Impact of trade openness, human capital, public expenditure and institutional performance on unemployment: evidence from OIC countries

Abstract

PurposeThis study examines the impact of trade openness, human capital, public expenditure and institutional performance on unemployment in various income groups of Organization of Islamic Cooperation (OIC) countries.Design/methodology/approachTraditional panel data methodologies neglect the issue of cross-sectional dependence and provide ambiguous outcomes. A novel approach, “dynamic common correlated effects (DCCE)”, is utilized in this study to tackle with aforementioned issue. Pooled mean group (PMG) estimation is also applied to verify the robustness of the findings.FindingsThe long-run estimates show that trade openness has a significant and negative relationship with the unemployment rate in overall and lower-income OIC economies and a positive correlation with unemployment in higher-income OIC countries. Public expenditure is negatively and significantly correlated with unemployment in higher-income and overall OIC economies. Moreover, human capital reduces unemployment in higher-income and overall OIC countries while increases unemployment in lower-income OIC economies.Practical implicationsThe research tends to endorse the argument for continuous trade openness policy along with efficient use of public expenditure and improved institutional performance to reduce unemployment in OIC countries.Originality/valueThe DCCE approach in this research considers heterogeneity and cross-sectional dependence between cross-sectional units and thus gives robust outcomes.