The Relative effects of Internal and External Factor on Unemployment: Empirical Evidence from Pakistan

Abstract

This study analyzes the relative internal and external factors of the unemployment rate in Pakistan by using annual time series of Pakistan from 1990 to 2022. In this analysis, the dependent variable utilized in the study is the unemployment rate, while the independent variables are secondary school enrollment, financial development, trade openness, FDI, and inflation rate. Different econometric approaches are used for data analysis. Correlation coefficient is used to examine the extent of relation between variables. Unit root test is used to analyze the level of stationary of variables using Augmented Dickey-Fuller test. ARDL model is used for the short- and long-run estimation of parameters. Lastly, different model diagnostic tests are applied to evaluate the issues of heteroskedasticity, autocorrelation, model specification, residuals normality and dynamic stability of model. The analysis shows that the variables secondary school enrolment, financial development, trade openness, and FDI are negatively and significantly related to the unemployment rate, whereas the inflation rate is positively and significantly related to the unemployment rate in Pakistan. In contrast, the short- run results show that secondary school enrollment, financial development, and inflation rate increase unemployment in the short-run, while trade openness is negatively related to the unemployment rate in Pakistan. Keeping in view the outcomes, it is concluded that internal and external factors are significant in influencing unemployment in Pakistan.