A Study on Determinants of Unemployment in

Pakistan
Abstract
This study has been carried out to examine the determinants of unemployment in
Pakistan for the period of 1981-2010 using Regression Model, descriptive stats and
graphs. Population growth, Interest rate, foreign direct investment, gross domestic
product and literacy rate in Pakistan are being used as explanatory variables. Also
the state of democracy in the country has been taken into consideration. Findings
include that population growth fuels unemployment positively and where as
literacy rate and foreign direct investment has negative impact on unemployment.
Often it is perceived that unemployment rate of rural areas is greater because in
rural areas there are less chances of employment as compared to urban areas where
there are more chances of employment due to more industries. Political regime is
also taken into consideration as a dummy variable. In this research we also analyze
factors underlying the employment, study the trends of variables involved in the
study and suggest recommendations for reduction in unemployment in Pakistan.
Numerical data collected from various sources which will be presented in forms of
charts and tables and will be given statistical and mathematical treatment through
use of E-views. The study is by and large descriptive in nature all the findings will
be analyzed theoretically and objectively.
Keywords Foreign direct investment (FDI) • • Real gross domestic product
(RGDP) • • International monitory fund (IMF) Unemployment rate (UE)
Population growth rate (PGR) • Political regime (PR) • Literacy rate (LR)
N. Syed
Management Science Department, National University (Fast), Karachi 75400,
Pakistan
J. Xu et al. (eds.), Proceedings of the Seventh International Conference 1337
On Management Science and Engineering Management (Volume 2),

Introduction
Unemployment is a critical problem and reflects the underutilization of manpower
by one nation. High unemployment not only results resource wastage but also
results in economic agony. Unemployment is one main problem faced by every
nation, be it a highly developed and industrialized or a deprived country. There are
several definitions and explanations for unemployment. It can be defined as “the
condition of having no job or being out of work” or “Proportion of people which
are able to work and actively searching jobs but they are unable to find it”. IMF
report (1998) defines ‘unemployment is measured annually as percentage of labor
force that can’t find a job’. International Labor Organization (2001) defines
unemployment as situation for ages 16 or above of being out of work or need a job
and continuously searching for it in the last four week but available to join work in
the next two weeks. The unemployed category do not include those who
voluntarily do not work, it includes students who are studying full time, those who
are retired, medically unfit and children. However, all people who are without
work, accessible for work and in search of for work are included in unemployed
people.
Unemployment is more evident in developing nations and it gives birth to many
undesirable social consequences in the country e.g. crimes such as theft and
burglary, suicide, assassination and a threat to the national security etc. It not only
affects the individuals but also by and large the country’s economic standing.
According to Pakistan Bureau of Statistics, it has a population over 177 million
and as per Pakistan Economic Survey 2011-12, the literacy rate in Pakistan is 58
percent. Foreign Direct Investment in Pakistan is around 532 million dollars in
2012, where as the GDP growth rate of the country is around 3.7 percent, which
has steadily declined over the past decade. It is a developing country and is facing
numerous social problems including unemployment being one of the major one.
The unemployment rate in Pakistan is around 5.55 percent. There are numerous
factors that affect the unemployment rate in Pakistan. The explanatory variables
under study are Population Growth Rate (PGR), Gross Domestic Product (GDP),
Poverty Rate (PR), Interest Rate (IR) and Foreign Direct Investment (FDI). Studies
have been conducted to understand the determinants of unemployment in different
nations and Pakistan, however there still exist a need to find out the relationships
of all these factors with one another. This can provide insights to the policy makers
to devise strategies for national growth. This study examines the trends in
unemployment rate since 1981 to 2010 in Pakistan.

Literature Review
Considerable amount of text is available for the determinants of unemployment,
which helps us to inspect the different aspects of unemployment as observed
throughout the world. Khan and Ali [10] investigated the problem of educated
unemployed persons in Pakistan, majority of which are less than thirty years of
age.
The study analyzes primary and secondary data sources. It shows that around fifty
percent of unemployed people are not willing to move away from their homes for
employment purpose. The paper suggests that for career counseling the
information base needs be enhanced. Chaudhry and Hamid [5] inspected the
reasons on unemployment in Pakistan. It is observed that one of the main reasons
of unemployment in Pakistan is the low quality of human resource in Pakistan.
Hunt [14] studied the employment rate for East German for 10-54 years old after
monetary union with the west. It is observed that the employment rate for them fell
from 89 to 73 percent in six years. Non-employment period is larger for women
and for those who are over 50 years of age. However the presence of children and
their care does not have significant affect on unemployment. Cartel and Furlong
[4] contrasted the experiences of 18 to 24 years old unemployed people in rural
and urban areas. As compares to urban areas, youth unemployment is less common
in rural areas but labor market in rural areas has low skills, also labor market in
rural areas is characterized by low demand of qualified workers’, insecure
employment, less training opportunities and married females lacks access to
childcare and other facilities.
Rocha and Divino [13] studied the link between taxes on household expenditures,
interest rate, and exchange rate in Brazil and Mexico. The data was analyzed by
using autoregressive distributed lag models. The results indicate that in both
countries, interest rate is positively related whereas taxes on household
consumption is negatively related to unemployment, however exchange rate is
positively linked with Brazil and negatively linked in Mexico.
A study conducted by Qayyum [11] identified that unemployment is higher in
urban area of Pakistan due to structural mismatch of required skills, poor wage
system and the lack of improper future counseling and training skills. A reverse
relationship exists between youth unemployment and training. Unemployment is
higher among females in Pakistan.
Ozturk and Akhtar [2] studied the relationship among FDI, direct investment, GDP
and unemployment in Turkey for the year 2000-2007. The result shows that FDI
do not ease unemployment in Turkey where as GDP is positively influenced by
deviations in exports, however is insignificant. The study suggests that Turkey
should increase its export in order to attract more FDI. Eita and Ashipala [6]
examined unemployment causes in Namibia for the period of 1971-2007. The
study reveals that inflation, GDP and investment are negatively where as wage
increase is positively linked to unemployment in Namibia. If GDP is below
potential GDP, that will also cause unemployment. It suggests workers’ need to
lower their wage demand in order to reduce unemployment, GDP will reduce
unemployment. Investment will also help in reduction of unemployment. Faridi et
al [8] examined the influence of education on employment of Pakistan through use
of primary data source in Bahawalpur. The study revealed that health, education
and experience has a strong positive relationship with employment. Higher
education provides higher results. It suggests government should play a strong role
in development of health and education sector in both urban and rural areas.
Berentsen et al [3] inspected the linkage between money and unemployment and
the impact of monetary factors on labor market behavior. Inflation and interest rate
are taken as measures for money. The study reveals a weal positive relationship
between the variables under study.
Emst [7] identified numerous factors contributing to unemployment in-and
outflows. These factors include investment dynamics, interest rates, wage
bargaining centralization, productivity growth, and legislations for employment
protection. The study suggests income support and training measures. Public
employment services can also help in outflow of unemployment. Rafiq et al [12]
conducted a study in the period 1998-2008 to examine the factors of
unemployment in Pakistan. The explanatory variables used in the study included
PGR, inflation rate and FDI. The findings revealed that population growth rate has
a positive influence on unemployment whereas FDI and inflation are negatively
linked to unemployment in Pakistan. Another study by Andrews and Nickel [15]
studied the phase after world war and suggested that increase in real wages results
in prolong unemployment spell. The finding reveals that one percent rise in real
wage results in two to five percent raise in duration of unemployment.
Research Methodology
Hypothesis
H0 : There exists no relationship between unemployment and population growth,
Interest rate, literacy rate, GDP, FDI in Pakistan.
H1 : There exists relationship between unemployment and population growth,
Interest rate, literacy rate, GDP, FDI in Pakistan.
Research Objectives
• To analyze the relationship between unemployment and its determinants in
Pakistan.
• To analyze factors underlying unemployment.
• To study the trends of explanatory variables involved in the study.
• To suggest recommendations for reduction in unemployment in Pakistan.
Type of Research
It is a secondary research, based on longitudinal study, in which the researcher is
trying to study the actors which have a direct effect on unemployment rate in
Pakistan. It is a Quantitative research.
Nature of Study
The research is explanatory in nature as it describes the cause and effect
relationship between two variables.

Data Sources
The study analyzes secondary data. Data related to unemployment, literacy rate,
population growth, interest rate FDI and GDP is readily available on state bank of
Pakistan website and from economic survey of Pakistan different editions.
Limitations of the Research
The overall scope of the study being too large requires more detailed research; as
the secondary data understudy is for last 30 years only, further more primary
research can give more insights and the views of unemployed people. Industry
specific, area specific, gender/age specific research needs to be carried out. The
study is carried out on limited determinants where as more determinants (e.g.
inflation, poverty, etc) may be included to have wide and in-depth analysis in
future.
Treatment of the Data
It is a descriptive study and all findings are analyzed theoretically and objectively.
The numerical data collected from various sources is presented in forms of charts
and tables and treated statistically through use of e-views.
Presentation of Data
Fig. 114.1 shows the trends of the variables selected for study.

Fig. 114.1 The trends of the variables selected for study

Table 114.1 shows the data for the selected dependent and undependable variables
for last 30 years.
Table 114.1 Data for the selective variables of the study for the year 1981-2010
Year Y X1 X2 X3 X4 X5
Unemp PoPGR RGDP IR LitR FDI
1980 1.4 84 252463 10.7 26.2 35
1981 3.6 84.25 300888 12.4 26.2 98
1982 3.3 86.4 349508 11.1 26.2 42.1
1983 3.8 89.4 403782 4.7 26.2 48
1984 3.7 91.9 459397 7.3 26.2 70.3
1985 3.7 97.7 510468 5.7 26.2 145.2
1986 3.6 97.7 555891 4.4 28.8 108.2
1987 3.1 100.7 608857 3.6 26.2 162.2
1988 3.1 103.8 704484 6.3 26.2 209
1989 3.1 107 797750 10.4 26.2 216.2
1990 3.1 110.4 892843 6 26.2 246
1991 6.3 113.8 1044508 12.7 34.9 335.1
1992 5.85 117.32 1223922 10.6 36 306.4
1993 4.71 118.5 1351589 9.8 37.2 354.1
1994 4.38 121.48 1577085 11.3 38.4 442.4
1995 5.35 124.49 1879965 13 39.6 1101.7
1996 5.37 126.9 2113037 10.8 40.9 682.1
1997 6.1 130.58 2408962 11.8 42.2 601.3
1998 5.9 132.35 2653292 7.8 43.6 472.3
1999 6.1 136.69 2912832 5.7 45 469.9
2000 6 139.96 3778155 3.6 47.1 322.5
2001 6 142.86 4155391 4.4 49 484.7
2002 7.8 146.75 4476319 3.5 50.5 798
2003 7.8 149.65 5027460 3.1 51.6 949.4
2004 8.3 152.53 5765058 4.6 53 1524
2005 7.7 153.96 6634243 9.3 53 3521
2006 7.6 156.77 7773106 7.9 54 5139.6
2007 6.2 159.06 8830640 7.8 55 5410.2
2008 5.2 162.37 10451715 12 56 3719.9
2009 5.2 162.49 13070268 20.8 56 2205.7
2010 5.6 173.51 15402783 11.7 57 2201

Interpretation of Graphs
No trend is observed in Interest rate, but a jump in interest rate is seen in the year
2009, that reflects tight monetary policy stance of State Bank of Pakistan aiming to
reduce inflation.
The increase in FDI can be observed in early 90s and another from 2002 to 2008
because of stable political and economic conditions. The decrease in FDI can be
observed in 2009-10, indicating adverse law and order situation resulting in
economic instability.
An increasing trend can be observed in 1990 in literacy rate. One major cause
being the funding provided by the united nation and the increase in budget
allocated by the government to education sector.
An increasing trend can be observed in population growth rate.
No trend can be observed in unemployment and GDP rate as unemployment varies
according to the economic situation. However an increase in the unemployment
trend can be seen in 2009-2010 because of the political instability, law and order
threats, and elevating commodity prices, and other such factors.
E-views Output
As shown in Table 114.2, the first column of descriptive statistics shows that
unemployment was at its peak level in 2004 and minimum in 1980, population
growth rate, GDP and literacy rate was highest in 2010 and lowest in 1980, interest
rate highest in 2009 and lowest in 2003 and FDI at its peak level in 2007 and
lowest in 1980. The Values of skewness and kurtosis shows that all variables are
relatively normally distributed, as the skewness values are closer to 0 and kurtosis
values are closer to 3.
Descriptive stats
UNEMP POPGR RGDP IR LITR FDI
Mean 5.127742 125.0087 3495699. 8.541935 39.70323 1045.855
Median 5.350000 124.4900 1879965. 7.900000 39.60000
442.4000
Maximum 8.300000 173.5100 15402783 20.80000 57.00000
5410.200
Minimum 1.400000 84.00000 252463.0 3.100000 26.20000
35.00000
Std. Dev. 1.726215 26.62806 3961289. 3.948820 11.63258
1473.810
Skewness 0.014196 0.036833 1.546607 0.757591 0.071320
1.885103
Kurtosis 2.272312 1.802889 4.630699 3.965735 1.471281
5.444088
Jarque-Bera 0.685017 1.858063 15.79341 4.170039 3.044882
26.07620
Probability 0.709987 0.394936 0.000372 0.124305 0.218179
0.000002
Sum 158.9600 3875.270 1.08E +08 264.8000 1230.800 32421.50
Sum Sq. Dev. 89.39454 21271.61 4.71E +14 467.7955 4059.510
65163463
Observations 31 31 31 31 31 31
Correlation Matrix
It can be seen from Table 114.3 that correlation matrix shows that literacy rate and
Population growth are strongly correlated with Unemployment, where as GDP,
FDI are moderately correlated with unemployment rate. The value of IR shows that
IR is negatively weakly correlated with unemployment rate.
Correlation matrix
UNEMP POPGR RGDP IR LITR FDI
UNEMP POPGR 1.000000
0.787930 0.787930
1.000000 0.501831 0.872227 0.824591
0.976452 0.505850
0.716139
RGDP 0.501831 0.872227 1.000000 0.308921 0.851646
0.742722
IR LITR 0.099757
0.976452 0.308921
0.851646 1.000000
0.112032 0.112032
1.000000 0.181900
0.716921
FDI 0.505850 0.716139 0.742722 0.181900 0.716921 1.000000
114.4.4 Regression Results
Regression results are shown in Table 114.4.
Table 114.4 The non-metallic mineral products variable value summary in 2008
Dependent variable: UNEMP
Method: Least squares
Date: 12/20/11 Time: 20:51
Sample: 1980 2010
Included observations: 31
Variable Coefficient Std. Error t-Statistic Prob.
-squared 0.839655 Mean dependent var 5.127742
-squared 0.807586 S.D. dependent var 1
S.E. of regression 0.757204 Akaike info criterion 2
Sum squared residual 14.33396 Schwarz criterion 2
Durbin-Watson stat F-statistic
Prob (F-statistic) 26
0
Coefficient of GDP shows if there is 1% increase in GDP, unemployment rate will
decrease by 0.000000186% that is a negligible amount. As increase in GDP is an
indicatotor of economic growth, resulting in job creation in the country, reducing
unemployment rate.
Coefficient of interest rate shows if there is 1% increase in interest rate,
unemployment rate will decrease by 0.63%. If there is increase in interest rate, it
shows the increase in return on investment in that case people will invest more in
business.
Coefficient of literacy rate shows if there is 1% increase in literacy rate,
unemployment will increase by 6.759%. It shows that there will be frictional
unemployment in the economy, which represents the mismatch between job
specification and job description.
Coefficient of FDI shows if there is 1% increase in FDI, unemployment will
increase by 0.45%. It was expected that there would be an inverse relationship
between the two variables but the research show that there exist a positive
relationship.
Hypothesis Testing
T statistics
T calculated values for GDP and Literacy rate are greater than T tabulated, so we
can reject the null hypothesis that there exist no relationship between GDP,
Literacy rate and unemployment.
T calculated values for population growth rate, interest rate and FDI are lesser than
T tabulated, so we can not reject the null hypothesis. We can reject the null
hypothesis at 58%, 9%, and 1% respectively.
F Statistics
F-calculated is greater than F-tabulated, so we can reject null hypothesis that that
there exist no relationship between GDP, Literacy rate and unemployment.
Conclusions
Progress can be seen in the last few years in Pakistan’s literacy rate, showing the
efforts made by the government. Stringent measures are being taken and an
improvement is seen in law & order situation in the country. Coming election are
considered to bring political stability. Government is providing micro loan facility
and many self employment/rozgar schemes have been initiated to decrease in
unemployment. Efforts are also in hand by the government to provide relaxation in
investment policies to encourage big guns to invest in major industries to afford
employment at large scale. However, providing technical facilities and training at
grass toot level low to skilled unemployed persons is yet another gray area and still
a lot to be done in this domain. A healthy budget required to be allocated for
education sector and research & development area. However, on the contrary
Government is cutting down already set budget in this field which could be fatal
for improving employment rate.
The statically study indicates that IR, GDP Growth rate and LR have a significant
impact in determining the unemployment rate. So if we try to improve the three
explanatory variables that will result in decrease of unemployment rate. The null
hypothesis is being rejected as there exists a relationship between the variables
under study. Whereas, a positive relationship between FDI and unemployment has
been observed. FDI and population growth rate proved to be statistically
insignificant. These results are contradictory to the existing literature.
Unemployment trend does not show any significant change but the rising
unemployment in the year 200910 is due to the worse law & order situation and
political instability. Under such conditions, investors did not find Pakistan as an
attractive market for business and many winded up their operations from the
country. This led to an increase in unemployment. Literacy rate and unemployment
rate are positively related to each other showing that if literacy rate increases than
there will be a mismatch between a person’s qualification and his job description,
in this case the people will remain unemployed, in search of better job opportunity.

Recommendations
A good law and order environment is believed to be essential for inflow of foreign
investment in a country. Hence it is suggested that more strong actions must be
taken by the government for further improvement in law & order situation. This
will result in conducive environment for not only domestic business but will also
attract foreign investors in the country thus providing better opportunities for
employment. Democracy, though still in a process of getting matured in Pakistan,
should flourish by all means to bring political stability in the country. Government
must promote such industries which can create better job opportunities. A number
of steps have already taken by government in this regard however, for this purpose
more relaxation in investment policies and confidence & security to the investors is
advisable. Consideration should be paid towards the low skilled unemployed
persons by providing technical facilities and training at grass toot level throughout
the country in order to enhanced their chance to earn rationally. The increasing
trend of population growth rate can be taken as an advantage to the country, they
can be better trained, and more industries can be set up for ultimately country can
act as export hub for various commodities. Enhanced and proper budget should be
allocated for education sector and research and development domain, which will
result in creation of more specialized fields and generation of better employment
openings. Some results are unexpected, hence it is suggested that further studies
can be carried out to find the reasons for unanticipated outcomes.