The Impact of Public Expenditure on Youth Unemployment: The Moderating Role of Governance in MENA Countries

Prior research has examined public expenditure, governance and youth unemployment largely in isolation, and the Middle East and North Africa (MENA) economies remain under-covered. This paper therefore examines the effect of government spending on youth unemployment and tests whether governance moderates this link in 20 MENA countries over 1996–2023. We employ the common correlated effects mean group (CCEMG) and dynamic CCEMG (DCCEMG) estimators, complemented by a short-run mean-coefficient analysis with small-T bias correction for dynamic heterogeneous panels as a robustness check. The findings reveal that public spending exerts a significant negative effect on youth unemployment, indicating the crucial role of government spending in creating jobs for young people; where such spending finances productive projects, more employment opportunities are created and youth unemployment falls. By contrast, both governance and its interaction with government expenditure are statistically insignificant, showing that governance indicators exert no indirect or moderating influence on the public expenditure–youth unemployment relationship in MENA. Policymakers in the region should therefore direct government spending towards manufacturing, agricultural projects, and fostering small and medium enterprises, which stimulate GDP and generate employment, thereby alleviating youth unemployment.