The graduates had tied themselves together with ropes around their necks to block a main Rabat street, poured fuel over their clothes and threatened to set themselves on fire, a Reuters journalist at the scene said.
Morocco, which brought in the austerity measures in January, faces demands from international lenders to reduce deficits and cut public spending, which has risen as Rabat sought to calm the kind of popular discontent seen in the Arab Spring revolts.
Those revolts began in 2011 after street vendor Mohamed Bouazizi set himself ablaze in the Tunisian city of Sidi Bouzid in a protest against police harassment there.
Unemployed graduates have long demonstrated for jobs in the Moroccan capital but their movement has gained strength since the start of the austerity programme.
Rabat police moved in quickly to spray the blind protesters with water cannon to dampen the fuel before chasing them away using batons. Hundreds of chanting protesters demanding jobs in the public sector joined them in support.
"I want a job in my country, I want dignity in my country," protesters chanted.
Morocco's public sector has in past hired massively in the public administration to ease social pressures and protests, but the kingdom's heavy spending following the 2011 Arab Spring uprisings has increased deficits.
Rabat is also cutting back wages for public workers, reducing subsidies and reforming its pension system.
Morocco's three largest labor unions agreed earlier this year to join forces against cuts in pensions and subsidies demanded by the government's international lenders, and say they plan massive protests in coming weeks.