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Government Size and Unemployment: Evidence from Industrial Countries

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  • Horst Feldmann

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Abstract

Using data from 19 industrial countries for the period 1985 to 2002, this paper analyzes how the size of the government sector affects unemployment. Controlling for the impact of the business cycle as well as for the impact of all major labor market institutions and unobserved country effects, we find that a large government sector is likely to increase unemployment. It appears to have a particularly detrimental effect on women and the low skilled and to substantially increase long-term unemployment. It seems that dominant stateowned enterprises, a large share of public investment in total investment as well as high top marginal income tax rates and low income threshold levels at which they apply are particularly detrimental. Copyright Springer Science+Business Media, Inc. 2006

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File URL: http://hdl.handle.net/10.1007/s11127-005-9003-y
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Article provided by Springer in its journal Public Choice.

Volume (Year): 127 (2006)
Issue (Month): 3 (June)
Pages: 443-459

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Handle: RePEc:kap:pubcho:v:127:y:2006:i:3:p:443-459
DOI: 10.1007/s11127-005-9003-y
Contact details of provider: Web page: http://www.springer.com

Order Information: Web: http://www.springer.com/economics/public+finance/journal/11127/PS2

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  1. 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.
  2. Karras, Georgios, 1993. "Employment and Output Effects of Government Spending: Is Government Size Important?," Economic Inquiry, Western Economic Association International, vol. 31(3), pages 354-369, July.
  3. Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March.
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  5. Juan C. Botero & Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1339-1382.
  6. 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.
  7. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications 4227, Inter-American Development Bank, Research Department.
  8. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-939, December.
  9. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, 04.
  10. Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
  11. Yann Algan & Pierre Cahuc & André Zylberberg, 2002. "Public employment and labour market performance," Economic Policy, CEPR;CES;MSH, vol. 17(34), pages 7-66, 04.
  12. Bjørn Volkerink & Jan-Egbert Sturm & Jakob de Haan, 2002. "Tax Ratios in Macroeconomics: Do Taxes Really Matter?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 29(3), pages 209-224, September.
  13. Demekas, Dimitri G & Kontolemis, Zenon G, 2000. " Government Employment and Wages and Labour Market Performance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(3), pages 391-415, July.
  14. Horst Feldmann, 2005. "Labour Market Institutions and Labour Market Performance in Transition Countries," Post-Communist Economies, Taylor & Francis Journals, vol. 17(1), pages 47-82.
  15. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Fall 2000), pages 109-154, August.
  16. Malley, Jim & Moutos, Thomas, 1996. " Does Government Employment "Crowd-Out" Private Employment? Evidence from Sweden," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 289-302, June.
  17. Yuan, Mingwei & Li, Wenli, 2000. "Dynamic employment and hours effects of government spending shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 24(8), pages 1233-1263, July.
  18. Dimitris Christopoulos & Efthymios Tsionas, 2002. "Unemployment and government size: Is there any credible causality?," Applied Economics Letters, Taylor & Francis Journals, vol. 9(12), pages 797-800.
  19. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  20. Jim Malley & Thomas Moutos, "undated". "Government Employment and Unemployment: With One Hand Giveth, the Other Taketh," ICMM Discussion Papers 47, Department of Economics University of Strathclyde.
  21. Abrams, Burton A, 1999. "The Effect of Government Size on the Unemployment Rate," Public Choice, Springer, vol. 99(3-4), pages 395-401, June.
  22. Horst Feldmann, 2003. "Labor Market Regulation and Labor Market Performance: Evidence Based on Surveys among Senior Business Executives," Kyklos, Wiley Blackwell, vol. 56(4), pages 509-540, November.
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Cited by:

  1. Can, Raif, 2015. "The Impact of Employment Protection Legislation on the Unemployment Rate in Selected OECD Countries," MPRA Paper 63329, University Library of Munich, Germany.
  2. Lorenzo E Bernal-Verdugo & Davide Furceri & Dominique Guillaume, 2012. "Labor Market Flexibility and Unemployment: New Empirical Evidence of Static and Dynamic Effects," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 54(2), pages 251-273, June.
  3. Horst Feldmann, 2008. "Business regulation and labor market performance around the world," Journal of Regulatory Economics, Springer, vol. 33(2), pages 201-235, April.
  4. Burton A. Abrams & Siyan Wang, 2006. "The Effect of Government Size on the Steady-State Unemployment Rate: A Structural Error Correction Model," Working Papers 06-05, University of Delaware, Department of Economics.
  5. Davide Furceri & Ernesto Crivelli & Joël Toujas-Bernate, 2012. "Can Policies Affect Employment Intensity of Growth? A Cross-Country Analysis," IMF Working Papers 12/218, International Monetary Fund.
  6. Burton A. Abrams & Siyan Wang, 2007. "The Effect of Government Size on the Steady-State Unemployment Rate: An Error Correction Model," Working Papers 07-14, University of Delaware, Department of Economics.
  7. Feldmann, Horst, 2012. "Banking deregulation around the world, 1970s to 2000s: The impact on unemployment," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 26-42.
  8. Davide Furceri, 2012. "Unemployment and Labor Market Issues in Algeria," IMF Working Papers 12/99, International Monetary Fund.
  9. Alberto Behar & Junghwan Mok, 2013. "Does Public-Sector Employment Fully Crowd Out Private-Sector Employment?," IMF Working Papers 13/146, International Monetary Fund.
  10. Siyan Wang & Burton A. Abrams, 2011. "The Effect of Government Size on the Steady-State Unemployment Rate: A Dynamic Perspective," Working Papers 11-12, University of Delaware, Department of Economics.
  11. Johanna Kemper, 2016. "Resolving the Ambiguity: A Meta-Analysis of the Effect of Employment Protection on Employment and Unemployment," KOF Working papers 16-405, KOF Swiss Economic Institute, ETH Zurich.
  12. Ahmet AYSU & Gökhan DÖKMEN, 2011. "An Investigation on the Relationship between Government Size and Unemployment Rate: Evidence from OECD Countries," Sosyoekonomi Journal, Sosyoekonomi Society, issue 16(16).
  13. Horst Feldmann, 2012. "Product Market Regulation and Labor Market Performance around the World," LABOUR, CEIS, vol. 26(3), pages 369-391, 09.
  14. International Monetary Fund, 2014. "Philippines; Selected Issues," IMF Staff Country Reports 14/246, International Monetary Fund.
  15. Feldmann, Horst, 2009. "The unemployment effects of labor regulation around the world," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 76-90, March.
  16. 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.
  17. Johan Graafland & Bart Compen, 2015. "Economic Freedom and Life Satisfaction: Mediation by Income per Capita and Generalized Trust," Journal of Happiness Studies, Springer, vol. 16(3), pages 789-810, June.
  18. Horst Feldmann, 2009. "The quality of the legal system and labor market performance around the world," European Journal of Law and Economics, Springer, vol. 28(1), pages 39-65, August.
  19. Graafland, J.J. & Compen, B., 2012. "Economic Freedom and Life Satisfaction : A Cross Country Analysis," Discussion Paper 2012-038, Tilburg University, Center for Economic Research.
  20. Olfa Alouini, 2009. "Country size, economic performance and the political economy of the euro zone : an empirical study of the size divide," Documents de Travail de l'OFCE 2007-01, Observatoire Francais des Conjonctures Economiques (OFCE).
  21. Mahalia Jackman, 2014. "A Note on the Labor Market Effects of Remittances in Latin American and Caribbean Countries: Do Thresholds Exist?," The Developing Economies, Institute of Developing Economies, vol. 52(1), pages 52-67, 03.

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