Unemployment Dynamics in Pakistan: Evidence from Macroeconomic Determinants and Structural Break Analysis

Abstract

Unemployment remains one of the most persistent macroeconomic challenges in developing economies, including Pakistan. This study investigates the determinants of unemployment using annual time-series data from 1970 to 2014. A structural break identified through the CUSUMSQ test divided the sample into two periods: 1970–1984 and 1985–2014. The study employs the Autoregressive Distributed Lag (ARDL) approach to examine both short-run and long-run relationships between unemployment and key macroeconomic variables, including inflation, trade openness, real gross domestic product (GDP), urban population, and foreign direct investment (FDI). Unit root tests confirmed a mixed order of integration, justifying the use of the ARDL framework. The bounds testing approach confirmed the existence of long-run cointegration among the variables in both periods. The results reveal that inflation significantly reduces unemployment, supporting the Phillips curve hypothesis, while trade openness contributes positively to unemployment. Economic growth exhibits a negative relationship with unemployment, although its effect varies across periods. Urbanization emerged as a significant determinant in the post-1985 period, whereas FDI showed limited influence. The findings highlight the importance of sustained economic growth, employment-oriented trade policies, and productive urban development in addressing unemployment challenges in Pakistan.

Keywords- Unemployment, Economic Growth, Inflation, Trade Openness, Urbanization, Foreign Direct Investment, ARDL, Pakistan