How tax reforms impact unemployment: Evidence from Azerbaijan

Abstract

This study investigates the effects of tax reforms carried out by the state to maximize the economic and welfare benefits on the unemployment rate in Azerbaijan from 2000 to 2021. An Autoregressive Distributed Lag (ARDL) empirical model is developed to measure the relationship between unemployment level and major indicators characterizing tax reforms. Initial estimations consider this linkage in both the short-term and the long-run periods, however, further analysis shows that only short-run estimations are statistically significant. The empirical analysis proves that qualitative and quantitative variables that characterize tax reform significantly affect unemployment rate in the short term. Research findings suggest that higher tax burden and application of concessions (after a year) may cause increased unemployment, while implementation of numerous allowances and concessions (within the year), application of an automated tax information system, and changes in legislation can be effective in reducing unemployment in Azerbaijan.