Do Government Purchases Affect Unemployment?

Abstract

We investigate empirically the effect of government purchases on unemployment in 20 OECD countries, for the period 1960-2007. Compared to earlier studies we use a data set with more variation in unemployment, and which allows for controlling for a host of factors that influence the effect of government purchases. We find that increased government purchases lead to lower unemployment; an increase equal to one percent of GDP reduces unemployment by 0.2 percentage point in the same year. The effect is greater in downturns than in booms, and also greater under a fixed exchange rate regime than under a floating regime. JEL-Code: E620, H300.

The determinants of unemployment rate in developing economies: does banking system credit matter?

“…This confirms the Keynesian theory of employment that Government expenditure increases investment in capital projects that are employment driven and also puts more money into the hands of the public that will invariably increase aggregate demand and employment. This finding is consistent with the claims made by Fatas andMihov (1998), Fedderke, Perkins, andLuiz, (2006), Steinar andSparrman (2012), andGenius, Choga, Maredza andMavetera (2013) which reported a negative relationship between Government expenditure and unemployment rate. Also, Government expenditure is significant enough in influencing unemployment rate in South Africa than in Nigeria.…”