How Does Government Spending Affect Labour Force Participation and Unemployment Within the WAMZ Countries?

Abstract

This study utilizes static and dynamic models in examining the short run and long run impacts of government spending on labour force participation and unemployment within the West African Monetary Zone (WAMZ) over the period 1991-2018. While the static models are estimated using the Pooled Ordinary Least Squares (POLS) technique and the Least Squares Dummy Variables (LSDV) technique, the dynamic models are estimated using the GMM-IV technique. The GMM-IV technique better addresses endogeneity issues relative to the other techniques utilized and also, the parameters obtained from the technique are confirmed to be consistent by the Arellano-Bond test for zero autocorrelation. Accordingly, this technique is given preference in this paper. The results from the technique reveal that government spending increases the labour force participation rate but has an ambiguous impact on unemployment rate. In the long run, the parameter estimates largely remain unchanged in terms of their sign and significance; however, they increase in size. Based on these findings, this paper firstly recommends that policy makers intensify efforts in increasing government spending; as a reduction may impact negatively on the labour force participation rate. Secondly, this paper recommends the formulation and implementation of fiscal policies that are robust enough to reduce the unemployment rate as they increase the labour force participation rate.