Does Government Size Explain Unemployment in MENA Countries?

Abstract

Economists typically believe that government size is an integral determinant of labor market efficiency. Therefore, it is important in practical and theoretical terms to understand the impact of government size on the unemployment rate. Recent empirical studies indicate the negative impact of government size on labor market performance. This paper explores the relationship between government size and the unemployment rate in seventeen MENA countries during the period 2003 – 2017 using seemingly unrelated regression models (SURs). The research found a statistically significant negative effect of government size on the labor market. It also found that total government expenditure as well as investment expenditure play a dampening role on the labor market. Causality tests indicate that there is significant two-way causal relationship between government size and the unemployment rate. But the dynamic analysis of causality indicates one-direction causality from the unemployment rate to government size. The proper policy must therefore start with addressing unemployment in MENA countries, one of whose tools is government sizing.