Institutional Quality and Unemployment in OECD Nations: A Panel Causality Test Using a Fourier Function

Abstract

A significant impact of institutional quality on sustainable growth has been revealed in recent studies. This study aims to examine the relationship between diferent institutions and their unemployment rates, considering the legal system and property rights index. A novel and robust panel Fourier causality test was conducted to investigate 38 OECD nations for the relationship between their institutional quality and unemployment rates between the years 2000 and 2018. Regardless of stationarity, the adopted method allowed for the endogenous identification of structures, locations, and forms, and the evaluation of causal relationships. In addition, the Fourier method and the trigonometric terms were used for analyzing the structural changes. According to the findings, a unidirectional causal relationship existed between the quality of the legal system and property rights and the unemployment rates in the investigated nations during the relevant period. In addition, bidirectional causality existed between the variables in Germany and the United States. It is therefore recommended to necessarily improve a nation's institutional structure to reduce its unemployment rate. Low unemployment rates would be achieved by improving institutional quality, particularly in developing nations. Therefore, policymakers must focus on formulating policies to reduce unemployment in the long run, considering the legal system and property rights of the nation.