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The Effect of Government Size on the Steady-State Unemployment Rate: A Structural Error Correction Model

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Author Info
Burton A. Abrams () (Department of Economics,University of Delaware)
Siyan Wang () (Department of Economics,University of Dela)

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Abstract

In this paper, we investigate the relationship between government size and the unemployment rate using a structural error correction model that describes both the short-run dynamics and long-run determination of the unemployment rate. Using data from twenty OECD countries from 1970 to 1999, we find that government size, measured as total government outlays as a percentage of GDP, plays a significant role in affecting the steady-state unemployment rate. We disaggregate government outlays and find that transfers and subsidies significantly affect the steady-state unemployment rate while government expenditures on goods and services play no significant role.

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File URL: http://www.lerner.udel.edu/economics/WorkingPapers/2006/UDWP2006-05.pdf
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Publisher Info
Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-05.

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Length: 40 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-05

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Postal: Purnell Hall, Newark, Delaware 19716
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Web page: http://www.lerner.udel.edu/departments/economics/
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Related research
Keywords: Steady-State Unemployment Rate; Government Size; Error Correction Model; Dynamic Panel Data Model; Arellano-Bond Estimator;

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
H10 - Public Economics - - Structure and Scope of Government - - - General
H19 - Public Economics - - Structure and Scope of Government - - - Other
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  2. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier. [Downloadable!] (restricted)
    Other versions:
  3. Horst Feldmann, 2006. "Government Size and Unemployment: Evidence from Industrial Countries," Public Choice, Springer, vol. 127(3), pages 443-459, June. [Downloadable!] (restricted)
  4. Karras, Georgios, 1993. "Employment and Output Effects of Government Spending: Is Government Size Important?," Economic Inquiry, Oxford University Press, vol. 31(3), pages 354-69, July.
  5. Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1.
    Other versions:
    • Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1.
  6. Abrams, Burton A, 1999. " The Effect of Government Size on the Unemployment Rate," Public Choice, Springer, vol. 99(3-4), pages 395-401, June. [Downloadable!] (restricted)
  7. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March. [Downloadable!] (restricted)
    Other versions:
  8. Nickell, Stephen, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer. [Downloadable!] (restricted)
  9. Juan Botero & Simeon Djankov & Rafael Porta & Florencio C. Lopez-De-Silanes, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, MIT Press, vol. 119(4), pages 1339-1382, November. [Downloadable!] (restricted)
    Other versions:
    • Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Juan Botero, 2003. "The Regulation of Labor," NBER Working Papers 9756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Michèle Belot & Jan C. van Ours, 2004. "Does the recent success of some OECD countries in lowering their unemployment rates lie in the clever design of their labor market reforms?," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 621-642, October. [Downloadable!] (restricted)
    Other versions:
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