This document analyzes factors that affect unemployment in Pakistan from 1980 to 2015. It examines how unemployment correlates with gross domestic product (GDP), population growth, and inflation. GDP has a positive relationship with unemployment, while population growth and inflation have negative relationships. The analysis finds that GDP, population growth, and inflation all significantly impact unemployment in Pakistan.

1. FACTORS EFFECTING
UNEMPLOYMENT

2. VARIABLES
• Unemployment
• Gross domestic product
• Population
• Inflation
• Dummy variable is Education

3. DESCRIPTION OF VARIBLES

4. UNEMPLOYMENT
• Unemployment is one of the significant variables
that depict the health of an economy and plays a
very important role in development of the
economies. In this project, the unemployment
rate is considered as dependent variable.

5. GROSS DOMESTIC PRODUCT
• The relationship between the GDP and unemployment rate can be
seen by the Okun’s Law. According to the law, “there is a
corresponding two percent increase in employment for every
established one percent increase in GDP.”
• It shows that the level of GDP is driven by the principles of demand
and the supply, if the demand is increasing than there is an increase
in GDP.
• So, the GDP and the unemployment rates are linked in way that
these both are macroeconomic factors which are used to gauge the
state of the economy.
• The GDP and unemployment rates are usually move together
because a decrease in GDP reflects the decrease in the rate of
employment.

6. POPULATION
• The growth in population is a symbol of
unemployment. It is very difficult to adjust the
huge population in the economic activities. The
population growth must have negative
relationship with the unemployment rate.
Because when the population grows,
unemployment rate will also increase.

7. INFLATION
• The relationship between the inflation and
unemployment rate must be negative because
when the wages of labor force increases then the
rate of unemployment decreases.

8. DAMMY VARIABLE
• The effect of education on unemployment in the
country is used as dummy (DM). There is a
causal effect of education on transitions between
labor force states, especially unemployment. The
0 value indicated the worst period of education
and 1 indicated the better period of educational
system.

9. MODEL SPECIFICATION & STATISTICAL TECHNIQUES
UE= β0+ β1GDP + β2POPL+ β3INF + μ
• UE =Unemployment
• β0 = Constant
• GDP = Gross Domestic Product
• POPL = Population
• INF = Inflation
• μ = Standard Error

10. HYPOTHESIS OF STUDY
• H0: There is no relationship between GDP and
Unemployment in Pakistan.
• H1: There is relationship between GDP and Unemployment in
Pakistan.
• H0: There is no relationship between Population and
Unemployment in Pakistan.
• H1: There is relationship between Population and
Unemployment in Pakistan.
• H0: There is no relationship between Inflation and
Unemployment in Pakistan.
• H1: There is relationship between Inflation and
Unemployment in Pakistan.

11. MULTIPLE REGRESSION ANALYSIS

13. MULTICOLLINEARITY
Detection Methods
• High R2 but few significant the ratios.
• High pair-wise correlations among
regressors.

14. Only one variable have negative multicollinearity that is
unemployment and population.

15. AUXILARY REGRESSION
• GDP = β0 + β1 POPL + β2 INF + µ
• POPL = β0 + β1 GDP + β2 INF + µ
• INF = β0 + β1 GDP + β2 POPL + µ

16. GROSS DOMESTIC PRODUCT

17. POPULATION

18. INFLATION

19. REMOVAL METHOD
• A priori information
• Combining Cross sectional and time series data
• Dropping the variable(s) and specification bias
• Transformation of variables
• Additional or New Data

20. AUTO CORRELATION
DETECTION METHODS OF AUTOCORRELATION
GRAPHICAL METHOD

21. -8
-4
0
4
8
12
1980 1985 1990 1995 2000 2005 2010 2015
RESID01

22. DURBIN WATSON D TEST
• HO: No positive autocorrelation
• H1: Positive autocorrelation
• N= 30
• K= 3
• (DL-DU)
• (1.006 – 1.421)
• Acceptable range of Durbin Watson is (1.006 –
1.421) in above model value of D.W is 1.197646 it
means in this model there is no auto correlation in
variables or data.

23. BREUSH GODGRY METHOD

25. THE RUN TEST METHOD
• HO: No autocorrelation
• H1: Autocorrelation
• (+++++) (------) ( ++) (--) (+++++++++++) (--)
(+) (-------)
• NO. OF BRAKETS = 8
• N1= 19
• N2= 17

26. THE RUN TEST METHOD (CONTD)..
• MEAN:
Mean = E(R) = 2 N1
N2/ N +1
= 2 (19) (17) / 36 +1
Mean = 17.459
• VARIANCE:
Variance= [2 N1 N2 (2 N1 N2 –
N)] /N2 (N-1)
[2 (19) (17) 2(19) (17) – 36] / 17
(36-1)
= 394,060 / 595
= 662.285
= √662.285
Variance = 25.734

27. • E(R) + Z (SE) ----------- E(R) – Z (SE)
• 17.459 + 1.96 (25.734) ------------ 17.459 - 1.96
(25.734)
• 67.897 ------------- (-32.979)

28. REMOVING AUTOCORRELATION
THE METHOD OF GENERALIZED LEAST
SQUARE

29. DURBIN WATSON TWO STEP PROCEDURE
1st step find regress residual on its lag and
the coefficient is its rho value.

31. 2ND STEP: Use the above rho value to transform the data

32. THE NEWEY – WEST METHOD

34. HETEROSCEDASTICITY
• Detection Method of Heteroscedasticity
• Graphical Method

35. Error and UE
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005 2010 2015
RESID UE

36. EORROR AND GDP
-2
0
2
4
6
8
10
12
1980 1985 1990 1995 2000 2005 2010 2015
RESID GDP

37. ERROR AND POPL
-2
-1
0
1
2
3
4
1980 1985 1990 1995 2000 2005 2010 2015
RESID POPL

38. ERROR AND INF
-4
0
4
8
12
16
20
24
1980 1985 1990 1995 2000 2005 2010 2015
RESID INF

39. PARK TEST
• HO: Homoscedasticity
• H1: Heteroscedasticity

40. Lresid2 =β1 + β2LGDP +µ

41. Lresid2 =β1 + β2LPOPL +µ

42. Lresid2 =β1 + β2LINF +µ

43. WHITE’S GENERAL
HETEROSCEDASTICITY TEST

45. REMOVAL METHOD
WHITE’S HETEROSCEDASTICITY-CONSISTENT
VARIANCES AND STANDARD ERRORS

47. DUMMY VARIABLE DATA

49. CONCLUSION
• It indicates that the factors affecting the unemployment
rate in Pakistan.
• The data collected to cover the period from 1980 to 2015.
• Many tests are being run for testing the selected data
• The variables selected for the project are unemployment
rate, gross domestic product (GDP), growing population
and inflation. The regression analysis showed the
significant impact of all the variables.
• The GDP of Pakistan showed the positive relation
whereas, the growing population and inflation showed
the negative relation with the unemployment rate.

50. • It is concluded that, the GDP has the relation
with the rate of unemployment due to the
various factors which are the reason for this
positive result such as; unequal income
distribution, poverty, political instability,
improper or underutilization of foreign
investment, growing population, worsening
economic condition and many other reasons. To
overcome all these situations, the policies need
to be revised.