Government Size and Unemployment in Developing Countries

Using data from 52 developing countries, this article analyses how the size of government affects unemployment. It tackles the reverse causality issue by instrumenting for the government size variable. According to the regression results, a large government sector is likely to increase the unemployment rate. The magnitude of the effect appears to be substantial, both among the total labour force as well as among women and young people. Furthermore, the estimates indicate that a large government sector is likely to substantially increase the share of long-term unemployed in the total number of unemployed. The results are robust to variations in specification.