Public Debt and unemployment growth: The need of new fiscal-monetary rules. Evidence from OECD countries

We analyse the long run relationship between unemployment rate and deficit-GDP ratio for 19 OECD countries from 1981 to 2009. Based on Westerlund (2007), we find co-integration between the two variables, demonstrating that fiscal deficit policies, in the long, create unemployment and viceversa. This effect is greater for the 13 OECD-European countries, which have a higher share of public expenditure to GDP and a higher natural rate unemployment. These results support the view that constitutional limits to deficit appear favourable to long term employment, particularly if the balance of the budget is obtained limiting the size of Government.