Combating Unemployment in Pakistan: Empirical Study of Key Macroeconomic Factors

Abstract

High rate of unemployment posits social, economic, and political challenges for any country. Therefore, the macroeconomic factors affecting unemployment rate are always a matter of great interest for researchers and policy makers. The current study analyzed the relative impact of internal and external factors of the economy affecting unemployment rate in Pakistan by using annual time series data from 1990 to 2023. Auto Regressive Distributed Lag (ARDL) bound test approach was used to examine the short run and long run impact of these factors. The analysis showed that the secondary school enrolment, financial development, trade openness, and Foreign Direct Investment (FDI) were negatively related to the unemployment rate, whereas the inflation rate was positively and significantly related to the unemployment rate in Pakistan. In contrast, the short-run results showed that the secondary school enrollment, and financial development, increased unemployment in the short-run while the trade openness and unemployment were negatively related to the unemployment rate in Pakistan. Keeping in view the outcomes, it was concluded that internal macroeconomic factors such as education and financial development, and external macroeconomic factors such as trade openness and FDI were crucial in combating unemployment in Pakistan.