Evaluating the impact of economic sanctions on employment in Iran using Synthetic Control Method

Document Type : Research Paper

Authors

1 Ph.D. student in Economics, Faculty of Economics and Social Sciences, Bu Ali Sina University, Hamadan, Hamadan, Iran

2 Associate Professor, Department of Economics, Faculty of Economics and Social Sciences, Bu Ali Sina University, Hamadan, Hamadan, Iran

3 Assistant Professor, Department of Economics, Faculty of Economics and Social Sciences, Bu Ali Sina University, Hamadan, Hamadan, Iran

Abstract

Introduction: The present study aims to investigate the impact of unilateral economic sanctions of the United States of America on Iran's employment during 1991-2020. Nowadays, the issue of employment and providing decent jobs is one of the major development goals and a main concern of policy makers and economists. Moreover, job creation is a major strategy to reduce poverty and improve well-being and thus to generate income and increase demand for goods and services. Nevertheless, with the advancement of science and technology and the specialization of jobs, the prospect of employment in most developing countries, including Iran, has become a major and fundamental problem. Several factors affect employment, one of which is definitely economic sanctions that cause social and economic inequalities as well as the reduction of economic growth through the restriction of the export and import of goods.
Methodology: This research examines the effects of the economic sanctions imposed by the United States on Iran's employment during 1991 to 2020. To this end, the synthetic control method (SCM) is applied. At the first step, the total employment is measured as the outcome variable. Then, a synthetic control unit is built for Iran, by which the expected employment occurs under a scenario with no sanctions after 2005. Then, the effects of sanctions on employment are estimated. The synthetic control method is a statistical method used to evaluate the effect of an intervention in comparative studies. It involves the construction of a weighted composite of groups that are used as a control group to compare the treated unit .Using the weighted mean of units as a comparison avoids the model-dependent extrapolation on which regression results are often based. This research shows the potential gains achieved by using synthetic controls in comparative studies. The effects of the intervention may have been randomly generated, in which case it will not be statistically significant. Therefore, in the next step, the inferential techniques proposed by Abadi et al. (2015 and 2010) are used to support the estimates of the synthetic control method and evaluate the significance of the results.
Results and Discussion: Considering the importance of employment in the social and economic life of any country, especially developing countries, international economic policies have been given almost as much attention as national policies to expand employment opportunities in less developed countries and have always been one of the concerns of planners. Therefore, it seems necessary to make a serious effort to identify the factors affecting employment, which can achieve the prior goals of employment and eliminate unemployment. One of the factors affecting Iran's employment in recent years is economic sanctions. The present study utilizes the synthetic control method (SCM) to investigate the effects of sanctions on Iran's employment. Through SCM, the difference in employment between the treated country (actual Iran) and the synthetic one (synthetic Iran) is estimated. Synthetic Iran is constructed as a convex composite of the countries in the control group in such a way that it is most similar to the actual Iran in terms of the predictor values of the pre-sanction outcome variable.
Conclusion: The study shows the intensification of the economic sanctions imposed on Iran since 2006 and the exposure of new sectors in the Iranian economy. There were thousands of declines in the employment of Iran until 2015, which is about -7% in employment of “actual Iran” and “synthetic Iran”. However, with the JCPOA agreement in 2015 and as a result of the resumption of trade, the employment rate decreased to 749 thousand, which was 41.3% in 2018. Yet, by Trump's victory in the elections and America's withdrawal from the JCPOA, and the increased pressure of sanctions, the gap between synthetic Iran and actual Iran reached its peak in 2020, i.e. 1966 thousand people (a 48.9% decrease). This was due to a sharp decrease in employment. The results also indicate that the synthetic Iran was a good reflection of the actual Iran in the pre-intervention period. The increase in economic costs from 2018 to 2020 also shows the large and long-term negative effect of the intervention (sanctions) on Iran's employment during the sanctions period. In addition, the placebo tests show that the results are statistically significant at the 10% level. Iran had the largest treatment effects and the highest ratio of MSPE after the intervention compared to before the intervention. The findings are also robust to the composition of the donor pool and the start of the sanctions, which is because the results are similar when the countries with positive weights are removed from the donor pool one at a time or when the treatment event is moved to 2004. However, the results are not sensitive to the composition of the donor pool or to the start of the sanctions.

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References

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The Journal of Economic Policy
Volume 14, Issue 28
March 2023
Pages 101-138

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