Measuring the Performance of Labor Market Indicators on Pakistan’s Economic Growth: Time Series Evidence from 1975-2016

The objective of the study is to analyze different labor market indicators including sectoral employment, literacy rate, labor force participation rate, unemployment and educational factors, which resulting impact on Pakistan’s economic growth, for a period of 1975 to 2016. The study extended neo endogenous growth theory by utilizing labor market indicators to analyze human capital reforms in a country. The study used conventional econometrics techniques, including unit root test, cointegration test and robust least squares test. The study further used impulse response function and variance decomposition analysis for inter-temporal relationship between the variables for the next ten years time period. The estimates of robust least squares regression confirmed that employment in agriculture and services sector substantially increases Pakistan’s economic growth by 1.11% and 2.10% respectively. Primary and secondary school enrolment further increases country’s economic growth with the elasticity estimates of 0.477% and 0.322% respectively. Economic growth influenced by high unemployment rate and low labor force participation rate, which confirmed the structural flaws in the labor market. The impact of government education expenditure on economic growth is positive, which implies that high public spending on education is imperative for economic development of a country. The policy implications could be deduce by impulse response function, which shows that labor market indicators substantially influenced Pakistan’s economics growth for the next year’s time period, while variance decomposition analysis confirmed that secondary school enrolment and labor force participation rate both will largely influenced per capita income for a next year’s time period. The study gives new insights of the relationships that need re-corrective measures to reduce labor market rigidities with sound economic policies of a country.