The Role of Public Debt in Employment Creation: The Threshold Effect of Institutional Quality
Keywords:
Employment, Government Debt, Institutional Quality, Oil-Exporting Countries, Threshold Regression MethodAbstract
This study investigated the effect of public debt on employment and determined the threshold role of institutional quality in the relationship between government debt and unemployment in oil-exporting OPEC countries. This applied study employed a panel-data econometric approach. Annual data from 15 oil-exporting countries—Algeria, Angola, the Republic of the Congo, Ecuador, Equatorial Guinea, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, and the United Arab Emirates—were analyzed for the 2000–2024 period. The unemployment rate was used as an inverse indicator of employment, while public debt as a percentage of gross domestic product was the principal explanatory variable. Institutional quality was measured using a composite index comprising control of corruption, government effectiveness, political stability, regulatory quality, rule of law, and voice and accountability. Inflation, economic growth, and crude oil prices were included as control variables. Hansen’s fixed-effects panel threshold regression model was employed for estimation. The threshold-effect test confirmed a significant nonlinear relationship between public debt and unemployment (F=20.03, p<0.001). Lagged unemployment had a positive and significant effect on current unemployment (β=0.798, p<0.001), indicating substantial unemployment persistence. Institutional quality (β=-0.327, p=0.026), inflation (β=-0.006, p=0.007), and economic growth (β=-0.032, p<0.001) significantly reduced unemployment. Oil prices also exerted a negative effect on unemployment (β=-0.003, p=0.057). Under the low-institutional-quality regime, public debt significantly increased unemployment (β=0.008, p=0.010). Conversely, above the institutional-quality threshold, public debt significantly reduced unemployment (β=-0.027, p=0.001). The estimated model was jointly significant and demonstrated strong explanatory power (R²=0.800, p<0.001). The employment-generating capacity of public debt depends substantially on institutional quality. Public borrowing can promote employment when supported by effective governance, transparency, corruption control, and productive resource allocation; otherwise, it may intensify unemployment and economic instability.
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Copyright (c) 2025 Randeh Qasim Naji (Author); Sakineh Sojoodi (Corresponding author); Mohammad Mahdi Barghi Oskooee (Author)
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