Department of Business Administration

Relationship between the Unemployment and GDP

growth in Pakistan

Introduction:
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.

According to the theories there is an inverse relationship between gross domestic product
(GDP) and the unemployment. This report investigates the relationship between GDP
growth and unemployment in Pakistan through Fitting the regression model and check
the strength of their relationship by the coefficient of correlation using the statistical
software MINITAB.

Literature Review:
“Pakistan's population has increased from 34 million in 1951 to 144 million in mid 2001.
The addition of over 108 million Pakistanis in just five decades is due to the high
population growth rates in the last thirty years. Continuing high population growth will
amount to Pakistan’s population reaching 220 million by the year 2020. Coupled with
poor human development indicators such as low literacy, high infant mortality and low
economic growth rates.” 1(2007)

“As defined by the International Labor Organization, "unemployed workers" are those
who are currently not working but are willing and able to work for pay, currently
available to work, and have actively searched for work. The prevalence of unemployment
is usually measured using the unemployment rate, which is defined as the percentage of
those in the labor force who are unemployed. No Census has ever been conducted in any
country of those who were employed and unemployed on any particular day so no

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accurate ratio can be finalized while some predictions can be made. The image of
unemployment is the one which we receive from our newspapers or televisions. We hear
our politicians explaining that the latest figures show that unemployment is decreasing,
while opposition party would be much more cynical. These different proclamations
insulate us from the realities behind the statistics. There are various reasons of
unemployment present in our society. Different economic schools of thought suggest
different policies to tackle unemployment. Several types of unemployment causes are
given different names by economic experts. Unemployment observed in Pakistan is
mainly Structural, Seasonal and Cyclical. There are other factors too but these three
particular factors largely impact unemployment rate. Structural unemployment is caused
by a mismatch between jobs offered by employers and potential workers. This may
pertain to geographical location, skills, and many other factors. For example, in the
period between 1996 and 1999s, students preferred medical field, but with time, this trend
changed and during the period of 2000-2004, a technology bubble emerged, creating a
demand for technical specialists. The second type of unemployment known as seasonal
unemployment occurs when an occupation is not in demand at a certain time of year. The
third type is cyclical unemployment that is observed when there is not sufficient
aggregate demand or job opportunities in the economy. There are two different terms
used for economic income or production namely, gross domestic product (GDP) and
gross national product (GNP). GDP is concerned with the region in which income is
generated. It is the market value of all the output produced in a nation in one year. GDP
focuses on where the output is produced rather than who produced it. In contrast, GNP is
a measure of the value of the output produced by the "nationals" of a region. GNP
focuses on who owns the production. For example, in the United States, GNP measures
the value of output produced by American firms, regardless of where the firms are
located. In Pakistan economy depends primarily on GDP system which to some extent is
not suitable for a country such as ours, lacking in proper management and infrastructure
of check and balance. GDP directly influence the region, if not handled properly regional
differences can take place. An example of this can be observed in three out of four
provinces of Pakistan. All these factors impact economy and the circle of employment or
unemployment one way or the other.”2 (2005)

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“For overcoming the unemployment the network of SMI (Small and Medium Industries)
should be spread all over the world especially in rural and far-flung areas of respective
countries to save the urbanization. Banks may be pressurized to give priority in granting
Small and Medium Loans. The increased network of SMI will also boost up the GDP of
respective countries.” 3(2001)

“Economic growth is the increase in value of the goods and services produced by an
economy. It is conventionally measured as the percent rate of increase in real gross
domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-
adjusted terms, in order to net out the effect of inflation on the price of the goods and
services produced. In economics, "economic growth" or "economic growth theory"
typically refers to growth of potential output, i.e., production at "full employment," which
is caused by growth in aggregate demand or observed output. As economic growth is
measured as the annual percent change of National Income it has all the advantages and
drawbacks of that level variable.” 4(2001)

“The Organization for Economic Co-operation and Development (OECD) compiles an

employment protection index that measures how easily employers in various countries
can terminate workers or hire temporary workers. The United States, Canada, the United
Kingdom, Japan, Germany, and France rank 1, 2, 3, 7, 22, and 25, respectively, among 30
OECD countries in labor market flexibility. The relatively low levels of labor market
regulation in the United States and Canada are consistent with their relatively large
increases in unemployment in the recent recession. Okun coefficients can change over
time because the relationship of unemployment to output growth depends on laws,
technology, preferences, social customs, and demographics. Some economists have
suggested that labor market reforms have made most industrialized countries more like
the United States, with smaller Okun coefficients.” 5(2000)

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Research objective:
Unemployment is a major problem for any country. This is because unemployment can
lead to a lot of social and economic problems. The objective of this research is to
understand whether or not unemployment be reduced by increasing the GDP in Pakistan.

Research Design:
• Type of study: Causal Research

• Nature of Data: Cross-sectional

• Sampling Design: The data will be secondary that’s why we do not

need of Sampling.
• Data Analysis: Pearson’s Coefficient of Correlation.
Hypothesis Testing of the Population Regression
Coefficient “β” for regression equation Y = α + β X
Hypothesis:
Let the sample regression equation Y on X is, Y = a + b X

• H0: β = 0
(Unemployment is not linearly related to GDP growth or)
(Unemployment does not affected by the change of GDP growth)

• H1: β ≠ 0
(Unemployment is linearly related to GDP growth or)
(Unemployment affected by the change of GDP growth)

• α (Level of significance) = 0.05

b − βo
• Test Statistic : t = ; βo = 0
sb

GDP - real growth rate Unemployment rate

Year
(%) (%)
t x y
2003 4.5 7.8
2004 5.5 7.7
2005 6.1 8.3
2006 6.6 6.6
2007 6.6 6.5
2008 5.3 5.6
2009 2.7 7.4

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 The regression equation is,

Y = 7.92 - 0.148 X

Predictor Coef SE Coef T P

Constant 7.917 1.616 4.90 0.004
X -0.1480 0.2950 -0.50 0.637

S = 0.998323 R-Sq = 4.8% R-Sq(adj) = 0.0%

Analysis of Variance

Source DF SS MS F P
Regression 1 0.2510 0.2510 0.25 0.637
Residual Error 5 4.9832 0.9966
Total 6 5.2343

therefore,
− 0.148 − 0
t =
0.295

tcalculated = −0.5

• Critical Region: The critical region at α = 0.05 for two tailed test with
degrees of freedom υ = 7 – 2 = 5 is t cal > t(0.025)(5) = 2.57
and t < -2.57

-2.57 2.57

• Conclusion: Since the calculated value of t falls in acceptance region,

therefore we accept H0: β = 0 and conclude that
Unemployment is not linearly related to GDP growth or
Unemployment does not affected by the change of GDP
growth.

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Pearson correlation of Unemployment rate (%) and GDP -
real growth rate (%):
r = -0.219

The coefficient of correlation indicates that the relationship between the unemployment
and GDP growth is negligible which support/verify the conclusion of hypothesis.

Data Collection:
The first step in an exploratory study is a search of the secondary literature. The data we
will use to analyzing will be secondary data. Studies made by others for their own
purposes represent secondary data. It is insufficient to discover a new through the
collection of primary data.

I acquired the secondary data from the internet and the second source of secondary data is
published documents.

Line of action:
In the beginning of the proposal writing I “read the several articles and research papers”
in different dimension and then I made “an inventory of variables”. In the second step I
“picked two variables and studied them” and kept the unemployment as a dependent
variable and GDP growth as a independent variable. In third step I discover
“Management Dilemma” and developed the “Research Question”. In the forth step I
made a “Research Design”. At the end I designed the “hypothesis” to test the relationship
between these two variables.

Scope of study:
Unemployment is one of the biggest economic and social problems in Pakistan. This
study will help to understand the kinds of unemployment as well as help in decision
making and to take the corrective actions regarding unemployment.

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There can be no negative relation between economic growth and unemployment, because
GDP growth and unemployment both are rising in the long run. It is evident that
employment will only increase if GDP is rising faster than productivity.

Place of work and facilities available:

To complete this Synopsis, I used different resources like Latif Ebrahim Jamal (LEJ)
digital Library University of Karachi to search the research articles, research papers and
research journals and State Bank of Pakistan Library. For analyzing the data I used the
statistical software MINITAB available in personal computer.

References:
1)
http://www.mopw.gov.pk/
2)
http://www.articlesbase.com/news-and-society-articles/the-rising-spectre-of-
unemployment-in-pakistan-1530788.html
3)
http://paknet.net/economic-and-financial-crisis/
4)
http://www.tradingeconomics.com/Economics/GDPGrowth.aspx?Symbolzzzzzzz
=PKR#ixzz0jvx73tVe
5)
Lee, Jim. “The Robustness of Okun’s Law: Evidence from OECD Countries.” Journal
of Macroeconomics, spring 2000, 22(2), pp. 331-356
6)
Okun, Arthur M. ‘‘Potential GNP: Its Measurement and Significance.”
In: Proceedings of the Business and Economic Statistics Section of the American
Statistical Association. Alexandria, VA: American Statistical Association, 1962,
pp. 89-104.
7)
2 Kaufman, Roger T. ‘‘An International Comparison of Okun’s Law.’’ Journal of
Comparative Economics, June 1988, 12(2), pp. 182-203; and Moosa, Imad A.
“A Cross-Country Comparison of Okun’s Coefficient.” Journal of Comparative
Economics, June 1997, 24(3), pp. 335-56.

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