Unemployment is has great importance among the macroeconomicproblems. If any country experiences unemployment, it will not only putnegative impact on the economic indicators of that country but, it will alsohurt the social norms of such country. In case of Pakistan; the unemploymentwas 3.
14 percent in the year 1973; it increased to 3.7 percent in the year1980, then it started declining and became 2.55 percent in the year 1989. Afterthe year 1989; the unemployment started increasing and it reached to itshighest level 8.64 percent in the year 2003. Afterwards, the unemployment ratereaches to 5.34 percent in the year 2010Besides unemployment; inflation is another macroeconomicproblem which hurts both economic and social indicators in any country.Pakistan economy has also come across with this macroeconomic problem.
Theinflation rate was 23.07 percent in the year 1973; it increased to 26.66percent in the year 1974, then it started decreasing and became 11.94 percentin the year 1980, and afterwards it reached to 7.84 percent in the year 1989.
After the year 1989; the inflation rate turned to be 2.91 percent in the year2003 and it became 13.88 percent in the year 2010. The inflation rate changedeach year and followed both upward and downward trend.
It could be seen fromthe figure no. 2 for a case of Pakistan.Real Per Capita GDP is used as proxy for economic growth inthis study. It is generally perceived that when economic growth takes place inthe country; it increases the pace of economic activity in the country, due towhich, employment increases. The increase in employment will enhance thepurchasing power of the people in the country and as result to it, consumptionincreases which leads to raise aggregate demand and hence inflation in thecountry. The real per capita GDP was Rs.
15025.8 in the year 1973; it turned tobe Rs. 17561.04 in the year 1980, it further went up to Rs. 23244.33 in theyear 1990, afterwards the upward trend continues to Rs. 26474.2 in the year2000 and finally it reaches to Rs.
34588.9 in the year 2010. The trend ofeconomic growth is presented in the following diagram:The association between inflation and unemployment is arelationship which has got a great fame in the literature. The studies likeRogerson’s (1988); Cooley and Hansen (1989), Mortensen and Pissarides (1994),Shi (1997), Pissarides (1999), Berentsen, Lagos and Wright (2005), Lehmann(2006), Beyer and Farmer (2007), Kumar (2008), Berentsen, Menzio andWright(2008), and Menzio and Wright (2008) have found a positive relationship betweeninflation and unemployment in the long run.On the other hand; Karanassou, Sala and Snower (2003), Franz(2005), and Schreiber and Wolters (2007) had found an inverse relationshipbetween inflation and unemployment in the long run.
After the relationshipbetween inflation and unemployment; another relationship has got great name inthe studies of macroeconomics and that is the relationship between economicgrowth and unemployment. The studies like Vandemoortele (1991); Oladeji (1994),Umo (1996), Rama (1998), Silvapulle et al (2004) and Stephen (2012) have foundan inverse relationship between economic growth and unemployment for thedifferent countries for different periods respectively. Based on this argument;this study is aimed at finding empirically the impact of inflation; tradeopenness, economic growth and urban population as share of total population onunemployment in case of Pakistan for the period ranges from 1973 – 2010.