Oil Prices, Labour Market Institutions, and Unemployment: Evidence from African Oil-Exporting Economies

The volatility of oil prices has a considerable impact on the economies of oil-exporting countries, making it critical to understand how price variations affect labour markets and unemployment. This study investigates the distinct role of labour market institutions in moderating the effects of oil price volatility on unemployment. Using the Cross-Sectionally Augmented Autoregressive Distributed Lag Model (CS-ARDL) on a panel dataset of nine African oil-exporting countries from 1994 to 2024, the study establishes a strong negative link between oil price changes and unemployment. Furthermore, the results show that real GDP growth leads to a reduction in unemployment in the long run, while the labour market institutional index has a negative impact on unemployment. Interacting the oil price with the labour market institutional index causes a further reduction in unemployment. These results suggest that good labour market institutions and macroeconomic stability are essential for reducing unemployment. While increases in oil prices directly stimulate a reduction in unemployment in African oil-exporting countries, this impact is reinforced by the presence of good labour market institutions in an economy. Therefore, the results suggest that countries with strong labour market institutions are more resilient in reducing the negative impact of oil price volatility on employment. As such, policymakers must prioritise labour market institutional reforms to enhance countries’ capacity to absorb oil price shocks and reduce unemployment during periods of oil prosperity and shield against employment declines when oil prices drop. Furthermore, the creation of oil stabilisation funds in these countries may serve a similar purpose. Contribution/originality: Against a background of inconclusive empirical evidence in the literature and a dearth of research on African countries, this study investigates the role of labour market institutions (LMIs) in the oil price–unemployment nexus in African oil-exporting countries. While highly dependent on oil revenue, these countries record persistent structural unemployment. Therefore, the study provides critical evidence to guide the formulation of policies necessary to deal with external shocks and facilitate structural shifts required for employment growth. Existing studies consider general institutional variables such as democratic accountability and the rule of law and do not assess the effect of labour market institutions. The current study fills in this gap by assessing the distinct role of labour market institutions that are specifically designed to regulate only work-related activities, such as quality of labour regulations, adequacy of social protection and unemployment benefits. Furthermore, this study employed the cross-sectionally augmented autoregressive distributed lag (CS-ARDL) for econometric estimations. Compared to previous studies, this is a more appropriate method that accounts for unobserved common factors such as oil price shocks affecting all oil-exporting countries simultaneously.