Dynamic link between budget deficits and unemployment: evidence from selected African countries

The unemployment rate poses a significant challenge in many developing nations due to insufficient capacity for absorption. This study examines the impact of budget deficits on unemployment rates in selected African countries, utilizing data from 1996 to 2022. The analysis employs the system GMM model, supplemented by a bias-corrected dynamic panel estimator and a quasi-maximum likelihood estimator to account for the precision of the findings. The three estimators indicate a negative impact of budget deficits on the variation in the unemployment rate. These results support the implementation of expansionary fiscal policies and align with the Keynesian perspective. The study has also examined heterogeneity regression, and the subgroup results indicate a negative relationship between budget deficits and unemployment. All findings support the Keynesian view that budget deficits boost economic growth by increasing aggregate demand, thereby creating job opportunities. The results emphasize the importance of classifying African nations based on their economic regions, former colonial masters, and level of economic development rather than treating them as a single, homogeneous group. The government should allocate a significant portion of its budget to development expenditures to stimulate economic growth, attract global investment for job creation, and increase the sources of government revenues.