Unraveling the impact of economic diversity on unemployment rates in ASEAN-6

Abstract

Economic diversification is widely acknowledged as a crucial approach for promoting economic stability. Although the advantages of diversification are wellrecognized, its influence on unemployment rates, specifically concerning gender and age dynamics, has not been investigated within the context of the Association of Southeast Asian Nations (ASEAN). This study seeks to address this research gap by examining the influence of economic diversification, along with other factors including inflation, population, foreign direct investment (FDI), human capital, institutional quality, and the COVID-19 pandemic, on the unemployment rates in the ASEAN region. The estimation approach involves the use of a fixed effects model with Driscoll and Kraay standard errors, using panel data from six ASEAN countries covering the period from 2000 to 2022. Before estimating, the model's validity and reliability are evaluated using the Chow test, Hausman test, and Lagrange Multiplier test. Additionally, tests are performed to assess autocorrelation, heteroscedasticity, and multicollinearity. The study demonstrates a strong correlation between economic diversification and reduced unemployment rates in ASEAN, encompassing different types of unemployment. Furthermore, the analysis emphasizes that both institutional quality and population dynamics exert a substantial negative influence on unemployment rates. On the other hand, there is a positive correlation between inflation and unemployment rates, though it is not statistically significant. Meanwhile, foreign direct investment (FDI) and human capital show a non-significant negative correlation with unemployment rates. Additionally, the COVID-19 dummy variable indicates that countries experienced elevated levels of unemployment during the pandemic. These findings suggest that governments in ASEAN should prioritize economic diversification, institutional quality, and targeted support for women and youth to reduce unemployment.