Public expenditure and unemployment: evidence from Ghana.

Abstract

The study examined the effect of public expenditure on unemployment in Ghana using annual data for the period 1980 to 2016 by employing Autoregressive Distributed Lag (ARDL) approach to cointegration. The study revealed that there is an inverse relationship between government consumption expenditure and unemployment rate. However, government capital expenditure and unemployment rate were found to be positively related. The study therefore established that the threshold of government gross fixed capital formation (capital) expenditure on the rate of unemployment is 6.9 percent of gross domestic product. Hence, government gross fixed capital formation (capital) expenditure that exceeds 6.9 percent of gross domestic product could help to reduce the unemployment rate in Ghana. Furthermore, the study revealed that inflation, external debt, domestic credit to private sector (as a proxy for private sector development) with the exception of growth rate of gross domestic product are significantly key determinants of unemployment in Ghana. The study recommends that government consumption spending should be increased to help control the rate of unemployment. The study also advocates that government capital spending should not be less than 6.9 percent of gross domestic product to be able to control unemployment. The study further recommends that fiscal authorities should ensure that revenue is generated internally by expanding the tax base to include the informal sector. This will aid the country to minimise external borrowing.