Impact of credit expansion and contraction on unemployment

The literature has not examined the factors leading to tight labor markets or unemployment in West African countries. We investigate the impact of private credit expansion and contraction on the unemployment rate in Economic Community of West African States (ECOWAS) countries. Credit expansion and contraction are measured using a three-level criterion. The fixed effect panel regression model was used to estimate the impact of private credit contraction and expansion on the unemployment rate in ECOWAS countries. Private credit contraction significantly increases the unemployment rate in ECOWAS countries. Private credit expansion does not have a significant effect on the unemployment rate. Real GDP growth has a significant negative effect on the unemployment rate which supports the prediction of the Okun’s Law while the inflation rate has a positive and insignificant effect on the rate of unemployment in ECOWAS countries which contradicts the prediction of the Phillips curve. Policymakers in ECOWAS countries need to be cautious when introducing policies that lead to private credit contraction as it could increase unemployment. Policymakers in ECOWAS countries should also find the “threshold” below which private credit contraction will worsen the unemployment rate and introduce policy measures to ensure that private credit contraction does not fall below the threshold.