Can Fiscal Deficit Reduce Unemployment? Empirical Insights from West African Economies

Achieving full employment remains a fundamental challenge in West Africa, intensified partly by persistent fiscal imbalances. This study examined the impact of fiscal deficit on unemployment in eight selected West African countries (Ghana, Gambia, Nigeria, Sierra Leone, Burkina Faso, Cote d’Ivoire, Senegal and Guinea-Bissau) from 1991 to 2022. To account for cross-sectional dependence and slope heterogeneity, the study employs the panel autoregressive distributed lag pool mean group (ARDL-PMG) technique. The empirical results reveal that inflation exerts a positive impact on unemployment in both the long and short runs. Furthermore, while economic growth reduces unemployment in the short run, it exhibits a jobless growth phenomenon in the long run, positively correlating with unemployment. Conversely, government expenditure and investment significantly reduce unemployment in the long run. Interestingly, the direct long-run effect of fiscal deficit on unemployment remains insignificant in the full sample, though short-run dynamics vary significantly across individual economies. Based on these findings, the study recommends that ECOWAS policymakers should shift focus from mere deficit financing toward structural fiscal reforms, highlighting targeted capital expenditure, domestic production for export, and strict adherence to the macroeconomic convergence criteria.