The Effects of Governance on Labour Unemployment in India: An Analysis Using the ARDL Cointegration Test and FMOLS Model

Using annual data for India spanning 1996–2023, this study investigates how governance quality shapes the unemployment rate. Four World Bank governance indicators—government effectiveness (GE), control of corruption (CC), political stability (PS) and rule of law (RL)—are examined alongside GDP, inflation and a structural-break dummy (D2018) capturing the Goods and Services Tax (GST) rollout. Long- and short-run relationships are estimated through autoregressive distributed lag (ARDL) bounds testing together with the fully modified ordinary least squares (FMOLS) estimator, and cointegration among the series is confirmed by the ARDL bounds test. GE emerges as a significant unemployment-reducing factor in the long run under both models, whereas PS and RL are significant only in the FMOLS specification. CC, by contrast, is positively linked to unemployment across both approaches, a pattern attributed to informal-sector workers being displaced by anticorruption reforms faster than the formal sector can absorb them. GDP growth lowers unemployment in both the long and short run, while RL and inflation also exert significant downward pressure in the short run; roughly 67% of any short-run disequilibrium is corrected within a single year. As one of the first studies to disaggregate governance indicators when assessing Indian unemployment, this article points to the policy value of deepening institutional quality, pairing anti-corruption efforts with formal job creation and factoring major reforms such as GST into labour-market planning.