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s the capacity to create jobs which increases economic growth. When the economy is in recession, firm will reduce production and it lead to the decline of labor demand. Thus, cyclical unemployment will rise sharply during recession.

2.2 Unemployment in Malaysia

It is essential to look at the unemployment trends in Malaysia for the period ranging from 2000 to 2009 (Figure 1). By observing the figure, unemployment rate remained moderate at approximate 3 percent.

Unemployment rate increases steadily from 2001 to 2004. On the year 2001, the 911 incident, US World Trade Centre was attacked by terrorists (Terence Tai-Leung Chong,2005). This attack marks the beginning of the US economy downturn. It then affects the whole world economy to decline. Being the largest economy in the world, US needs to import tremendously from the rest of the countries. Thus, US economy downturn has decreased its import and the world's export will decline as well. When the decline of export for the country, it will directly cause the down fall of the country's economic growth as the productivity has been reduced .Therefore, the global economy will be sluggish. Hence, unemployment rate in Malaysia is 3.7 percent on 2002.

During 2003, Malaysia was hit by double critical incidents which were Severe Acute Respiratory Syndrome (SARS) and Iraq War (Robert Evans,2003). Unemployment rate was 3.8 percent which has increased 0.1percent. There was an immediate effect from the outbreak of SARS and Iraq War due to the large amount of inter-regional trade. SARS and Iraq War have triggered a global downturn therefore affect the world economy into recession, and lowered world growth forecasts. SARS epidemic was concentrating in Asia which is the fastest growing economy in the world and that had basically been keeping the world economy to float.

Malaysia has gone through East Asia financial crisis during 1997. Thus, Malaysia has the ability to combat and survive during the sub-prime crisis. Some efforts of the policy maker have made to strengthen the domestic economy. Policy maker has implemented several monetary policy as well as fiscal policy to stimulate the economy. The increasing trend and steady growth in the Malaysia's Leading Index (LI) and the ratio of the Coincident Index to Lagging Index in 2007 (Public Bank Berhad,2007) indicates that the Malaysian economy was continue to remain strong and healthy in 2008 which US sub-prime mortgage crisis deceleration in the US economy.

Figure 1: Unemployment Rate in Malaysia

Sources: Indexmundi.com (2008). Malaysia - Unemployment rate (%). Retrieved

During a period of high unemployment, employees worry about losing their job and not able to get another job. Other than that, workers are less willing to leave unsatisfactory jobs because it is not easy to be hired at this current period. This may cause a decrease in production because workers are lack of experience in their current job. Higher unemployment rate will also affecting the government tax revenue. It is because there are more workers losing their jobs and leads to decrease in government revenue from income tax.

2.3 Factors that affect Unemployment

There are four independent variables that affect unemployment which are consumption, investment, government spending, and trade.

2.3.1 Consumption

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