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CAUSES OF UNEMPLOYMENT IN PAKISTAN

ASMA BERJEES

THE RESEARCH REPORT IS AS PER

REQUIREMENT FOR THE AWARD OF THE

B.SC (HONOURS) DEGREE.

In

ECONOMICS

KINNAIRD COLLEGE FOR WOMEN

LAHORE

SESSION: 2004-2008

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RESEARCH COMPLETION CERTIFICATE

It is certified that Ms Asma Berjees of the final Semester (Session 2004-2008),Department of Economics has carried out this research work entitled Causes of

Unemployment in Pakistanunder my supervision.

It is assured that this research work is original and has not been published anywhere.

Ms. Saima Malik Date: _____________

Supervisor

(Lecturer of Economics)

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ACKNOWLEDGMENT

This is a token of my gratitude for all those who at any stage and in any possible way

helped me and make this research a reality.

First and foremost my utmost gratitude and thanks to Almighty Allah who enabled me

not only to complete this research work but also blessed me in countless ways throughout

my life. I pay honor to His Prophet Hazrat Muhammad (PBUH) who is forever a torch of

guidance and light of knowledge for mankind and teaches us high ideas of life. Deep

gratitude and appreciation to my research advisorMs. Saima Malik, for helping me torender this research work. It was a matter of great honour for me to work under her able

supervision. I am highly thankful to her infinite knowledge, guidance, valuable advices,

help and everything she taught me inspite of her busy schedule.

I also pay my heartiest obligation and thanks to Mrs. Shahida Saleem, Head of

Economics Department, Kinnaird College for Women, Lahore who provided me all

possible facilities for research work. She is an extraordinary intelligent professor.

Special thanks to my family and friends for their love, support, and encouragement.

Lastly, I would like to dedicate this piece of research work to my parents whom I

consider assets of my life.

Sincere Thanks

Asma Berjees

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ABSTRACT

This research report presents results that are examined to see that what are the

main factors that causes increase in the unemployment rate in Pakistan. The research

report explains the relationships of the factors that causes increase in the rate ofunemployment and unemployment rate. Based on past studies, it is just a small effort to

carry out a research on this topic.

In this report, certain variables are identified on the basis of having greater impact

on unemployment rate and also which can be easily quantified. In order to analyze the

variables associated with unemployment rate a detailed review of the work done by

previous researchers on the topic of unemployment was done.

Secondary data sources have been used and data has been collected from 1990-

2007 from the Economic Survey of Pakistan. Variables taken are investment growth

rate, illiteracy rate, and population growth rate.

The objective of this study is to test the hypothesis that whether population

growth rate, illiteracy rate, and investment growth rate causes an increase in the rate of

unemployment in Pakistan.

Multiple regression analysis has been carried out to see the relationships among

unemployment rate and the variables selected. Our results show positive relationship of

unemployment rate with illiteracy and population growth rate while a negative or inverse

relationship between investment growth rate.

Thus, the above given factors cause serious impact on the unemployment rate.

Unemployment is a hurdle in the economic growth of the country. The government on its

part must identify and promote sectors, which are considered not only to be the major

drivers of growth but also have the greatest potential of creating more employment

opportunities. In order to sustain this spectacular pace of growth and maintain healthy

and vigorous macroeconomic indicators would require a prolonged period ofmacroeconomic stability, financial discipline, and consistent and transparent policies.

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TABLE OF CONTENTS

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION PAGE NO.

1.1 TYPES OF UNEMPLOYMENT 4

1.2 UNEMPLOYMENT SECNARIO IN PAKISTAN 5

1.3 CAUSES OF UNEMPLOYMENT IN PAKISTAN 11

1.3.1 POVERTY 11

1.3.2 ILLITERACY 12

1.3.3 POLITICAL INSTABILITY 12

1.3.4 INEQUALITY OF INCOME 12

1.3.5 FOREIGN DIRECT INVESTMENT 13

1.3.6 LOW LEVEL OF INVESTMENT 13

1.3.7 ABSENCE OF TECHNICAL EDUCATION 13

1.3.8 LOCAL LABOR MARKET CONDITIONS 13

1.3.9 HIGH RATE OF POPULATION GROWTH 14

1.3.10 NATURAL DISASTER 14

1.3.11 LOW TECHNOLOGICAL PROGRESS 141.3.12 LESS OPPORTUNITIES OF EMPLOYMENT 14

CHAPTER 2: LITERATURE REVIEW 16

CHAPTER 3: OBJECTIVE OF THE STUDY

3.1 PROBLEM STATEMENT 20

3.2 OBJECTIVE OF THE STUDY 20

3.3 TYPE OF INVESTIGATION 20

CHAPTER 4: METHODOLOGY

4.1 SOURCE OF DATA 21

4.2 METHODOLOGY 21

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4.3 VARIABLE SELECTION CRITERIA 21

4.4 THEORETICAL FRAMEWORK 22

4.5 EXPLANATION OF THEORETICAL FRAMEWORK 24

CHAPTER 5: DATA INTERPRETATION AND DISCUSSIONS

5.1 RUNNING A LINEAR MULTIPLEREGRESSION 25

5.2 REGRESSION ANALYSIS 25

5.3 INTERPRETATION OF MULTIPLE REGRESSION RESULTS 26

CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS

6.1 CONCLUSION 296.2 LIMITATIONS OF THE STUDY 30

6.3 RECOMMENDATIONS 31

REFERENCES 34

APPENDIX 36

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LIST OF TABLES

TABLES PG NO.

TABLE NO 1.1 CIVILIAN LABOR FORCE, EMPLOYEDAND UNEMPLOYED OF PAKSIATAN 5

TABLE NO 1.2 EMPLOYED WORK FORCE WITH

MAJOR OCCUPATIONAL GROUPS 10

TABLE NO 5.1 TABLES ENTERED/REMOVED 26

TABLE NO 5.2 MODEL SUMMARY 26

TABLE NO 5.3 ANOVA 27

TABLE NO 5.4 COEFFICIENTS 28

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LIST OF FIGURES

FIGURES PG NO.

FIGURE 1.1 DISTRIBUTION OF LABOR FORCE BY SECTOR 8FIGURE 4.1 THEORETICAL FRAMEWORK 23

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CHAPTER 1

INTRODUCTION

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Unemployment is a major social and economic problem. Unemployment is a situation

where the total number of vacancies is much less than the total number of jobseekers in

the country. Unemployment is the major cause that proves as a hurdle for the

development in the country. Unemployment is a central problem because when

unemployment is high, resources are wasted and people's incomes are depressed; during

such periods, economic distress also spills over to affect people's emotions and family

lives.

There are many seekers but few jobs. In a society where who you know has replaced

what you know as the major criteria for jobs, chances of employment are bleak due to

massive downsizing in the public sector. Tens of thousands of graduates leaving the

universities every year are finding it harder to find a suitable employment. Not only it ishard to find a job but the high level of unemployment has also hurt those already

employed in a distinct way. With the abundance of workers the employers have leverage

to hire and fire at will, play loose with the benefits and offer lower salaries and those who

are not satisfied with the working conditions are always welcome to leave. Of course,

there are thousands who are willing to fill the space at whatever the salary may be.

Unemployment undermines the economic and social stability of any society. Societies

which fail to provide gainful and secure employment to their people invite politicalinstability, social unrest and economic insecurity. The link between unemployment and

crime has also been well established.

Employment is also directly related to all industrial and trade activities. These activities

slow down when there is a high level of unemployment but increases when it is low. In

an inter-dependent world the unemployment issue has taken a global perspective. This is

evident from the following example: The average annual rate of growth in global exports

was 6.6 per cent during 1965-80. It declined to 4.1 per cent between 1980-91.

The unemployment rate may be different from the impact of the economy on people. The

unemployment figures indicate how many are not working for pay but seeking

employment for pay. It is only indirectly connected with the number of people who are

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actually not working at all or working without pay. Therefore, critics believe that current

methods of measuring unemployment are inaccurate in terms of the impact of

unemployment on people as these methods do not take into account the 1.5% of the

available working population incarcerated in U.S. prisons (who may or may not be

working while incarcerated), those who have lost their jobs and have become discouraged

over time from actively looking for work, those who are self-employed or wish to

become self-employed, such as tradesmen or building contractors or IT consultants, those

who have retired before the official retirement age but would still like to work

(involuntary early retirees), those on disability pensions who, while not possessing full

health, still wish to work in occupations suitable for their medical conditions, those who

work for payment for as little as one hour per week but would like to work full-time.

Over the years, many less developed nations and the developing nations have tried to

wipeout the intensity of unemployment, which seems quite prevalent and widespread

among these countries. The reasons and causes for this have remained subject to different

interpretations depending upon the specifications, demographics, and regional profiles of

different countries, thus the perceptions regarding having a plausible solution lacks

concurrency. The level of unemployment is moving up. The socio economic system of

the country and institutions has failed to provide employment to the increasing labour

force. The ILO reports that unemployment worldwide hit a record high last year of 185.9

million people worldwide, or 6.2 percent of the global labor force.

In fact, unemployment is a two dimensional problem: the demand side and the supply

side. The overall unemployment is higher in the highly literate ethnic groups. So, in short

term, the creation of employment opportunities for educated and young segment is a

basic requirement to reduce ethnic disparities. To reduce the differential of

unemployment rates between the ethnic groups is a logical way to reduce the demand and

supply gap in the labor market of the intermediate degree holders. It will be a long-term

solution.

The socio-economic fall out of the high unemployment rate is evident from the drastic

increase in the crime wave. Today robberies, dacoities and kidnapping for ransom have

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become a fearsome fixture of life in the country. The resultant lack of civil peace and the

rule of the law undermines the very basis of all industrial, economic and trade activities

in the country. The case for sustainable development for employment can hardly be

argued more forcefully.

Increasing poverty is forcing people even to the extent of committing suicides. Price

hikes have made life impossible--never was this statement more true than it is today. A

huge group of middle class, the entire lower middle class and lower class are unable to

purchase the basic necessities of life. These price hikes are not likely to be for the

legislators and the elite; it is always the masses that must shoulder these burdens.

Nationalization of industrial units very badly affected the investment industrial sector.

The private investor shifted their capital to other countries. Employment in the private

sector absolutely stopped for many years. The higher growth rate of population is the

major causes of unemployment. The population has exceeded the optimum level. The

resources of the country are limited.

Employment cannot be provided to the increasing labour force.

The cottage industries in rural areas had been faded out by the machine made goods. The

artisans have been rendered unemployed. Educated young men like white collar jobs.They do not like to perform manual labour. The higher age of retirement in government

services has blocked the employment of educated young men. Re-employment of civil

and military high-ranking offices in government corporations and agencies deprives the

qualified men from employment.

Economy is not showing any substantial growth; infact, we fail to achieve the targeted

GDP each year and the manufacturing sector for several years running are showing

negative growth. Unfortunately, as economy goes from bad to worse, unemploymentobviously shows no sign of abating.

Political instability is one with the successive governments failing to come up with any

substantial plan to tackle growing unemployment. There is a vicious cycle of

unemployment and the mandarins at the top do not have a clue as to how to reduce it.

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Unemployment is caused by many factors in a modern market economy. It can be caused

by rapid technological change, business cycle or recessions, seasonal factors in some

industries particularly such as changes in tastes and climatic conditions which affects

demand for certain products and services, individual perceptions and willingness to work

and search for jobs, their values and attitudes towards some jobs and about employers,

accessibility for retraining and acquisition of work skills, willingness and perception of

unemployed of the benefits of training and the possibility for them to get a job after the

training even though they have a chance to get a job, discrimination in the workplace

based on race, color, religion, ethnicity, age and class.

It can be seen from the above causes unemployment in a particular period can be a

combination caused by social factors and how the economy as a whole works and alsodue to the subjective individual factors. In a sociological point of view according to

functionalist and conflict theorists the unemployment is caused primarily by the social

factors than by the individual factors. However according to Max Weber and symbolic

interaction theories individuals construct their own social constructs and perception and

they can be subjective in their behaviour and therefore can become unemployed even

though the actual condition they can get a job in the job market.

In summary applying the sociological and the primary causes of unemployment isindividual as well as a social problem in a market economy. As discussed above it is

caused by the society as well as by individuals. Even the economy or societal factors are

not present unemployment can be caused by individual perception and their own

subjective behavior.

1.1 TYPES OF UNEMPLOYMENT

There are seven types of unemployment: Frictional unemployment occurs when a workermoves from one job to another. While he searches for a job he is experiencing frictional

unemployment. Structural unemployment is caused by a mismatch between the location

of jobs and the location of job-seekers. "Location" may be geographical, or in terms of

skills. The mismatch comes because unemployed are unwilling or unable to change

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geography or skills. Cyclical unemployment, also known as demand deficient

unemployment, occurs when there is not enough aggregate demand for the labor. This is

caused by a business cycle recession. Technological unemployment is caused by the

replacement of workers by machines or other advanced technology. Classical or real-

wage unemployment occurs when real wages for a job are set above the market-clearing

level. This is often as a result of government intervention, as with the minimum wage, or

unions. Some, such as Murray Rothbard, suggest that even social taboos can prevent

wages from falling to the market clearing level. Marxian unemployment is needed to

motivate workers to work hard and to keep wages down. Seasonal unemployment occurs

when an occupation is not in demand at certain seasons.

1.2 UNEMPLOYMENT SCENARIO IN PAKISTAN

In Pakistan unemployment rate is increasing in both rural and urban areas in absolute as

well as in percentage terms. Unemployment rate in rural areas is greater as compared to

Urban areas. Because of industries there are more chances of employment in Urban areas.

In Rural areas businessmen are setting up industries due to which now rural people seek

Manufacturing sector for employment. As in rural areas there is no proper source of

earnings due to which unemployment rate is increasing. As agriculture sector is not

absorbing them due to adaptation of mechanical instruments and bad conditions. Small

scale industries are not working efficiently due to worse economic conditions. So Rural

people are not finding proper source of earning. It is clear from Percentage distribution of

employed persons by major industries division. In Pakistan, unemployment is of

structural and cyclical nature.

TABLE 1.1

Civilian Labor Force, Employed and Unemployed of Pakistan (No. in million)

1999-2000 2001-2002 2003-2004

Labor Force 39.4 42.39 45.23

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Employed 36.32 38.88 41.75

Unemployed 3.08 3.51 3.48

Source: Labor Force Survey 2001-02 and 2003-2004

The Pakistan economic survey (Government of Pakistan: 1990) has been showing a

constant rate of unemployment at 5.4 percent, but the World Bank (1990) sources

mentioned 18 percent rate of unemployment in Pakistan. The big difference is occurred

due to discrepancies in definition and quantification methodologies. The hidden

unemployment in the rural areas of Pakistan is not included in the rate of unemployment.

The barter system and availability of foodstuff without monetary cost conceal the actual

unemployment in the rural areas in some cases.

According to Labour Force Survey 1996-97, the rate of open unemployment was 6.1

percent and 5.4 percent as per Labour Force Survey of 1994-95. This indicates that rate

of unemployment has increased between these two surveys by 0.7 percent officially but

unofficially unemployment is much larger than this rate. 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 employmentdue to more industries.

From Okun's law we know that for every 2% fall in GNP relative to potential GNP, the

unemployment rate rises by 1% point. High unemployment is a symptom of waste for

during recessions, when unemployment is high, the economy is not producing up to high

level. When economy is not producing sufficiently, we can say that we are unable to use

our full resources for production purposes. Economy will not grow as fast as it can if

become able to produce at high level.

However large the cost to economy of unemployment, a recounting of Rupees lost does

not adequately convey the human, social and psychological toll that periods of persistent

involuntary unemployment bring. Although unemployment has plagued capitalism, the

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Industrial Revolution, understanding its causes and costs has been possible only with the

rise of modern macroeconomic theory. It is apparent that recessions and the associated

high unemployment are extremely costly to the economy.

Understanding the sources of unemployment has proved one of the major challenges of

modern macroeconomics. Voluntary unemployment may be or when qualified people

chose not to work out the going wage rate unemployment occur.

The key element in understanding involuntary unemployment is the inflexibility of wages

in the face of economic shocks. The same situation is in Pakistan, inflexibility arises

because of costs involved in administering the compensation system.

The upward creep in the natural rate arises mainly because of demographic trends

particularly the higher proportion of teenagers in the labour force. In addition,

government policies are also increasing unemployment rate i.e. Golden Shake Hand, ban

on jobs increasing unemployment rate.

The government is trying to reduce the unemployment rate. Under Prime Minister's Self

Employment Scheme, different Banks and Small Business Finance Corporations are

extending loans to unemployed youths and skilled professionals having diploma/degreeand business experience.

Loans ranging from Rs.10,000 to be Rs.500,000 for small business and from Rs.500,000

to Rs.5,000,000 for small industries etc. Small Business Finance Corporation is playing

role in reducing unemployment. Up to March 1999, the Small Business Finance

Corporation has sanctioned Rs.2,208.4 million, against amounting to Rs.1,551.95 million

have been disbursed to 9,383 persons.

The SBFC has generated employment for 28,149 persons under the Prime Minister's Self-

Employment Scheme up to March 31, 1999. A Small and Medium Enterprises

Development (SMEDA) has been setup for growth and development of self-employment

schemes in Pakistan. During the year 1998, about 104,000 persons have been sent abroad

for employment under Govt. overseas employment schemes.

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FIGURE 1.1Distribution of Labor Force by sector:

2005 2006

Source: Labor Force Survey 2005-06 and 2006-2007

The liberal economic and fiscal policies of the government may reduce unemployment

rate because they can create new job opportunities and business in the country. There is a

need to announce an economic revival package to stimulate investment and industrialproduction, boost exports, and broaden the tax bases and lower tariffs. In addition,

construction of additional motorways and setting up of industrial zones throughout the

country would also generate new opportunities for employment in the country.

One of the primary aims of any government should be the elimination of unemployment.

Although achieving zero level unemployment is not only highly impossible but also

undesirable at various levels to check the inflationary trend.

It is imperative that all governmental policies need to be directed towards achieving this

goal. Identifying the problem is the first step towards successfully solving it. However, a

look at officially compiled statistics shows that unemployment level in Pakistan is much

higher than that portrayed by the government.

Agriculture

Mining &

Manufacturing

Construction

Transport

Trade

Others

Agriculture

Mining &

Manufactu

Constructio

Transport

Trade

Others

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This is primarily due to the criteria used for the measurements of labour force,

employment and unemployment. Population census and periodic Labour Force Surveys

are the major sources of data on labour supply, employment and unemployment in

Pakistan.

In addition, agricultural census also provides information on employment in the

agriculture sector, the biggest employer of labour force, over 44 per cent or 15.98 million

people in 1999.

Many changes have been made to define the meaning of labour force and employment in

Pakistan The Population Census of 1951 defined the labour force as all persons of 12

years and above were self-supporting, partially self-supporting or seeking work. In 1961,

its definition was changed to include all those of ten years and above who were working

for profit or wages or helping their family members. Not only the change lowered the age

but it also included the unpaid family members in the employed.

For instance, based on a population of 184.5 million today and a participation rate of 28.7

per cent, the total labour force in Pakistan comes to 38.6 million of which 36.2 million

were employed. This also shows that only 2.4 million persons were unemployed in the

country which reflected an affordable unemployment rate of 6.1 per cent. In fact,unemployment is a much more serious problem than the official statistics show.

This also poses another relevant and worrying question. If the unemployment rate of 6.1

per cent is correct, the employment rate is an ideal 93.9 per cent. Those who know

Pakistan, and there are many, find this highly unpalatable.

Unemployment in Pakistan today is prevalent at all levels. It does not spare the highly

qualified professionals any more be they doctors, engineers and MBAs. It hurts the

illiterates, non-skilled, skilled, educated and professionals alike. However, it hurts the

first two disadvantaged classes more than the others.

While the weekend editions of major national dailies appear to be full of help-wanted

advertisements they only tend to give a wrong picture of the unemployment situation.

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Firstly, the majority of jobs advertised are aimed at the highly qualified professionals

whose share in the total employment is just 3.6 per cent.

There are little or no vacancies advertised for the two biggest occupational groups

skilled agricultural and fishery workers whose share is 36.8 per cent and the elementaryor unskilled workers whose share is 22.9 per cent.

TABLE 1.2

Employed Work Force by Major Occupational Groups (2006)

Group No.%ageShare

Legislators, senior officials and managers 3.1 m 8.6%Professionals 1.3 m 3.6%

Technicians and Associate Professionals 1 m 2.8%

Clerks 1.1 m 3%

Service Workers and Shop and Market Sales Workers 2.8 7.7%

Skilled Agricultural and Fishery Workers 13.3m 36.8%

Craft and Related Trade Workers 3.6 m 9.9%

Plant and Machine Operators and Assemblers 1.7 m 4.7%

Unskilled 8.3 m 22.9%

Total 36.2 m 100%

[Source: Economic Survey 2006-07]

In a country like Pakistan, where less than 1.4 per cent of the children, enrolled in

primary school, manage to reach universities and professional colleges, the increased

demand for professionals in the job market could hardly make any difference for the

majority which drops out at all levels of the academic progress.

The over emphasis on the maximization of the GDP has also led to uneven distribution of

income in Pakistan. The data on income distribution, based on Household Income and

Expenditure Surveys conducted by the Federal Bureau of Statistics during 1963 to 1994,

shows at least four distinct phases of inequality at the ratios of the highest 20 per cent and

the lowest 20 per cent income groups.

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The first phase between 1963-71 shows that inequality in income distribution narrowed

the ratio of highest to lowest 20 per cent income group decreased from 7.1 per cent in

1963-64 to 4.9 per cent in 1970-71. The second phase, from 1971-79 widened the income

inequality from 5.4 per cent to 6.1 per cent. Once again, the ratio declined in the third

phase, 1984-87 from 6.2 per cent to 5.5 per cent. In the fourth phase, 1987-93, the

inequality in income distribution worsened as the ratio sharply rose by 2.3 per cent to 7.8

per cent.

The inequality between the household income shares of the lowest 20 per cent and

highest twenty per cent is obvious from the data collected by the Federal Bureau of

Statistics from 1979 to 1993. In 1979, the lowest 20 per cent enjoyed a share of 8.3 per

cent of the total income while that of the highest 20 per cent was 41.3 per cent. By 1992-93 the share of the highest 20 per cent increased by 7.6 per cent to 48.9 per cent while

that of the lowest 20 per cent decreased by 2.2 per cent to 6.1 per cent. The middle 60 per

cent share also declined from 47.6 per cent to 45.6 per cent during the same period.

But the statistics also tend to give the false impression about the share of family income

due to very basic flaw in the criteria for measurement of the labour force which includes

all those over ten years seeking work during the year.

The sharp decline in the household income shares of the lowest and the middle-income

groups can be attributed to unemployment and under-employment.

1.3 CAUSES OF UNEMPLOYMENT IN PAKISTAN

There are various causes of unemployment in Pakistan. Factors like low level of

investment, political instability, illiteracy, high rate of population growth, poverty,

absence of technical knowledge, less opportunities of employment and many others areconsideres as the main causes of increase in unemployment rate in pakistan. There are

professionals who are still unemployed even they have got good education from

prestigious institutions. The main causes of unemployment in Pakistan are explained in

detail below:

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1.3.1 POVERTY

Poverty is considered as a root cause of unemployment in Pakistan. There are people who

are living below the standard of living. As poverty rises, it causes rise in the

unemployment. The average income of Pakistani is really low as compared to the incomeof the developing countries. Due to poverty, enough eduation or good level of education

is not attained and this causes increase in unemployment when people do not have that

education level which is required for a specific job. Poverty is considered as a main cause

of unemployement in Pakistan.

1.3.2 ILLITERACY

Illiteracy ia also considered as a main cause of unemployment in Pakistan. Here theabsence of technical and educational level is also considered in the illiteracy. Most of the

people are unemployed in Pakistan because they have lack of technical education and

they do not know technical know how and they are not skilled enough to opt a job.

There are a lot of unskilled laborers in Pakistan and that factor is considered in illiteracy.

As the illiteracy increases the level of unemployment also increases.

1.3.3 POLITICAL INSTABILITY

Political instability also causes unemployment in the country. A stable political system

provides more opportunities to the people. Due to political instability there is sharp

slowdown in growth of the large-scale manufacturing sector increases rate of

unemployment. In Pakistan, political instability is a big problem because every new

government that comes to rule the country make the new laws and policies regarding

trade and industry which affects the previous process and due to such changes in the

labor market there are variations in the unemployment rate.

1.3.4 INEQUALITY OF INCOME

Income inequality is one of the important cause of unemployment. The greater the

income inequality, the greater is the rate of unemployment. In developing countries,

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where income inequality is present the rich are becoming rich day by day and poor are

becoming poor day by day. In Pakistan, this factor exists and due to the existence of this

factor the unemployment rate is increasing rapidly. The elite class is becoming rich and

the poor class is becoming poorer.

1.3.5 FOREIGN DIRECT INVESTMENT

Globalization and trade openness has led to FDI in developing countries. Because the

world market is highly capitalized and competetive, FDI and multinationals are interested

in keeping their costs low and product quality high. This is a fact that due to foreign

direct investment there is a decline in unemployment. Therefore, in order to do so, theyinvest in developing countries and hire cheap labor in the form of children. The only

disadvantage is that it increases child labor in the country.

1.3.6 LOW LEVEL OF INVESTMENT

Due to poverty and unemployment, people have less income in hand, so due to this they

save and invest less. Less investment and low level of saving also cause unemployment.

People do not even know that investment and saving are in the favor of their country.This is due to lack of education among people. More investment means that there will be

a decline in the unemployment rate of the country. But due to low level of investement

the unemployment rate rises.

1.3.7 ABSENCE OF TECHNICAL EDUCATION

Due to illiteracy, people do not know that how much technical education is important for

them to acquire a good job. They kept on going with their conventional thinking. So asthere will be absence of technical education, there will be a rise in the percentage of

unemployment. Technical education and vocational training is very important to attain a

good job.

1.3.8 LOCAL LABOR MARKET CONDITIONS

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Mismatch in demand for and supply of labour in various sectors of the economy is also

an important cause of unemployment. Where there is excess of labor supply, labor

demand is required and vice versa. So unemployment rate increases because labor supply

is not equal to the labor demand

1.3.9 HIGH RATE OF POPULATION GROWTH

A very important cause of increase in the unemployment rate is the high rate of

population growth. The population rate of Pakistan is growing day by day, and due to that

much increase in the population rate there are less opportunities of employment. These

less opportunities leads to an increase in the unemployment rate. The resources ofPakistan are less than as compared to the population, so unemployment rate increases

rapidly.

1.3.10 NATURAL DISASTERS

Natural disasters often become a cause of rise in unemployment. Due to the destruction

caused by the natural disasters, thousands of employed people became unemployed and

started seeking for some other jobs to earn income. So due to natural disasters theunemployment rate increases and it also destroys the stable economy of the country.

1.3.11 LOW TECHNOLOGICAL PROGRESS

In a developing country like Pakistan, there is lack of latest and technological progress.

Due to not that much advanced and latest machinery there is low technological progress

in the economy. Due to low technological progress, there are less opportunities of

employment. Low technological progress increases the unemployment rate. Lowtechnological progress increases due to unskilled laborers who are not skilled enough to

use the machinery.

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1.3.12 LESS OPPORTUNITIES OF EMPLOYMENT

In Pakistan, there are less opportunities of employment because the people have low

incomes. Due to low level of incomes, they do not save and invest. As the level of

investment and level of saving is low, that increases unemployment rate. When the levelof investment is less that causes less opportunities of employment. In Pakistan, less

opportunities of employment causes unemployment rate to increase.

These are the variables that cause increase in the rate of unemployment. Some of the

factors that have greater influence on the unemployment rate are described in detail in the

further study.

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CHAPTER 2

LITERATURE REVIEW

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Numerous researches have been conducted on the main reason of unemployment and

various factors that cause unemployment.. The research papers not only explains the

major causes for the rising rate of unemployment in the country but as well as their

effects on the society. It is very vast issue and the focus of the researchers was to obtainthe main causes of rise in unemployment in Pakistan.

Ayub M. (1994) wrote that applying the sociological and the primary causes of

unemployment is individual as well as a social problem in a market economy. He further

discussed that unemployment is caused by the society as well as by individuals. Even the

economy or societal factors are not present unemployment can be caused by individual

perception and their own subjective behavior.

Poverty is the foremost cause of unemployment. It is one of the prime constraints and a

case study has been provided by Shah A. (1998) on the natural disasters. Through this

case study, he presented a major cause of unemployment in the country. Due to a flood in

1998, whole of the economy of the particular region was destroyed and millions of the

employed people became unemployed.

Weber M. (1999) wrote an article Measures of employment and unemployment, and

stated that the measures of employment and unemployment may be "too high". In somecountries, the availability of unemployment benefits can inflate statistics since they give

an incentive to register as unemployed. People who do not really seek work may choose

to declare themselves unemployed so as to get benefits; people with undeclared paid

occupations may try to get unemployment benefits in addition to the money they earn

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from their work. Conversely, the absence of any tangible benefit for registering as

unemployed discourages people from registering

Unemployment was highlighted as social issue by Waheed A. and Mujahid N (2000).

They emphasized that illiteracy, poverty, and social and economic pressure are the main

cause of the unemployment. They described unemployment as a socio-economic

problem.

The relationship of unemployment and labor market was analysed by Khan J (2001).

They clarified with various examples that there is mismatch in demand for and supply of

labor in various sectors of the economy. He claimed that mismatch in the labor market is

due to the wrong policies of the government.

The relationship between high rate of population and unemployment has been

examined by Mangi N (2002). She described in detail the problems of having big family

sizes and lack of resources as the main causes of unemployment. As the families are very

big but there are lack of resources. So due to increase in population growth, there is lack

of employment opportunities.

Taft C. (2005) concluded that since not all unemployment may be "open" and counted by

government agencies, official unemployment may be very low even under capitalism.

Most poorer capitalist countries lack a modern welfare state and unemployment insurance

so that it is very difficult to afford being unemployed for very long: they often end up

taking jobs below their skill levels. Those who might be counted as "unemployed" in the

rich countries end up instead being underemployed and not counted.

A case study was provided on the migration of refugees as a cause of unemployment by

Ahmed A (2003). He stated that the country already has the problem of less opportunities

for employment and this migration of refugees increased the percentage of

unemployment. Babar M. and Abbas A. argued the same issue same year. Their research

aimed at the giving up behaviour of the people. They explained the fact that due to

unsatisfactory jobs and insufficient incomes people are committing suicides and giving

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up their lives. The researchers criticized on the government policies and took this issue as

the major cause of unemployment in Pakistan.

Hans F Sennholz (2004) author of Politics causes unemployment stated that chronic

unemployment is obviously a political disease that springs from the primitive notion thatgovernment can improve everyone's income and working conditions by legislation and

regulation. It is an affliction that stems from misinterpretation and misinformation about

work and income and from an undaunted faith in collective force and coercion. It clearly

reflects the spirit and mentality of our age. Unless they soon give way to the spirit of

individual freedom and enterprise the rate of unemployment is likely to rise. It may even

reach the levels of the old European welfare states, such as France, Germany, and Italy,

where unemployment rates usually exceed 10 percent.

In October 2004, Zada M. pinpointed the root cause to poverty, social instability, gender

inequality, absence of vocational and technical training and deficient education system.

The same year Ali U. highlighted the causes of unemployment. He took rise in

population, lack of opportunities for employment, rise in corruption, poor credit facility,

income inequality, and improper policies as the root causes of unemployment.

The relationship between unemployment and low level of saving and investment was

explored by Chahdhry R. (2005). The same year in March, Siddiqui S. brings to

knowledge that how the unemployed labor force preferred unemployment in dreams of

becoming millionaire within a night. Bhagwati J. (2005) went onto examine a broader

and more detailed perspective of unemployment by encompassing all the ways it is

defined to date.

Less opportunities of employment was taken as the main cause of unemployment byKhan A. (2006). He explains that unemployment is a real issue and he explains the fact

that as far as economy is growing, unemployment is also rising in the same way. The

same year in November, Sulehri A. examined the relationship between unemployment

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and foreign direct investment. He stated that increase in foreign investment would

increase employment opportunities.

Robert. S Andrew (2007) conducted a survey "Payroll Survey", based on a sample of

160,000 businesses and government agencies that represent 400,000 individual

employers.This survey measures only nonagricultural, nonsupervisory employment; thus,

it does not calculate an unemployment rate, and it differs from the ILO unemployment

rate definition. These two sources have different classification criteria, and usually

produce differing results. Additional data is also available from the government, such as

the unemployment insurance weekly claims report available from the Office of

Workforce Security, within the U.S. Department of Labor Employment & Training

Administration.

The latest research carried out in 2007 by Ali M. described that political instability is

a cause of unemployment in the country. Due to unstable political system, lack of

political wills, political decisions, security taxes, and labor laws unemployment increases.

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CHAPTER 3

OBJECTIVE OF THE STUDY

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3.1 PROBLEM STATEMENT

To what extent high rate of population growth, illiteracy and low level of

investment causes an increase in the rate of unemployment in Pakistan.

3.2 OBJECTIVE OF THE STUDY

The objective of the study is to test the following hypothesis and see the

relationships and impact of various variables on the unemployment rate in Pakistan.

If illiteracy rate is high, the higher will be the rate of unemployment. There is a relationship between the investment growth rate and unemployment

rate.

The higher the rate of population growth, the higher the rate of unemployment.

3.3 TYPE OF INVESTIGATION

The type of investigation undertaken in this research report is correlational and

analytical study. It is carried out with the help of a statistical technique i.e. multipleregression as the objective is to investigate that how the various factors causes an

increase in the unemployment rate in Pakistan.

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Chapter 4

METHODOLOGY

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4.1 SOURCE OF DATA

Secondary data is used in this study for 17 years from 1990 till 2006 for both the

countries. Data was taken from the Economic Survey of Pakistan for various years.

4.2 METHODOLOGY

In order to achieve the above-mentioned objectives, secondary data for the

independent variables (population growth rate, illiteracy rate and investment growth rate)

and dependent variable (unemployment rate in Pakistan) from 1990-2006 is taken into

consideration. Thus, time series analysis is undertaken. The computer software

programme of SPSS (statistical package for social sciences) has been applied to run a

multiple regression to analyze the dependence of population growth rate, illiteracy rate,

and investment growth rate on unemployment rate in Pakistan.

This secondary data for the economy of Pakistan has been collected for 17 years

(1990 --- 2006). Hence, this research report deals with the time series data.

4.3 VARIABLE SELECTION CRITERIA

Here, the variables that are taken into consideration are selected according to the

objective; these all above-mentioned independent variables have the greater influence on

the increase in unemployment rate in Pakistan and they can be easily quantified. There

are also other variables which affect the unemployment rate and causes an increase in the

unemployment rate as mentioned in the literature survey, but they cannot be quantified as

reallocation of resources and due to lack of availability of the data. So the variables are

selected which can be easily quantified. These factors causes increase in the rate of

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unemployment in the country and their impact on unemployment can easily be seen in the

further study.

4.4 THEORETICAL FRAMEWORK: -

Theoretical framework gives a diagrammatic representation of the relationship

between the independent and the dependent variables. Dependent variable is the one

whose value we are trying to predict and the independent variables are the ones who areused to predict the value of the dependent variable.

There are various factors that cause increase in unemployment rate in the country.

Through the employment rate, the economy of the country is concerned. Low rate of

unemployment shows the growing rate of the economy in the country.

The variables, which are selected to carry out the research, are now shown with help of a

theoretical diagrammatic structure known as theoretical framework. The independent

variables are on the right hand side while the rate of unemployment which is dependent

on the factors mentioned is shown on left hand side.

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Unemployment

Dependent variable

Population

Growth Rate

Investment Growth

Rate

Illiteracy Rate

Independent Variables

THEORETICAL FRAMEWORK

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4.5 EXPLANATION OF THE THEORETICAL FRAMEWORK: -

As the population is growing day by day, it is causing less opportunities of labor

which increases the rate of unemployment.

High rate of population growth contributes much towards rise of unemployment

that is taking country towards under developing side.

In Pakistan, the literacy rate is less; due to this, the laborers or the people who

seek for job do not get employment.

In the absence of technical and vocational education, a large number of educated

youth remains jobless and the unemployment rate increases.

Higher the illiteracy rate, higher the unemployment rate.

Increase in level of investment would increase employment opportunities. This

will cause decline in unemployment rate.

The higher the level of investment the lower will be the rate of unemployment

because the higher investment level creates more job opportunities.

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CHAPTER 5

DATA INTERPRETATION AND

DISCUSSIONS

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5.1 RUNNING A LINEAR MULTIPLE REGRESSION: -

Regression analysis investigates the dependence of the dependent variable on the

independent variables and provides an equation to be used for estimating the value of the

dependent variable from the known values of the independent variable.

The following are the results that are obtained from this research:

As mentioned earlier, the independent variables taken are illiteracy rate, population

growth rate and investment growth rate while the dependent variable is unemployment

rate.

5.2 REGRESSION ANALYSIS: -

To test whether our hypothesis is rejected or accepted we may need to run regression on

the variables that we considered and explained in theoretical framework.

Our hypothesis is:

Ho: The three independent variable will not cause an increase in unemployment rate in

Pakistan.

H1: The three independent variable will cause an increase in unemployment rate in

Pakistan.

To test this hypothesis given above, multiple regression analysis has been done

using SPSS software and coding techniques and results that we obtained are interpreted.

To carry out this regression, values for all these variables were collected from 1990 to

2006 for the economy of Pakistan. By using the SPSS software programme, multiple

linear regression has been used.

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The following equation for regression analysis is given as:

Y = a + b 1X 1 + b2 X2 + b3 X3 + e

Where Y = Rate of unemployment in Pakistan

X 1= Illiteracy rate in Pakistan.

X2 = Population growth rate in Pakistan.

X3 = Investment growth rate in Pakistan.

a = intercept term

b 1= regression coefficient with respect to illiteracy rate.

b2 = regression coefficient with respect to population growth rate.

b3= regression coefficient with respect to investment growth rate.

e= stochastic error term

Thus, the following results were obtained after running linear multiple regression:Table 5.1

Variables Entered/Removedb

investment

growth

rate,

iliiteracy

rate,

population

growth ratea

. Enter

Model

1

Variables

Entered

Variables

Removed Method

All requested variables entered.a.

Dependent Variable: unemployment rateb.

Enter method is used and the above table shows the independent variables which are

entered to see that they cause increase in unemployment rate in Pakistan.

5.3 INTERPRETATION OF MULTIPLE REGRESSION RESULTS

In the model summary table given below, R is 0.867, which is the correlation of the

three independent variables with the dependent variable, after all the Interco-relations

among the three independent variables are taken into account.

Table 5.2

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Model Summaryb

.867a .752 .694 .59929 .752 13.118

Model

1

R R Square

Adjusted

R Square

Std. Error of

the Estimate

R Square

Change F Change

Predictors: (Constant), investment growth rate, iliiteracy rate, population growth

rate

a.

Dependent Variable: unemployment rateb.

R Square in this table of model summary is 0.752, which is actually the square of the

multiple R (0.867) 2. R square is the coefficient of determination and it tells us the

percentage of variation in the dependent variable, which is explained by the independent

variables. In this model investment growth rate, illiteracy rate and population growth rate

explains 75% of the factors that causes increase in unemployment rate. Also R Square

being 75% shows that these three variables causes 75% increase in unemployment rate,

there can be other variables that we have not considered that may have more variables

that causes increase in unemployment rate therefore our R Square is 75%.

The value of Durbin-Watson depicts the amount of autocorrelation present in our model.

Auto correlation is defined as the correlation present between the error terms of a given

model. If the value of Durbin-Watson lies between 1.5 and 2.5, it depicts minimal

autocorrelation.In the model, the Durbin-Watson value is 1.672, which implies that there is noautocorrelation.

Table5.3

ANOVAb

14.134 3 4.711 13.118 .000a

4.669 13 .359

18.803 16

Regression

Residual

Total

Model1

Sum of

Squares df Mean Square F Sig.

Predictors: (Constant), investment growth rate, iliiteracy rate, population growth ratea.

Dependent Variable: unemployment rateb.

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The ANOVA table shows that the F value of 13.118 is significant at the 0.0001 level. In

the df (Degree of freedom) in the same table, the first number represents the number of

independent variables that are 3, the second number (13) is the total number of complete

responses for all the variables in the equation (N), minus the number of independent

variables (K) minus 1, (N- K- 1) = (17 3 1) = 13. The F statistic produced is

significant at the 0.0001 level of significance. Thus, table shows that the overall model is

significant at 100 % level of significance.

Table5.4

Coefficientsa

87.702 27.050 3.242 .006

.766 .233 4.764 3.282 .006

.300 .108 4.051 2.773 .016

-.039 .020 -.297 -1.919 .077

(Constant)

iliiteracy rate

population growth rate

investment growth rate

Model

1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.

Dependent Variable: unemployment ratea.

This table shows that which among the three independent variables- illiteracy rate,

investment growth rate and population growth rate influences most the variance.

According to this table 1% increase in illiteracy rate will lead to 0.766 % increase in

unemployment rate. If population growth rate is increased by 1% unemployment rate

will increase by 0.300%. 1% increase in investment growth rate will lead to 0.039%

decrease in unemployment rate By substituting the beta values in the regression equation

the following results are obtained. = 87.702 + 0.766 X1 + 0.300 X2 0.039X3

Results mean that 75% of the increase in unemployment rate has been

significantly explained by the three independent variables. Thus our hypothesis is

sustained. Our overall significance of the model is also at 0.0001 level. This means that

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we reject our null hypothesis Ho. We accept the alternatives hypothesis H 1: i.e. The three

independent variable will significantly cause increase in unemployment rate in Pakistan.

Thus, regression results have proved that there exists a relationship between

unemployment rate and low level of investment, illiteracy rate and population growth

rate.

CHAPTER 6

CONCLUSIONS AND

RECOMMENDATIONS

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6.1 CONCLUSION

There are many factors that are responsible for the increase in unemployment rate

in Pakistan but the findings of this research report show that illiteracy rate, investment

growth rate and population growth rate are important variables influencing rate of

unemployment in Pakistan.

After running multiple linear regression using SPSS the findings show that in case

of Pakistan the value of coefficient of determination R square is 0.752 showing that 75%

variation is explained by unemployment rate due to illiteracy rate, investment growth rate

and population growth rates.

In Pakistan, correlation of unemployment rate with investment growth rate is

negative showing an inverse relation. Correlation of unemployment rate with population

and illiteracy rate is positively correlated.

Although government of Pakistan is taking important steps to reduce the rate of

unemployment but a large segment of population is living under the poverty line and is

still unemployed. Unemployment is the biggest hindrance in the way of economic

development. It is very important for Pakistan to identify the major variables that are

responsible for the increase in rate of unemployment.

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6.2 LIMITATIONS OF STUDY: -

There is lot of difficulty in getting reliable data in Pakistan because different

sources provide different data.

The sources available for data collection in Pakistan are very limited.

Some of the variables are difficult to quantify as political instability, natural

disasters etc, which are mentioned in the literature review of causes of

unemployment in Pakistan and their statistical values are also inaccessible. The whole data has been collected from the Economic Survey of Pakistan.

There were different values of the data in different sources and even there was

variation in the values of Economic Survey of Pakistan.

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6.3 RECOMMENDATIONS

Issue of unemployment is a multidimensional phenomena and it cannot be treated

in isolation. There should be proper and proportional focus on all the sectors of the

economy. Reduction in the rate of unemployment is one of the major goals for Pakistan.

Although economic growth is very important for reduction in unemployment ratebut growth without development did not play a very vital role. Economy of Pakistan is

growing but is not developing. There should be more focus on the development

components - basic standard of living, primary education, poverty reduction, health

facilities etc.

In order to cause a decline in unemployment rate employment promotion policies

should be used, as a result the investment level will increase, incremental capital output

ratio will reduce, efficiency level will increase and more employment opportunities will

be created. This will have a strong impact on reduction of unemployment rate.

Furthermore, policies should be made to ensure better access of the poor to financial

resources, credit, markets, skills, information, and other means of livelihood.

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Pakistan is a agrarian economy and major part of its population lives in the rural

areas. In Pakistan rural unemployment is a bigger phenomenon. So, in order to alleviate

employment there is a need for rural development. Policies must be adopted for

increasing agricultural productivity and diversification by moving to market-determined

agricultural prices, strengthening research and extension services, and expanding the role

of private sector in storage and agricultural support services.

Rural infrastructure should be expanded especially for roads, irrigation, and

drainage and water resource conversion. New labor intensive techniques should be

introduced. Easy Credit facilities should be given to the local farmers. They should be

given proper incentive for their work new techniques of farming and more knowledge

about seeds fertilizers and pesticides should be provided .Govt. must start such programsin which these facilities are given.

Population growth rate has a very strong impact on the increase in unemployment

rate. In order to reduce unemployment rate it is very important to control the growing

population in Pakistan. Government must take steps in collaboration with private sector

agencies and civil society including NGOs to carry out family planning programs. New

health care clinics should be opened especially in the rural areas. Most importantly

awareness campaigns should be carried out about the importance of family planning.

There is a need for better manpower planning. The government must take important steps

to increase the efficiency of labor. When labor is more productive, more income will be

generated and it will contribute more to the economic development. Thus rate of

unemployment will reduce.

Employment creation is another useful measure for reduction in unemployment

rate. The government must invest in the sectors that have greater potential to generate

employment. In this context, the strategy called for rapid growth in agriculture, small and

medium industries, housing and construction and the Information Technology sectors.

In Pakistan there exist an increasing gap between rich and poor. Rich are

becoming richer and poor are becoming poorer. The children of poor cannot study in

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those school in which the children of rich people study. So there should be equal level of

education for everyone. This factor will really help in reducing the level of

unemployment in the country.

The government should increase Public Sector Development Programme

(PSDP) for the current fiscal year. Since the focus of PSDP has been on accelerating

growth, increased funds for PSDP would mean enhancing public sector investment to

generate employment thus raising overall growth.

Skill Development Councils developed by Ministry of Labour Manpower and

Overseas Pakistanis should identify needs of geographical area, prioritise them on market

demand and facilitate the training of workers through training providers in public andprivate sectors. These councils should meet the diversified training needs of the industrial

and commercial sectors and should train more laborers.

Government of Pakistan should pay more attention on Ten Year Perceptive

Development Plan for the period 2001-11. It has the major goals of accelerating GDP

growth and reducing unemployment. This plan envisages to create 11.3 million new job

opportunities so far through investment of Rs. 11287 billion during the Plan period.

The government on its part must identify and promote sectors, which are

considered not only to be the major drivers of growth but also have the greatest potential

of creating more employment opportunities. In order to sustain this spectacular pace of

growth and maintain healthy and vigorous macroeconomic indicators would require a

prolonged period of macroeconomic stability, financial discipline, and consistent and

transparent policies. These, along with improved governance and better quality

infrastructure would encourage private sector to play a leading role in promoting

investment and growth.

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REFERENCES

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Gilani, I. et al. (1981),Labour Migration from Pakistan to the Middle East

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and its Impact on the Domestic Economy. PIDE, Islamabad.

Government of Pakistan,Economic Survey (Various Issues), Economic Advisor's Wing,

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APPENDIX

Data Table No. 1

Original Values for all the independent and dependent variables for Pakistan.

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Source: Economic Survey of Pakistan [2006-2007]

Data Table No: 2

No. of Employed in comparative LFS (Million)

Years UnemploymentRate (%)

InvestmentRate (%)

Illiteracy Rate(%)

Population Rate(millions)

1990-1991 6.22 22.76 65.1 110.791991-1992 5.85 26.89 64.0 113.611992-1993 4.73 14.80 62.8 116.471993-1994 4.84 14.78 61.6 119.391994-1995 5.41 13.87 60.4 122.361995-1996 5.40 15.98 59.1 124.501996-1997 6.10 9.67 57.8 127.50

1997-1998 6.10 10.87 56.4 130.601998-1999 6.10 5.89 55.0 133.501999-2000 6.00 14.65 52.9 136.702000-2001 6.00 9.60 51.0 139.402001-2002 7.80 4.65 49.5 142.902002-2003 7.80 12.46 48.4 145.302003-2004 8.30 15.98 47.0 149.002004-2005 7.70 32.84 47.0 151.102005-2006 7.60 32.70 46.0 154.002006-2007 6.50 21.40 45.9 156.80

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Source: Labour Force Survey 2003-04

Year Pakistan Rural Urban1990-91 29.14 20.66 8.481991-92 30.19 21.82 8.371992-93 31.06 22.38 8.681993-94 31.83 23.42 8.411994-95 31.96 23.34 8.621996-97 34.75 24.24 10.511997-98 36.44 25.50 10.941999-00 36.72 26.08 10.642001-02 38.88 26.66 12.22

2003-04 41.75 28.64 13.11

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