 4.658E+09 81580651
24 Cambodia 2004 1.332 3.924782 13066469 5.338E+09 131416229
25 Cambodia 2005 1.346 6.349255 13273354 6.293E+09 379180191
26 Cambodia 2006 1.297 6.143256 13477709 7.275E+09 483209383
27 Cambodia 2007 1.257 7.668393 13679962 8.639E+09 867288539
28 Cambodia 2008 0.824 24.99718 13883834 1.035E+10 815180218
29 Cambodia 2009 0.579 -0.66131 14093604 1.04E+10 928393617
30 Cambodia 2010 0.771 3.99623 14312212 1.124E+10 1.404E+09
31 Cambodia 2011 0.577 5.478587 14541423 1.283E+10 1.539E+09
32 Cambodia 2012 0.505 2.932725 14780454 1.405E+10 1.988E+09
33 Cambodia 2013 0.438 2.9426 15026332 1.523E+10 2.068E+09
34 Cambodia 2014 0.692 3.855239 15274503 1.67E+10 1.853E+09
35 Cambodia 2015 0.393 1.22127 15521436 1.805E+10 1.823E+09
36 Cambodia 2016 0.716 3.045415 15766293 2.016E+10 2.476E+09

29
37 Cambodia 2017 0.683 2.890925 16009414 2.218E+10 2.788E+09
38 Cambodia 2018 0.652 2.457965 16249798 2.454E+10 3.213E+09
39 Indonesia 2000 6.078 3.688619 211513823 1.65E+11 4.55E+09
40 Indonesia 2001 6.082 11.50011 214427417 1.604E+11 2.977E+09
41 Indonesia 2002 6.604 11.90012 217357793 1.957E+11 145085549
42 Indonesia 2003 6.657 6.757317 220309469 2.348E+11 596923828
43 Indonesia 2004 7.303 6.06406 223285676 2.568E+11 1.896E+09
44 Indonesia 2005 7.945 10.4532 226289470 2.859E+11 8.336E+09
45 Indonesia 2006 7.551 13.10867 229318262 3.646E+11 4.914E+09
46 Indonesia 2007 8.06 6.406563 232374245 4.322E+11 6.928E+09
47 Indonesia 2008 7.209 10.22666 235469762 5.102E+11 9.318E+09
48 Indonesia 2009 6.106 4.386416 238620563 5.396E+11 4.877E+09
49 Indonesia 2010 5.614 5.134204 241834215 7.551E+11 1.529E+10
50 Indonesia 2011 5.153 5.356048 245116206 8.93E+11 2.056E+10
51 Indonesia 2012 4.468 4.2795 248452413 9.179E+11 2.12E+10
52 Indonesia 2013 4.336 6.412513 251806402 9.125E+11 2.328E+10
53 Indonesia 2014 4.049 6.394925 255129004 8.908E+11 2.512E+10
54 Indonesia 2015 4.514 6.363121 258383256 8.609E+11 1.978E+10
55 Indonesia 2016 4.301 3.525805 261554226 9.319E+11 4.542E+09
56 Indonesia 2017 4.185 3.808798 264645886 1.015E+12 2.051E+10
57 Indonesia 2018 4.511 3.198346 267663435 1.042E+12 1.891E+10
58 Lao DPR 2000 1.953 25.08464 5323700 1.731E+09 33890000
59 Lao DPR 2001 1.828 7.811808 5409582 1.769E+09 23904284
60 Lao DPR 2002 1.743 10.63134 5493246 1.758E+09 4451297
61 Lao DPR 2003 1.63 15.48935 5576640 2.023E+09 19484001
62 Lao DPR 2004 1.49 10.46227 5662208 2.366E+09 16917263
63 Lao DPR 2005 1.35 7.165418 5751676 2.736E+09 27720000
64 Lao DPR 2006 1.145 6.545594 5846074 3.453E+09 187310641
65 Lao DPR 2007 0.97 4.661973 5944948 4.223E+09 323520000
66 Lao DPR 2008 0.84 7.628809 6046620 5.444E+09 227770000
67 Lao DPR 2009 0.804 0.141188 6148623 5.833E+09 318598209
68 Lao DPR 2010 0.708 5.982545 6249165 7.128E+09 278805903
69 Lao DPR 2011 0.709 7.568989 6347567 8.749E+09 300743507
70 Lao DPR 2012 0.712 4.255127 6444530 1.019E+10 617755395
71 Lao DPR 2013 0.717 6.371427 6541304 1.194E+10 681397257
72 Lao DPR 2014 0.702 4.129243 6639756 1.327E+10 867646122
73 Lao DPR 2015 0.692 1.277354 6741164 1.439E+10 1.078E+09
74 Lao DPR 2016 0.68 1.596915 6845846 1.581E+10 935296173
75 Lao DPR 2017 0.66 0.8255 6953035 1.685E+10 1.693E+09
76 Lao DPR 2018 0.641 2.039874 7061507 1.795E+10 1.32E+09

30
77 Malaysia 2000 3 1.53474 23194257 9.379E+10 3.788E+09
78 Malaysia 2001 3.53 1.416785 23709119 9.278E+10 553947368
79 Malaysia 2002 3.48 1.807872 24208391 1.008E+11 3.193E+09
80 Malaysia 2003 3.61 1.089676 24698819 1.102E+11 3.219E+09
81 Malaysia 2004 3.54 1.421271 25190652 1.247E+11 4.376E+09
82 Malaysia 2005 3.53 2.975071 25690611 1.435E+11 3.925E+09
83 Malaysia 2006 3.32 3.609236 26201961 1.627E+11 7.691E+09
84 Malaysia 2007 3.23 2.027353 26720370 1.935E+11 9.071E+09
85 Malaysia 2008 3.34 5.440782 27236006 2.308E+11 7.573E+09
86 Malaysia 2009 3.69 0.583308 27735040 2.023E+11 114664435
87 Malaysia 2010 3.25 1.622852 28208035 2.55E+11 1.089E+10
88 Malaysia 2011 3.05 3.174471 28650955 2.98E+11 1.512E+10
89 Malaysia 2012 3.04 1.663571 29068159 3.144E+11 8.896E+09
90 Malaysia 2013 3.11 2.105012 29468872 3.233E+11 1.13E+10
91 Malaysia 2014 2.88 3.142991 29866559 3.381E+11 1.062E+10
92 Malaysia 2015 3.1 2.10439 30270962 3.014E+11 9.857E+09
93 Malaysia 2016 3.44 2.090567 30684804 3.013E+11 1.347E+10
94 Malaysia 2017 3.41 3.871201 31105028 3.19E+11 9.368E+09
95 Malaysia 2018 3.35 0.884709 31528585 3.586E+11 8.57E+09
96 Myanmar 2000 0.792 -0.10917 46719701 8.905E+09 254789765
97 Myanmar 2001 0.791 21.10131 47225120 6.478E+09 208303564
98 Myanmar 2002 0.809 57.07451 47702171 6.778E+09 150511226
99 Myanmar 2003 0.811 36.58972 48148902 1.047E+10 248882510
100 Myanmar 2004 0.794 4.534214 48564484 1.057E+10 211364295
101 Myanmar 2005 0.774 9.368618 48949924 1.199E+10 234904379
102 Myanmar 2006 0.732 19.99649 49301050 1.45E+10 275812653
103 Myanmar 2007 0.698 35.0246 49621475 2.018E+10 709922015
104 Myanmar 2008 0.687 26.79954 49929642 3.186E+10 863880447
105 Myanmar 2009 0.765 1.472343 50250367 3.691E+10 1.079E+09
106 Myanmar 2010 0.785 7.718382 50600818 4.954E+10 901133535
107 Myanmar 2011 0.786 5.02146 50990615 5.998E+10 2.52E+09
108 Myanmar 2012 0.79 1.467583 51413698 5.994E+10 1.334E+09
109 Myanmar 2013 0.796 5.643039 51852451 6.027E+10 2.255E+09
110 Myanmar 2014 0.778 4.953299 52280807 6.545E+10 2.175E+09
111 Myanmar 2015 0.766 9.454172 52680726 5.969E+10 4.084E+09
112 Myanmar 2016 1.141 6.928825 53045226 6.326E+10 3.278E+09
113 Myanmar 2017 1.551 4.572537 53382581 6.672E+10 4.002E+09
114 Myanmar 2018 1.494 6.872329 53708395 7.121E+10 1.291E+09
115 Philipines 2000 3.7 3.977125 77991755 8.103E+10 1.487E+09
116 Philipines 2001 3.698 5.345502 79672873 7.626E+10 760000000

31
117 Philipines 2002 3.632 2.722772 81365258 8.136E+10 1.769E+09
118 Philipines 2003 3.527 2.289157 83051971 8.391E+10 492000000
119 Philipines 2004 3.553 4.829211 84710542 9.137E+10 592000000
120 Philipines 2005 3.795 6.516854 86326250 1.031E+11 1.664E+09
121 Philipines 2006 4.052 5.485232 87888675 1.222E+11 2.707E+09
122 Philipines 2007 3.434 2.9 89405482 1.494E+11 2.919E+09
123 Philipines 2008 3.72 8.260447 90901965 1.742E+11 1.34E+09
124 Philipines 2009 3.858 4.219031 92414158 1.683E+11 2.065E+09
125 Philipines 2010 3.605 3.789836 93966780 1.996E+11 1.07E+09
126 Philipines 2011 3.592 4.718417 95570047 2.241E+11 2.007E+09
127 Philipines 2012 3.504 3.026964 97212638 2.501E+11 3.215E+09
128 Philipines 2013 3.497 2.582688 98871552 2.718E+11 3.737E+09
129 Philipines 2014 3.6 3.597823 100513138 2.846E+11 5.74E+09
130 Philipines 2015 3.068 0.674193 102113212 2.928E+11 5.639E+09
131 Philipines 2016 2.708 1.253699 103663927 3.049E+11 8.28E+09
132 Philipines 2017 2.552 2.853188 105173264 3.136E+11 1.026E+10
133 Philipines 2018 2.338 5.211605 106651922 3.309E+11 9.832E+09
134 Singapore 2000 3.7 1.361624 4027887 9.607E+10 1.552E+10
135 Singapore 2001 3.76 0.997198 4138012 8.979E+10 1.701E+10
136 Singapore 2002 5.65 -0.39168 4175950 9.254E+10 6.157E+09
137 Singapore 2003 5.93 0.507905 4114826 9.765E+10 1.705E+10
138 Singapore 2004 5.84 1.662727 4166664 1.15E+11 2.439E+10
139 Singapore 2005 5.59 0.425106 4265762 1.278E+11 1.932E+10
140 Singapore 2006 4.48 0.962902 4401365 1.486E+11 3.913E+10
141 Singapore 2007 3.9 2.10488 4588599 1.809E+11 4.734E+10
142 Singapore 2008 3.96 6.627782 4839396 1.936E+11 1.36E+10
143 Singapore 2009 5.86 0.59672 4987573 1.942E+11 2.344E+10
144 Singapore 2010 4.12 2.823661 5076732 2.398E+11 5.532E+10
145 Singapore 2011 3.89 5.247793 5183688 2.794E+11 4.916E+10
146 Singapore 2012 3.72 4.575603 5312437 2.951E+11 5.531E+10
147 Singapore 2013 3.86 2.358604 5399162 3.076E+11 6.439E+10
148 Singapore 2014 3.74 1.025148 5469724 3.149E+11 6.87E+10
149 Singapore 2015 3.79 -0.52262 5535002 3.08E+11 6.977E+10
150 Singapore 2016 4.08 -0.53227 5607283 3.181E+11 7.072E+10
151 Singapore 2017 4.2 0.57626 5612253 3.384E+11 9.777E+10
152 Singapore 2018 4.019 0.43862 5638676 3.642E+11 9.104E+10
153 Thailand 2000 2.389 1.591969 62952642 1.264E+11 3.366E+09
154 Thailand 2001 2.6 1.626909 63539196 1.203E+11 5.067E+09
155 Thailand 2002 1.82 0.697309 64069087 1.343E+11 3.342E+09
156 Thailand 2003 1.54 1.80435 64549866 1.523E+11 5.232E+09

32
157 Thailand 2004 1.51 2.759149 64995299 1.729E+11 5.86E+09
158 Thailand 2005 1.35 4.540369 65416189 1.893E+11 8.216E+09
159 Thailand 2006 1.22 4.637474 65812536 2.218E+11 8.917E+09
160 Thailand 2007 1.18 2.241541 66182067 2.629E+11 8.634E+09
161 Thailand 2008 1.18 5.468489 66530984 2.914E+11 8.562E+09
162 Thailand 2009 0.936 -0.84572 66866839 2.817E+11 6.411E+09
163 Thailand 2010 0.622 3.247588 67195028 3.411E+11 1.475E+10
164 Thailand 2011 0.66 3.808791 67518382 3.708E+11 2.474E+09
165 Thailand 2012 0.58 3.0149 67835957 3.976E+11 1.29E+10
166 Thailand 2013 0.489 2.184886 68144501 4.203E+11 1.594E+10
167 Thailand 2014 0.576 1.895142 68438730 4.073E+11 4.975E+09
168 Thailand 2015 0.597 -0.90042 68714511 4.013E+11 8.928E+09
169 Thailand 2016 0.688 0.18815 68971331 4.124E+11 2.81E+09
170 Thailand 2017 0.83 0.665632 69209858 4.553E+11 8.229E+09
171 Thailand 2018 0.766 1.063898 69428524 5.05E+11 1.321E+10
172 Vietnam 2000 2.26 -1.71034 79910412 3.117E+10 1.298E+09
173 Vietnam 2001 2.76 -0.43154 80742499 3.269E+10 1.3E+09
174 Vietnam 2002 2.12 3.830828 81534407 3.506E+10 1.4E+09
175 Vietnam 2003 2.25 3.234648 82301656 3.955E+10 1.45E+09
176 Vietnam 2004 2.14 7.754947 83062821 4.543E+10 1.61E+09
177 Vietnam 2005 2.137 8.284572 83832661 5.763E+10 1.954E+09
178 Vietnam 2006 2.08 7.418017 84617540 6.637E+10 2.4E+09
179 Vietnam 2007 2.026 8.344449 85419591 7.741E+10 6.7E+09
180 Vietnam 2008 1.791 23.11545 86243413 9.913E+10 9.579E+09
181 Vietnam 2009 1.737 6.716983 87092252 1.06E+11 7.6E+09
182 Vietnam 2010 1.114 9.207466 87967651 1.159E+11 8E+09
183 Vietnam 2011 1.875 18.67773 88871561 1.355E+11 7.43E+09
184 Vietnam 2012 1.676 9.094703 89802487 1.558E+11 8.368E+09
185 Vietnam 2013 1.977 6.592675 90753472 1.712E+11 8.9E+09
186 Vietnam 2014 1.873 4.084554 91714595 1.862E+11 9.2E+09
187 Vietnam 2015 2.125 0.631201 92677076 1.932E+11 1.18E+10
188 Vietnam 2016 2.083 2.668248 93638724 2.053E+11 1.26E+10
189 Vietnam 2017 2.053 3.520257 94596642 2.238E+11 1.41E+10
190 Vietnam 2018 1.993 3.539628 95540395 2.452E+11 1.55E+10

33
5.2. Do-file
use "C:\Users\admin\Downloads\datafinal.dta" //to import dataset
encode code, gen(country)
xtset country year //to declare the data to be a panel dataset
xtsum uem pop inf loggdp logfdi
corr uem pop inf loggdp logfdi
xtreg uem pop inf loggdp logfdi, re
xttest0 //to decide whether Pooled OLS model or RE model should be used
xtreg uem pop inf loggdp logfdi, fe
est sto fe
xtreg uem pop inf loggdp logfdi, re
hausman fe //to decide whether FE model or RE model should be used
corr uem pop inf loggdp logfdi
reg uem pop inf loggdp logfdi
vif //to detect multicollinearity
ssc install xttest3
xtreg uem pop inf loggdp logfdi, fe
xttest3 //to detect heteroskedasticity
xtserial uem pop inf loggdp logfdi //to detect autocorrelation
ssc install xttest2
xtreg uem pop inf loggdp logfdi, fe
xttest2 //to detect cross-sectional correlation
xtreg uem pop inf loggdp logfdi, fe cluster(country)

5.3. The STATA command’s outputs

The ouput of the command xtset country year
. xtset country year
panel variable: country (strongly balanced)
time variable: year, 2000 to 2018
delta: 1 unit
Figure 1. Panel dataset declared result

34
The ouput of the command xtsum UEM POP INF logGDP logFDI
. xtsum uem pop inf loggdp logfdi

Variable Mean Std. Dev. Min Max Observations

uem overall 2.959126 2.148455 .393 9.316 N = 190

between 2.130332 .8705263 6.640526 n = 10
within .7139758 1.180442 5.6346 T = 19

pop overall 5.89e+07 6.88e+07 333165 2.68e+08 N = 190

between 7.20e+07 383685.8 2.39e+08 n = 10
within 6441199 3.13e+07 8.74e+07 T = 19

inf overall 4.850346 6.917394 -2.314972 57.07451 N = 190

between 3.935656 .3280127 13.9202 n = 10
within 5.816883 -9.179019 48.00466 T = 19

loggdp overall 24.90271 1.642864 21.27208 27.67233 N = 190

between 1.599855 22.46288 26.93039 n = 10
within .6190561 23.45635 26.05089 T = 19

logfdi overall 21.51932 1.904104 15.30871 25.30585 N = 190

between 1.642618 19.02659 24.28045 n = 10
within 1.088296 17.69944 23.74255 T = 19

Figure 2. Data description

The ouput of the command corr UEM POP INF logGDP logFDI:
. corr uem pop inf loggdp logfdi
(obs=190)

uem pop inf loggdp logfdi

uem 1.0000
pop 0.2549 1.0000
inf -0.2241 0.1398 1.0000
loggdp 0.2151 0.5983 -0.1856 1.0000
logfdi 0.0902 0.3073 -0.2228 0.8485 1.0000

Figure 3. Correlation matrix between variables

35
The ouput of the command xtreg UEM POP INF logGDP logFDI, re:
. xtreg uem pop inf loggdp logfdi, re

Random-effects GLS regression Number of obs = 190

Group variable: country Number of groups = 10

R-sq: Obs per group:

within = 0.2391 min = 19
between = 0.0900 avg = 19.0
overall = 0.0648 max = 19

Wald chi2(4) = 39.32

corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

uem Coef. Std. Err. z P>|z| [95% Conf. Interval]

pop -2.30e-08 7.32e-09 -3.14 0.002 -3.73e-08 -8.64e-09

inf -.005936 .0087629 -0.68 0.498 -.023111 .0112389
loggdp -.1507737 .15068 -1.00 0.317 -.4461011 .1445538
logfdi -.0826315 .0777981 -1.06 0.288 -.235113 .06985
_cons 9.875268 2.602501 3.79 0.000 4.774459 14.97608

sigma_u 2.1627131
sigma_e .6358061
rho .92044805 (fraction of variance due to u_i)

Figure 4. Random Effects regression result

The ouput of the command xttest0:

. xttest0

Breusch and Pagan Lagrangian multiplier test for random effects

uem[country,t] = Xb + u[country] + e[country,t]

Estimated results:
Var sd = sqrt(Var)

uem 4.615857 2.148455

e .4042494 .6358061
u 4.677328 2.162713

Test: Var(u) = 0
chibar2(01) = 1060.10
Prob > chibar2 = 0.0000
Figure 5. Breusch-Pagan Lagrange Multiplier Test result

36
The ouput of the command xtreg UEM POP INF logGDP logFDI, fe:
. xtreg uem pop inf loggdp logfdi, fe

Fixed-effects (within) regression Number of obs = 190

Group variable: country Number of groups = 10

R-sq: Obs per group:

within = 0.2615 min = 19
between = 0.0844 avg = 19.0
overall = 0.0645 max = 19

F(4,176) = 15.58
corr(u_i, Xb) = -0.8911 Prob > F = 0.0000

uem Coef. Std. Err. t P>|t| [95% Conf. Interval]

pop -4.72e-08 8.98e-09 -5.26 0.000 -6.49e-08 -2.95e-08

inf -.0055513 .0083598 -0.66 0.508 -.0220496 .0109471
loggdp -.0608111 .147047 -0.41 0.680 -.3510135 .2293913
logfdi -.0640177 .0744515 -0.86 0.391 -.2109502 .0829149
_cons 8.65802 2.437831 3.55 0.000 3.846877 13.46916

sigma_u 4.6002844
sigma_e .6358061
rho .981256 (fraction of variance due to u_i)

F test that all u_i=0: F(9, 176) = 185.41 Prob > F = 0.0000
Figure 6. Fixed Effects regression result

The ouput of the command hausman fe:

Note: the rank of the differenced variance matrix (3) does not equal the number of coefficients being tested
(4); be sure this is what you expect, or there may be problems computing the test. Examine the output
of your estimators for anything unexpected and possibly consider scaling your variables so that the
coefficients are on a similar scale.

Coefficients
(b) (B) (b-B) sqrt(diag(V_b-V_B))
fe . Difference S.E.

pop -4.72e-08 -2.30e-08 -2.42e-08 5.20e-09

inf -.0055513 -.005936 .0003848 .
loggdp -.0608111 -.1507737 .0899625 .
logfdi -.0640177 -.0826315 .0186138 .

b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(3) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 53.43
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)

Figure 7. Hausman Test result

The ouput of the command vif (after using reg):

. vif

Variable VIF 1/VIF

loggdp 6.75 0.148175

logfdi 4.60 0.217406
pop 2.20 0.454887
inf 1.15 0.866801

Mean VIF 3.68

Figure 8. Results of variance inflation factors

37
 The ouput of the command xttest3:
. xttest3

Modified Wald test for groupwise heteroskedasticity

in fixed effect regression model

H0: sigma(i)^2 = sigma^2 for all i

chi2 (10) = 1285.94

Prob>chi2 = 0.0000

Figure 9. Modified Wald Test result

The ouput of the command xtserial UEM POP INF logGDP logFDI:
. xtserial uem pop inf loggdp logfdi

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation
F( 1, 9) = 21.404
Prob > F = 0.0012
Figure 10. Wooldridge Test result for autocorrelation

The ouput of the command xttest2:

. xttest2

Correlation matrix of residuals:

__e1 __e2 __e3 __e4 __e5 __e6 __e7 __e8 __e9 __e10
__e1 1.0000
__e2 -0.4405 1.0000
__e3 -0.4177 0.6815 1.0000
__e4 -0.5085 0.3203 -0.2058 1.0000
__e5 0.5392 0.1657 0.3056 -0.5053 1.0000
__e6 0.9163 -0.2006 -0.1597 -0.5579 0.6602 1.0000
__e7 0.0998 -0.3801 0.0873 -0.7337 -0.0225 0.0521 1.0000
__e8 -0.2235 0.3435 0.2979 0.1764 0.3820 -0.2118 -0.2194 1.0000
__e9 -0.5440 0.3631 -0.0572 0.9187 -0.4010 -0.5128 -0.7303 0.0888 1.0000
__e10 0.6500 -0.1711 -0.1997 -0.2103 0.3815 0.6702 -0.0382 -0.3209 -0.1689 1.0000

Breusch-Pagan LM test of independence: chi2(45) = 157.506, Pr = 0.0000

Based on 19 complete observations over panel units
Figure 11. Breusch-Pagan LM Test for cross-sectional correlation

38
 The ouput of the command xtreg UEM POP INF logGDP logFDI, fe
cluster(country):
. xtreg uem pop inf loggdp logfdi, fe cluster(country)

Fixed-effects (within) regression Number of obs = 190

Group variable: country Number of groups = 10

R-sq: Obs per group:

within = 0.2615 min = 19
between = 0.0844 avg = 19.0
overall = 0.0645 max = 19

F(4,9) = 29.19
corr(u_i, Xb) = -0.8911 Prob > F = 0.0000

(Std. Err. adjusted for 10 clusters in country)

Robust
uem Coef. Std. Err. t P>|t| [95% Conf. Interval]

pop -4.72e-08 1.17e-08 -4.03 0.003 -7.37e-08 -2.07e-08

inf -.0055513 .006445 -0.86 0.411 -.0201308 .0090283
loggdp -.0608111 .2134154 -0.28 0.782 -.5435903 .4219681
logfdi -.0640177 .074518 -0.86 0.413 -.232589 .1045536
_cons 8.65802 4.306479 2.01 0.075 -1.083912 18.39995

sigma_u 4.6002844
sigma_e .6358061
rho .981256 (fraction of variance due to u_i)

Figure 12. Fixed Effects regression result using clustered standard errors

39