Unemployment when economic growth takes place in the

Unemployment is has great importance among the macroeconomic
problems. If any country experiences unemployment, it will not only put
negative impact on the economic indicators of that country but, it will also
hurt the social norms of such country. In case of Pakistan; the unemployment
was 3.14 percent in the year 1973; it increased to 3.7 percent in the year
1980, then it started declining and became 2.55 percent in the year 1989. After
the year 1989; the unemployment started increasing and it reached to its
highest level 8.64 percent in the year 2003. Afterwards, the unemployment rate
reaches to 5.34 percent in the year 2010

Besides unemployment; inflation is another macroeconomic
problem which hurts both economic and social indicators in any country.
Pakistan economy has also come across with this macroeconomic problem. The
inflation rate was 23.07 percent in the year 1973; it increased to 26.66
percent in the year 1974, then it started decreasing and became 11.94 percent
in 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 year
2003 and it became 13.88 percent in the year 2010. The inflation rate changed
each year and followed both upward and downward trend. It could be seen from
the figure no. 2 for a case of Pakistan.

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Real Per Capita GDP is used as proxy for economic growth in
this study. It is generally perceived that when economic growth takes place in
the country; it increases the pace of economic activity in the country, due to
which, employment increases. The increase in employment will enhance the
purchasing power of the people in the country and as result to it, consumption
increases which leads to raise aggregate demand and hence inflation in the
country. The real per capita GDP was Rs. 15025.8 in the year 1973; it turned to
be Rs. 17561.04 in the year 1980, it further went up to Rs. 23244.33 in the
year 1990, afterwards the upward trend continues to Rs. 26474.2 in the year
2000 and finally it reaches to Rs. 34588.9 in the year 2010. The trend of
economic growth is presented in the following diagram:

The association between inflation and unemployment is a
relationship which has got a great fame in the literature. The studies like
Rogerson’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 between
inflation 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 relationship
between inflation and unemployment in the long run. After the relationship
between inflation and unemployment; another relationship has got great name in
the studies of macroeconomics and that is the relationship between economic
growth and unemployment. The studies like Vandemoortele (1991); Oladeji (1994),
Umo (1996), Rama (1998), Silvapulle et al (2004) and Stephen (2012) have found
an inverse relationship between economic growth and unemployment for the
different countries for different periods respectively. Based on this argument;
this study is aimed at finding empirically the impact of inflation; trade
openness, economic growth and urban population as share of total population on
unemployment in case of Pakistan for the period ranges from 1973 – 2010.