Effects of Fiscal Policy on Unemployment Rate in Iraq

Abstract

The recent rise in the Iraqi unemployment rate has led to so many macroeconomic problems that have led the government to undertake a major reform of various policies. It is essential for federal governments to upgrade their key policies, including physical policies, to stabilize the economy. This study therefore examines the effect of fiscal policy on unemployment rates. Johansen cointegration, the Unrestricted VAR method and the Granger causality test are the main analytical techniques used in the study. Results from the cointegration outcome of Johansen shows that there is no long-run relationship between the variables. While the result of unrestricted VAR system indicated that, both total government expenditure and government revenue coefficients at lag one has negative relationship with unemployment which implies increase in both government expenditure and revenue can decrease unemployment rate of Iraq with coefficients and probability values of -0.472035, -2.044219, 0.0234, and 0.342 respectively. Also taking total government expenditure (LGEXD) as dependent variable in the system equation portrays that, the coefficients of unemployment rate have negative relationship with total government expenditure and statistically significant at 5% level. While government revenue has positive effects on total government expenditure which implies as government revenue increases so also expenditure increases and is statistically significant at 5%. The study therefore advises that, through expansionary fiscal policy, government can have efficient fiscal policies that can help increase aggregate demand and the pace of economic growth by reducing taxes and increasing overall government spending. Therefore, the study obviously showed that rising both government spending and income would lower unemployment rate. Since lower taxes raise disposable income and thereby help increase consumption, leading to higher aggregate demand (AD). Also, less businesses would go bankrupt with higher aggregate demand and faster economic growth, implying less job losses.