Impact of Unemployment of the growth Rate of Pakistan

By

Saba khalid

Roll No: 167147

Supervisor

Mam Maham

This proposal submitted in partial fulfilment of the requirement of the award of the degree of

BS HONOR

IN

ECONOMICS

Department of Economics

Govt post graduate college for women samundri

Course of content
 Acknowledgement
Abstract
1. Introduction
2. Research literature
3. Methodology
3.1. Selection of variable and data
3.2. Methodology
3.3. Economic techniques
3.4. Conclusion
4. Empirical Results
5. Conclusion

Acknowledgement
 I would like to express my special thanks to our teacher mam maham
for her time and efforts she provided throughout the year. Your useful advice
were really helpful to me during the projects completion.In this aspect ,I am
internally grateful to you.

Abstract
 This study found the impact of inflation and unemployment on economic
growth in Pakistan. The time series data used for the time period of 1980 to 2010
which is collected from world data bank. The unit root ADF and philliperron shows
that economic growth is stationary on level as well as 1st difference but
unemployment and inflation are stationary on 1st difference. The ARDL result
shows that there is a long run relationship between the variable. Furthermore,
the results of White Heteroskedasticity, Ramsey reset and Breusch-Godfrey Serial
Correlation LM test shows that there is no problem of heteroskedasticity,
misspecification of model and serial correlation respectively.

Keywords:
Inflation, Unemployment, Economic Growth.

1.Introduction.
 Unemployment is one of the big and vital problems in all over the world. It is
the common issue in developed aswell as underdeveloped countries. It is the
consistent problem facing by all industrially advance and as well aspoor countries.
Unemployment occurs when people are without jobs. Unemployment means
people are able towork and actively finding job but fail to get a job.According to
neoclassical economic, unemployment occurswhen rigidities are imposed on
labor market from the outside. But according to Keynesian
economics,unemployment is due to in efficiency of markets and ineffective
demand for goods and services.

Underdeveloped countries aim to achieve a greater economic growth rate in

the shortest amount of time. These nations obtained cutting-edge technology
from the West, but they implemented inadequate strategies to attain greater
economic growth, which led to a dramatic rise in unemployment.Pigou(1993) ..
According to Aghion & Howitt (1994), more economic expansion brought about
the introduction of new methods and technologies. These methods and
technologies result in the economy losing jobs.

Pakistan's economy was based on agriculture at the time of its founding, and
it imported consumer goods while also exporting agricultural products like cotton
and jute. Since Pakistan's founding in 1947, her performance has not been
constant due to the government's shifting policies. Pakistan's 6.7% and 6.1%
annual growth rates in the 1960s and 1970s, respectively, were quite
encouraging. On the other hand, Pakistan has a very substantial unemployment
problem as a result of major policy initiatives that prioritise economic expansion
over job creation. In the 1970s, Pakistan's unemployment rate was only 0.52%; by
the 2000s, it had risen to 3.41%. Amjad and Ahmad (1989).

Numerous social ills including property violence, corruption, murder, etc.

increase with unemployment. For all economies, rising unemployment is
undesirable. The availability of jobs can be increased through investment by
creating new employment opportunities. The public and private sectors'
increased investment can influence the unemployment rate. Rural and urban
unemployment are two categories of unemployment. More people are
unemployed in urban than rural locations.

Raphael and Winter-Ebmer (2001).

High inflation rates have been linked to higher unemployment in several

economies. In several economies, high inflation has been associated with both
low unemployment and high inflation. R.M. Blank (1993). Similar to how some
nations have moderate to low inflation and moderate to lower unemployment,
and others have moderate to low inflation but moderate to high unemployment,
certain countries have economies that are in both of these situations. As a result,
various economies experience inflation in different ways. M. Chaudhary and N.
Ahmad (1995).

The rate of unemployment in Pakistan is influenced by a wide range of

factors. Population Growth Rate (PGR), Gross Domestic Product (GDP), Poverty
Rate (PR), Interest Rate (IR), and Foreign Direct Investment (FDI) are the
explanatory variables being studied. There is still a need to comprehend the
connections between all of these elements, despite the fact that studies have
been done to understand the causes of unemployment in Pakistan and other
countries. The policy makers can use this information to develop strategies for
achieving national growth. This study looks at Pakistan's unemployment rate
developments from 1981 to 2010. Asif .Sobia .Nadeem (2016).

From one economy to the next, unemployment and inflation are both
different. (Slenic, 1993. High inflation rates have been linked to higher
unemployment in several economies. In several economies, high inflation has
been associated with both low unemployment and high inflation. R.M. Blank
(1993). Similar to how some nations have moderate to low inflation and
moderate to lower unemployment, and others have moderate to low inflation but
moderate to high unemployment, certain countries have economies that are in
both of these situations. As a result, various economies experience inflation in
different ways.

M. Chaudhary and N. Ahmad (1995).

Objectives.
1. To examine the role of unemployment in the economy of Pakistan.

2. To find the impact of unemployment on economic growth.

3. To suggest some important policy about unemployment and

economic growth.

2.Review of Literature.
Okun(1962) asserted that there is a bad correlation between a nation and
unemployment and GDP growth rate . They used the technique of ordinary least
square(ols). They used annual data from the year 2000 to 2012. They found that
gross domestic product has a favourable connection to unemployment.

Cheema and Atta (2014) analyzed that fixed investment and trade have a
negative correlation with unemployment they used the Autoregressive
distributed lag (ARDL) techniques.they used the annual data from 1973 to 2010.
They found that unemployment had a effect on production gap and productivity
that is both favorable and significance.

Aqil and Qureshi (2014 ) analyzed that GDP growth rate and inflation have
minimal effects on unemployment. They used the technique of ordinary least
square (OLS). They used annual data in Pakistan 1983 to 2010.They found that
GDP inflation foreign direct investment and other factors all contribute to the
current studied foundation.They found that foreign direct investment (FDI) and
population have a substantial and unfavorable impact on Pakistan's
unemployment.

Umaro and Zubair (2012) found the effect of inflation on the growth and
development of the economy. They used the technique of Time series data for
the time period of 1972 to 2010 from central bank. They used the unit root test to
estimate the impact of inflation on economic growth.

Abbas (2014) analyzed to relationship between economic growth and

unemployment.they used the method of Autoregressive distributed lag (ARD).
They used annual data from 1990 to 2006. The result of the study conclude that
there is no association between economic growth and unemployment in the short
run. However in the long run, a significant negative relationship is present
between unemployment and economic growth in Pakistan.

Rizvi and Nishat (2019) investigated the impact of FDI on employment

opportunities on pakistan.they studied the time period of 1985 to 2008. They
used unit root test. The result suggested that FDI does not create a direct impact
on employment opportunities in Pakistan. They also suggested that besides FDI
investment policies other measure should be taken to encourage employment
growth.

Drinkwater et,al.(2003) analyzed the panel data of a sample of twenty

countries in order to study role of remittances in labor market dynamic covering
the period of 1970 to 2000. The result of the study reveal that remittances
income is an insignificant determinant of unemployment but it is positively
associated with Investment.
 Shaari et,al.(2012) investigated the impact of FDI on unemployment and
economic growth in Malaysia. They used the time period of 1980 to 2007. They
used the ordinary least square (OLS) technique. They studied report a negative
and statistically significant relationship between FDI and unemployment and a
positive significant relationship between FDI and GDP.

Akhtar and Shahnaz (2005) examined the determinants of youth

unemployment using data from 1991 to 2004. In 1990 there is high
unemployment due to low GDP and investment. They worked on both micro and
macro determinants of youth unemployment issues in Pakistan.
First,unemployment of youth only begins to decrease if the annual growth rate of
GDP is greater than 4.25 percent per year. Second, the growth rate of services
sector GDP has greater impact on decreasing female unemployment.Third, the
private sector investment has greater impact than public sectorinvestment to
reduce youth unemployment. Household micro level data showed that skill
acquisition and vocational training have no impact on employment.

Eita and Ashipala (2010) analyzed the determinants of unemployment in

Pakistan for the period of 1971-2007.They used macroeconomic variables for
unemployment model. They used Engle and Granger approach to estimate the
model. The results showed that there is negative relationship between inflation
and unemployment, positive between wage rate and unemployment and
negative between investment and unemployment.

3. Methodology
3.1Selection of Variables and Data
The data used in this study are time series data for the time period of
1980 to 2010. The data collected from Hand Book of Statistics published by State
Bank of Pakistan and World Data Bank published by World Bank. This study used
the Economic Growth as Dependent Variable, Inflation and Unemployment as
explanatory variables. Literature Reviews shows that there is negative
relationship between Unemployment and Economic Growth but positive
relationship between Economic Growth and Inflation.

Data description
S.No. Variable Time Data type Source
period of data

1 GDP 1980 to Time series World

2010 data
bank

2 Unemployment 1980 to Time series do-

2010

3 Inflation 1980 to Time series do-

2010

3.2. Methodology

Therefore, this study used the Cobb-Douglas Production Function then the model
specified as follow:-
Y= βo infα1 .unep α1 (i)

Y= βo + β1inf+ β2unemp+et (ii)

LogY= log βo + β1 log inf+ β2 log unemp + et (iii)
Y = GDP / Economic Growth
Inf = Inflation
Unemp = Unemployment
3.3.Economic Techniques
To estimate the impact of inflation and unemployment on economic growth
initially this study used theAugmented Dicky Fuller test for Unit Root to check
whether variables are stationary or station. Gross Domestic Product (GDP) and
Inflation are stationary on level and intercept and unemployment is stationary on
first difference then used the ARDL model. To used the ARDL method this study
used the wald test to find out the long run relationship between the variables.
3.4. Conclusion
Fifth Chapter, Methodology and Data discussing about the data type, data
time period and data source. Further developed an equation in this chapter that
showing the variables and also mentioned what kind of econometric techniques
are used in this study to estimate the impact of inflation and unemployment on
economic growth.

4. Empirical Results
Previous studies show that the Gross Domestic Product (GDP) has a
negative relationship with unemployment and positive relationship with inflation
(Gandelman and Murillo 2009). Inflation has negative for Gross Domestic Product
and have negative correlation with unemployment in Pakistan (Umar and
Razaullah 2013). Further this study used the Autoregressive-Distributed Lag
(ARDL) model to find out the long run relationship between the unemployment,
inflation and economic growth.

Unit root Test (Augmented Dickey Fuller and Phillip Perron Tests):

ADF. Philip curve.

Variable Level First Lavel First
difference different

GDP -3.897848* -7.588275* -3 .833471 -14.58290

Unemployment -1.535782 -7.491979* -1.535783 -7.433154

Inflation -3.182056* -5.966626* -3.221323* -7.271777*

Three levels of critical value 1%, 5% and 10%. Number of “ * ” signs

show that at how many levels of critical values, variable is stationary. E.g. at level
of ADF test. foreign exchange rate(-3.182056**) variable is stationary at second
levels of critical values.

The unit root test shows that variables are stationary or non-stationary.
The two tests augmented dickey fuller and Phillip Perron tests are used to check
the stationary. The results intimate that GDP is stationary at level and intercept in
augmented dickey fuller as well as Phillip Perron.Unemployment is stationary at
first difference and intercept in ADF as well as Phillip Perron and on the other
hand inflation is stationary on level and intercept in ADF and Phillip Perron. All the
variables are not stationary on same level so this study used the Autoregressive
Distributive Lag (ARDL) model technique.

ARDL
Variable Coefficient Std .Error t-statistic Prob

@TREND -0.057640 0.020774 -2.774664 0.0111

LN_INF(-1) -0.143131 0.189622 -0.754824 0.4584

LN_UNP(-1) -1.196232 0.697055 -1.970550 0.0615

According to the results of ARDL inflation (Ln_Inf ) has negative insignificant

impact on GDP and Unemployment has negative significant impact on GDP .

Wald test
Test statistic Value df Probability

F-statistic 7.764785 (3,21) 0.0011

Chi-square 23.29436 3 0.0000

The wald test F-statistics is 7.764785 is higher then the lower and upper
bond values which shows there is co-integration exist between the variables and
it also shows that there is a long run relationship between the variables.

5. Conclusion
This study found the impact of inflation and unemployment on economic
growth in Pakistan. The time series data used for the time period of 1980 to 2010
which is collected from world data bank. The previous studies show that there is a
negative relationship between unemployment and economic growth but on the
other hand inflation have a positive impact on economic growth. This study
results of unit root ADF and philliperron shows that economic growth is stationary
on level as well as 1st difference but unemployment and inflation are stationary
on 1st difference. This study also used the Autoregressive Distributive Lag (ARDL)
Model technique.

The ARDL results shows that co-integration exist between the variables
that shows there is a long run relationship between the variable. Furthermore,
the results of White Heteroskedasticity, Ramsey reset and Breusch-Godfrey Serial
Correlation LM test shows that there is no problem of heteroskedasticity,
misspecification of model and serial correlation respectively.

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