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The Effect of Government Size on the Steady-State Unemployment Rate: An 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 Delaware)

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Abstract

The relationship between government size and the unemployment rate is investigated using an 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 and after correcting for simultaneity bias, 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. Importantly, when government outlays are disaggregated, transfers and subsidies are found to significantly affect the steady-state unemployment rate while government purchases of goods and services play no significant role.

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File URL: http://www.lerner.udel.edu/economics/WorkingPapers/2007/UDWP2007-14.pdf
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Publisher Info
Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 07-14.

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Length: 41 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:dlw:wpaper:07-14.

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Postal: Purnell Hall, Newark, Delaware 19716
Fax: (302) 831-6968
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;

Other versions of this item:

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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  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. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October. [Downloadable!] (restricted)
  5. 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.
  6. Ziliak, James P, 1997. "Efficient Estimation with Panel Data When Instruments Are Predetermined: An Empirical Comparison of Moment-Condition Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(4), pages 419-31, October.
  7. Burton A. Abrams & Siyan Wang, 2007. "Government Outlays, Economic Growth and Unemployment: A VAR Model," Working Papers 07-13, University of Delaware, Department of Economics. [Downloadable!]
  8. 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)
  9. 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:
  10. 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)
  11. 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)
  12. James J. Heckman & Carmen Pages, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," NBER Working Papers 7773, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. 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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