Does Increased Institutional Quality Reduce Unemployment? Evidence from OECD Countries

The success of the economic policies implemented to ensure macroeconomic stability is closely related to the institutional structure in the country. The number of studies emphasizing that even well-designed policies are likely to fail unless they are supported by a solid institutional infrastructure is increasing day by day. As it is known, one of the main macroeconomic problems of countries is unemployment. The chances of success of policies implemented to reduce unemployment are low in countries where institutional indicators are not good. For example, employment policies will not work effectively in countries where there is nepotism rather than merit in recruitment. Again, if the rule of law is not in question, employment contracts will not be able to fulfill their function. The aim of this study is to examine the relationship between unemployment and institutional quality for the period 2002-2019 in 38 OECD member countries. The World Governance Indicators (WGI) published by the World Bank were used as the institutional quality indicator in the analysis. First of all, WGI indicators were combined with principal components analysis (PCA) to form a single index. This index and the effect of each subcomponent on unemployment separately were the results of the analysis, as the institutional quality increases, the unemployment rate decreases.