Government Size and Unemployment: Evidence from Developing Countries

Abstract

Using data from 58 countries and the period 1980 to 2003, this paper analyzes how the size of government affects unemployment in developing countries. According to the regression results, a large government sector is likely to increase unemployment. A large share of government consumption in total consumption and a large share of transfers and subsidies in GDP most clearly appear to have a detrimental effect. By contrast, we do not find evidence that dominant state-owned enterprises and a large share of public investment in total investment affect unemployment, neither for bad nor for good. The results are robust to variations in specification and estimation method.