Modeling unemployment duration, determinants and insurance premium pricing of Malaysia: insights from an upper middle-income developing country

Wooi Chen Khoo; Kim Leng Yeah; Shun Yi Hong

doi:10.1007/s43546-022-00287-2

Modeling unemployment duration, determinants and insurance premium pricing of Malaysia: insights from an upper middle-income developing country

SN Bus Econ. 2022;2(8):116. doi: 10.1007/s43546-022-00287-2. Epub 2022 Aug 2.

Authors

Wooi Chen Khoo¹, Kim Leng Yeah², Shun Yi Hong³

Affiliations

¹ Department of Applied Statistics, School of Mathematical Sciences, Sunway University, No. 5, Jalan Universiti, Bandar Sunway, 47500 Petaling Jaya, Selangor Darul Ehsan Malaysia.
² Jeffrey Sachs Center On Sustainable Development, Sunway University, No. 5, Jalan Universiti, Bandar Sunway, 47500 Petaling Jaya, Selangor Darul Ehsan Malaysia.
³ Department of Actuarial Science and Risk, School of Mathematical Sciences, Sunway University, No. 5, Jalan Universiti, Bandar Slunway, 47500 Petaling Jaya, Selangor Darul Ehsan Malaysia.

Abstract

This paper investigates the behavior and determinants of unemployment in Malaysia, an upper middle-income country with relatively low unemployment but rising labor market mismatches, and derives a model-based insurance premium pricing schedule that broadens the country's unemployment insurance coverage. The unemployment profile is best fitted with Burr distribution, and using survival analysis, the average unemployment duration is found to be the highest for the youths and it decreases gradually after age 20. The results of the Cox proportional hazards model show that age, gender, and education are significant explanatory variables of unemployment. While all age groups are statistically significant in explaining unemployment, the youngest cohort has the least likelihood of being hired, while the older groups are found to have a lower hazard ratio that could be attributed to work experience. The significant gender effect is also characterized by the female workforce taking a longer time to exit unemployment as shown by its lower hazard rate than male workers. Similar to findings for other countries, those with higher education have the highest chance of gaining employment. Fitting the estimated parameters to a standard unemployment insurance premium pricing framework based on the Capital Asset Pricing Model (CAPM), the analysis shows that the coverage of the existing national unemployment insurance scheme can be expanded to all income categories at lower premium prices. The widening of the coverage will contribute to the strengthening of the country's social safety net in addition to reducing inequalities in the post-COVID-19 period.

Supplementary information: The online version contains supplementary material available at 10.1007/s43546-022-00287-2.

Keywords: Employability insurance scheme; Survival analysis; Unemployment duration.

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