Unemployment & Fiscal Policy

by Gregory Hamel, Demand Media

The federal government creates laws, regulations and policies to protect or benefit the American people, which may have economic impacts such as job creation. According to The Free Dictionary, fiscal policy describes taxation and spending that the government pursues in an effort to influence the overall state of the economy. Two common goals of fiscal policy are to reduce unemployment and encourage economic growth.

Importance of Unemployment

Unemployment negatively impacts the federal government's ability to generate income and also tends to reduce economic activity. When unemployment is high, fewer people are paying taxes to the government. At the same time, unemployment means there are fewer people with disposable income to spend on goods and services. Low consumer spending makes it more difficult for businesses to thrive and expand, which dampens economic growth.


Taxation is one of the primary fiscal policy tools the government has at its disposal to reduce unemployment. High taxes mean consumers have less disposable income, which results in less consumption. When consumers buy less, business take in less revenue and are less likely to hire new workers or may even lay off workers to reduce costs. Cutting taxes is a common method the government uses to spark economic growth and reduce unemployment. Tax cuts put more money into the hands of consumers, which can lead to increased revenue for business and expansion and hiring.

Government Spending

Spending on government programs is another way the federal government can attempt to influence unemployment. For example, if the government funds new public works programs, such as building infrastructure like roads or train systems, it can create jobs that serve to reduce unemployment and increase disposable income and spending. If such programs encourage overall economic growth, public-sector workers may be able to find jobs in the private sector after the projects are complete.


While reducing taxes and increasing spending can encourage economic growth and reduce unemployment, both practices can increase the government's debt. Lower taxes mean that the government takes in less revenue, and if spending exceeds revenue, the government has a deficit, meaning it is losing money over time and increasing its debt load. When economic growth is high and unemployment is low, the government may increase taxes and reduce spending to make up for debts accumulated during periods of low growth and high unemployment.

About the Author


Suggest an Article Correction

Have Feedback?
