Government Size, Economic Growth and Unemployment: Evidence from Advanced and Developing Economy Countries (A Time Series Analysis, 1996–2006)

Abstract

The primary objective of this study is to estimate empirically the impact of government size on economic growth in 32 advanced and 51 developing countries from 1996 to 2006. Specifically, how do the effects of government size on economic growth in two groups of countries differ? In contrast to previous studies, this one attempts to gauge the relative effect of government size on economic growth by using a united regression model combining advanced and developing countries, as well as the same control variables. As theoretically expected, this study demonstrates that the effect of government size on economic growth is positive for developed countries and negative for advanced countries. Furthermore, the model confirms that the relative effect of government size on economic growth in developing countries is almost five times higher than in advanced ones. Another purpose of this study is to estimate the impact of government size on the unemployment rate in two groups of countries. The evidence from the regression results shows that greater government size is associated with a higher unemployment rate in both groups of countries. The study demonstrates that a larger government has a detrimental effect on economic growth, due, at least in part, to a higher unemployment rate. In addition, the model confirms that the relative effect of government size on the unemployment rate in developing countries is almost three times higher than in advanced countries. Finally, based on the result that government size has significantly different effects on economic growth and the unemployment rate across two groups of countries, this study implies that policy makers need to consider different levels and types of fiscal policies to improve economic growth depending on the country’s economic level.