Abstract
Estimates a three‐equation model to test various economic hypotheses regarding the relationship between unemployment rate and defence spending in 18 OECD countries during the period 1962‐1988. Reveals that the relationship which exists between unemployment rate and defence spending is not uniform across countries. Defence spending has a favourable impact on unemployment rate in Germany and Australia, whereas in Denmark it worsens the employment situation. In Australia, Germany and Belgium, non‐defence spending and the unemployment rate are causally independent. Defence spending appears to act as a stablization tool in response to changes in the unemployment rate only in the UK. No significant causal relationship between unemployment rate and either type of spending is revealed in Japan, The Netherlands, Italy, Spain, Austria, New Zealand, Sweden, Canada and the USA. Observes a few cases of bi‐directional causality between unemployment rate and defence/non‐defence spending. Gives possible explanations for the observed cross‐country variability in causal relation.