How do trade openness, public expenditure and institutional performance affect unemployment in OIC countries? Evidence from the DCCE approach

This study explores the relationship between trade openness, public expenditure, institutional performance, and unemployment in member countries of the Organization of Islamic Cooperation (OIC) (formerly the Organization of the Islamic Conference). The conventional panel data techniques overlook cross-sectional dependence and yield-biased results. A new methodology called dynamic common correlated effects (DCCE) is employed to deal with the issue of cross-sectional dependence. The long-run results demonstrate that trade openness is inversely and significantly associated with overall unemployment and youth unemployment in lower-income as well as all the OIC economies and positively correlated in the higher-income OIC group. Public expenditure has an inverse and significant correlation with unemployment in OIC countries overall and higher-income OIC countries. Moreover, institutional performance and foreign direct investment are negatively related to unemployment in all OIC economies. The research shows the need for the continuation of open trade policies, strong institutions, and higher public expenditure in the OIC countries in order to decrease overall unemployment—in particular, youth unemployment.