In a groundbreaking study that revisits the intricate dynamics between government spending and unemployment, new empirical evidence from Turkey spanning nearly four decades has challenged long-standing assumptions about fiscal policy’s role in labor markets. Deploying an innovative dual adjustment methodology combined with the Hodrick-Prescott filter, the research unpacks the persistent complexity of how different governmental expenditures influence the unemployment rate, offering fresh insights that have profound implications for emerging economies undergoing structural transformation.
At the core of this analysis is the decomposition of the unemployment time series into two distinct but interrelated components: a permanent long-term trend and a transitory short-term fluctuation. This dual adjustment approach allows researchers to tease apart underlying structural shifts in the labor market from temporary volatility, an advancement over conventional single-layer analyses. Notably, the permanent component captures enduring trends driven by factors such as economic growth and structural reforms, while the transitory component reflects cyclical variations influenced by seasonal effects or short-lived policy impacts.
The application of the Hodrick-Prescott (HP) filter with a smoothing parameter (lambda) of 6.25, aligned with Turkey’s specific business cycle characteristics, yielded statistically significant results absent in traditional co-integration methods such as the Engle and Granger (EG) technique. This methodological innovation revealed that co-trending relationships exist at a 10% significance level, suggesting that conventional models may overlook meaningful long-run connections between government expenditures and unemployment dynamics.
Delving into the long-term effects, the study uncovers that current expenditure positively correlates with unemployment, substantiating the Abrams curve hypothesis, which posits that increased government consumption can inadvertently dampen labor demand by crowding out private sector activity. Precisely, a one-percentage-point hike in current expenditure corresponds to nearly a one-point rise in unemployment, signaling potential inefficiencies or misallocations in government spending that may stymie job creation.
Conversely, investment expenditure exhibits a robust negative association with unemployment, implying a crowding-in effect through which public capital projects invigorate economic productivity and job opportunities. An incremental one-point surge in public investment results in a substantial 1.656 percentage point fall in unemployment, underscoring the pivotal role of infrastructural development, education, and health sector investments in fostering sustained labor market improvements in Turkey.
Unexpectedly, transfer expenditures, encompassing both social welfare payments and interest obligations on domestic and foreign debt, show a negative relationship with unemployment, albeit with a modest coefficient. This finding nuances traditional Keynesian expectations by highlighting the heterogeneous composition of transfers, where not all outlays translate equally into consumption or direct labor market stimulus. The presence of debt-servicing costs within this category potentially dampens the overall stimulative effect, necessitating a more granular evaluation of transfer policies.
Inflation emerges as a critical instability indicator affecting unemployment through its inverse relationship with total factor productivity. The analysis reveals that lowering inflation enhances productivity but may paradoxically increase unemployment due to diminished impetus for further employment in more efficient production environments. This counterintuitive dynamic challenges policymakers to balance inflation control with employment objectives carefully.
Agricultural employment plays a significant role in lowering unemployment, both in the short and long term, reflecting Turkey’s economic context where declining agricultural labor supply contributes to a shifting labor force toward more skilled sectors. A one percentage point rise in agricultural employment decreases unemployment by notable margins, highlighting the sector’s enduring importance despite trends of urbanization and industrialization.
Real GDP, measured in natural logarithmic terms (lyr), maintains a predictable negative relationship with unemployment across both temporal components, reaffirming aggregate demand’s centrality in job creation. The modest effect size, while smaller relative to other variables, remains statistically significant, further endorsing growth-oriented policies as foundational to labor market health.
Short-term analyses reveal fewer significant predictors but confirm current expenditure’s positive impact on unemployment in the transient domain, consistent with the Abrams curve’s short-run implications. Meanwhile, both agricultural employment and real GDP remain influential, reinforcing the necessity of sectoral and macroeconomic policies that address immediate labor market fluctuations.
A key contribution of the study lies in its fragility analysis, which tests the robustness of empirical findings across varying sample intervals. This recursive approach confirms that using a smoothing parameter of 6.25 yields more stable and less fragile results than the traditional value of 100, emphasizing the critical need for tailoring analytical techniques to country-specific business cycle structures rather than defaulting to generic parameters.
This nuanced understanding extends beyond academic exercise to practical policy design. For developing economies similar to Turkey, the findings advocate for prioritizing public investment projects that stimulate productivity and employment while critically evaluating the composition of government expenditures to avoid unintended labor market distortions. Moreover, managing inflation and supporting agricultural employment emerge as levers that can indirectly safeguard employment without compromising economic stability.
The absence of cointegration underscored in the research implies that traditional views of steady-state relationships between unemployment and fiscal components may be insufficient to capture evolving economic realities under structural shifts. Hence, adopting dual adjustment models provides a more nuanced and dynamic framework that policymakers can leverage for crafting responsive and evidence-based interventions.
Further study is warranted to dissect the mechanisms through which specific categories of government spending affect labor demand and supply, especially in light of heterogeneous effects observed for transfers versus investments. Additionally, exploring the channeling of inflation dynamics through productivity and employment linkages can refine monetary and fiscal coordination strategies to optimize outcomes.
In sum, this research marks a significant advancement in comprehending the multifaceted relationship between public expenditures and unemployment. By tailoring methodologies to the context of Turkey’s economic cycles and leveraging sophisticated decomposition techniques, it sets a precedent for future analyses in emerging economies grappling with similar challenges.
As global economies navigate uncertain labor markets amid structural shifts, insights from this Turkish experience illuminate pathways for harnessing government spending more effectively to foster sustainable employment growth while mitigating the risks inherent in economic transitions.
This study not only renews theoretical discourse around Keynesian and Abrams curve paradigms but also provides empirical grounding that supports calibrated, context-aware policy frameworks essential for the labor market resilience of developing nations.
Subject of Research: The dynamic impact of different types of government expenditures on unemployment rates, specifically within the Turkish economy from 1980 to 2019, analyzed through a dual adjustment approach decomposing unemployment into permanent and transitory components.
Article Title: Reconsidering the impact of government expenditures on unemployment rate: the Turkish experience (1980–2019)
Article References:
Çolakoğlu, N. Reconsidering the impact of government expenditures on unemployment rate: the Turkish experience (1980–2019). Humanit Soc Sci Commun 12, 1740 (2025). https://doi.org/10.1057/s41599-025-06010-4
Image Credits: AI Generated
DOI: https://doi.org/10.1057/s41599-025-06010-4
