Pakistan's Inflation-Unemployment Nexus Analysis

Unemployment and inflation remain among the most central and persistently challenging concerns in macroeconomic policymaking worldwide. For developing economies such as Pakistan, this relationship assumes heightened complexity due to structural rigidities, external vulnerability, and entrenched macroeconomic imbalances (Haque & Qayyum, 2023; Khan & Ahmed, 2025). This article examines the inflation–unemployment nexus in Pakistan through the integrated lens of economic theory, historical dynamics, and structural characteristics. By synthesizing these perspectives, it underscores the necessity of coordinated monetary, fiscal, and structural reforms to secure sustainable price stability alongside inclusive employment generation.

Inflation and unemployment function as core indicators of macroeconomic performance and social welfare. Policymakers typically confront a perceived short-run trade-off, often framed through the Phillips Curve, which posits an inverse relationship between inflation and unemployment. However, Pakistan’s experience deviates from this conventional framework. Episodes of stagflation characterized by elevated inflation concurrent with sluggish growth and high unemployment have recurred, particularly during periods of exchange rate depreciation, energy price adjustments, and IMF-supported stabilization programs (SBP, 2025; PIDE, 2024). These dynamics suggest that cost-push pressures and structural bottlenecks dominate demand-driven cycles.

Unlike advanced economies where excess aggregate demand frequently drives inflation, Pakistan’s inflationary process is largely supply-constrained. Energy shortages, import dependence, administered price revisions, indirect taxation, and currency volatility transmit into generalized price increases (Ahmed & Mustafa, 2024). Simultaneously, unemployment remains persistent due to limited industrial diversification, low productivity growth, skills mismatches, and rapid demographic expansion approximately 2.5 million new labor force entrants annually (PBS, 2025; ILO, 2024). The coexistence of structural inflation and structural unemployment indicates that orthodox stabilization tools alone are insufficient. A calibrated mix of macroeconomic stabilization, export-oriented industrialization, human capital investment, and institutional reform is therefore indispensable for breaking this cyclical constraint.

Inflation and Unemployment Trends in Pakistan

Pakistan’s recent macroeconomic trajectory reflects persistent inflationary pressures alongside structurally elevated unemployment, reinforcing the complexity of stabilization efforts.

Pakistan has experienced chronic inflation, punctuated by sharp accelerations during episodes of external account stress, exchange rate depreciation, and fiscal consolidation (SBP, 2025). Average headline inflation reached 23.4 percent in FY2023–24 before moderating to approximately 17.2 percent in FY2024–25 still far above the State Bank of Pakistan’s medium-term target range of 5–7 percent (SBP, 2025; Ministry of Finance, 2025). Core inflation, which excludes volatile food and energy components, remained elevated at 16.8 percent in early 2025, signaling entrenched inflationary expectations and second-round effects.

Several structural and policy-driven factors underpin this inflationary persistence. Energy price rationalization under IMF-supported programs has resulted in repeated upward revisions in electricity and gas tariffs, while domestic fuel prices have cumulatively increased by approximately 135 percent since 2022 (Ministry of Energy, 2025). Simultaneously, the rupee has depreciated by nearly 65 percent against the US dollar since 2021, amplifying import costs through exchange rate pass-through (SBP, 2025). Fiscal dominance, particularly pre-2024 monetization of deficits, expanded liquidity pressures (Haque & Qayyum, 2024). Global commodity price volatility and supply chain disruptions further compounded imported inflation (World Bank, 2025a). Additionally, expanded sales tax coverage and higher indirect taxation under fiscal consolidation have elevated production and distribution costs (FBR, 2025).

Food inflation, carrying a 34.6 percent weight in the consumer price index, averaged 28.3 percent in 2023–24, disproportionately burdening low-income households whose expenditure shares on food exceed 50 percent (PBS, 2025; UNDP, 2024). Importantly, Pakistan’s inflation is predominantly cost-push in nature. Rising input prices (energy, imported raw materials, transportation, and taxation) compress firm margins and reduce output, rather than stimulating demand-driven employment expansion (Ahmed & Mustafa, 2024; PIDE, 2024).

Parallel to inflationary stress, unemployment remains structurally embedded. The overall unemployment rate rose to 8.2 percent in FY2024 from 6.9 percent in FY2022 (PBS, 2025). Youth unemployment stands at 14.5 percent, affecting approximately 3.8 million individuals (ILO, 2025). Female labor force participation remains critically low at 23.7 percent, with female unemployment at 16.2 percent (PBS, 2025; World Bank, 2025b). Educated unemployment is particularly acute, reaching 17.3 percent among degree holders (HEC, 2025), reflecting pronounced skill mismatches.

Each year, 2.5–2.8 million new entrants join the labor force, yet formal job creation averages only 400,000–600,000 positions annually (PBS, 2025; Ministry of Planning, 2025). Structural constraints including limited technical and vocational training coverage (7 percent enrollment among youth), predominance of informal employment (72–75 percent of non-agricultural employment), sectoral concentration in low-productivity agriculture (37.2 percent of employment), and constrained SME financing restrict employment absorption (NAVTTC, 2025; ILO, 2025; SMEDA, 2024).

Crucially, Pakistan exhibits weak employment elasticity of growth: a one percent increase in GDP yields only 0.3–0.4 percent employment growth (ADB, 2024). This decoupling undermines the conventional Phillips Curve trade-off, suggesting that without structural transformation, macroeconomic stabilization alone cannot reconcile inflation control with employment expansion.

Monetary and Fiscal Policy Dynamics in Pakistan’s Inflation–Unemployment Context

The State Bank of Pakistan (SBP), operating under enhanced autonomy following the SBP Act 2021, conducts monetary policy primarily through adjustments in the policy rate with price stability as its statutory objective. In response to the post-2022 inflation surge, the SBP increased the policy rate cumulatively by 1,225 basis points from 7 percent in September 2021 to 22 percent by June 2024 before gradually easing to 17.5 percent by early 2026 (SBP, 2025; 2026). While interest rate transmission to lending rates and aggregate demand typically materializes with a 6–8-month lag, several structural constraints dilute effectiveness. Pakistan’s inflation is predominantly cost-push, driven by energy tariffs, exchange rate depreciation, and indirect taxation, factors largely insensitive to domestic interest rate tightening. Moreover, historical fiscal dominance weakened policy credibility, though reforms have improved institutional discipline. Government borrowing absorbs nearly two-thirds of banking sector credit, crowding out private investment; private sector credit growth fell to 2.1 percent in FY2025, constraining output and employment (SBP, 2026). The sizeable informal economy further weakens monetary transmission. Consequently, disinflation via tight monetary policy imposes real sector costs, reinforcing short-run unemployment pressures.

Fiscal policy remains equally pivotal. Persistent budget deficits averaging above 7 percent of GDP and public debt near 74 percent of GDP (FY2025) perpetuate macroeconomic fragility (Ministry of Finance, 2025; IMF, 2025). Historically, deficit monetization expanded money supply, while contemporary tax-based consolidation has transmitted inflation through higher production costs. Debt servicing now consumes over half of federal revenues, compressing development expenditure from 4.5 percent of GDP in FY2018 to 2.8 percent in FY2025, limiting employment-generating public investment. The resulting policy dilemma is acute: fiscal consolidation restrains demand and employment, yet expansion risks inflation, currency pressure, and renewed instability.

Strategic Policy Implications for Stabilization and Employment

The preceding analysis underscores that demand-side stabilization alone whether through monetary tightening or fiscal consolidation cannot resolve Pakistan’s entrenched inflation–unemployment dilemma. While macroeconomic stabilization is indispensable for anchoring expectations, restoring investor confidence, and safeguarding external balances, contractionary policies impose significant short-run employment costs without correcting the structural drivers of cost-push inflation. A dual-track strategy is therefore essential: disciplined macroeconomic management combined with comprehensive structural transformation.

Competitiveness-enhancing reforms constitute the only durable pathway toward reconciling price stability with employment expansion. Energy sector restructuring remains foundational. Eliminating circular debt, rationalizing tariffs while protecting low-income households, improving distribution efficiency, and accelerating renewable energy deployment would reduce import dependence and production costs. Export diversification is equally critical. Moving beyond textile concentration toward engineering goods, pharmaceuticals, information technology services, and processed agro-products would mitigate external vulnerability and create higher-productivity employment. Special economic zones must prioritize genuine value addition rather than enclave-style assembly operations.

Improving the investment climate is central to employment generation. Regulatory simplification, credible contract enforcement, predictable taxation, and expanded SME credit access can unlock private investment. Equally vital is human capital transformation. Curricular reform, alignment of university output with industry demand, large-scale expansion of technical and vocational education, and remediation of foundational learning deficits are prerequisites for raising labor productivity and reducing educated unemployment.

Labor market interventions require greater emphasis. Active labor market programs, job matching services, wage subsidies, apprenticeship schemes, and targeted retraining, remain severely underfunded relative to peer economies. Expanding such programs can directly mitigate unemployment rather than relying solely on aggregate growth effects.

Monetary–fiscal coordination under central bank autonomy remains necessary but insufficient. Fiscal consolidation must prioritize progressive revenue mobilization and documentation rather than compressing development spending. Finally, strengthened social protection, through indexed cash transfers and graduation pathways, can cushion vulnerable households during structural transition, ensuring reform sustainability and social cohesion.

Conclusion

The analysis of Pakistan’s inflation–unemployment nexus reveals a complex interplay between structural constraints, policy dynamics, and external vulnerabilities. Unlike advanced economies where demand-driven inflation dominates, Pakistan’s inflation is largely cost-push, stemming from energy shortages, exchange rate volatility, imported inputs, and fiscal measures. Simultaneously, unemployment remains structurally elevated due to skill mismatches, limited industrial diversification, low labor productivity, rapid demographic expansion, and a dominant informal sector. This combination has repeatedly produced stagflationary episodes, illustrating the inadequacy of conventional Phillips Curve expectations and highlighting the limitations of standard monetary and fiscal interventions when applied in isolation.

Monetary tightening, while essential for anchoring inflation expectations, exerts short-run costs on output and employment. Fiscal consolidation, though critical for macroeconomic sustainability, is constrained by high debt servicing and the need to maintain development expenditure. The structural nature of Pakistan’s unemployment and cost-push inflation underscores that stabilization alone cannot achieve inclusive growth. Durable solutions require integrated structural reforms: energy sector restructuring, export diversification, investment climate improvement, and human capital development. Complementary labor market programs and strengthened social protection mechanisms are necessary to buffer vulnerable populations and facilitate equitable adjustment.

In essence, Pakistan’s macroeconomic challenges call for a dual-track strategy: disciplined macroeconomic management coupled with deep structural transformation. Only through this coordinated approach can price stability, sustainable employment growth, and social resilience be reconciled, breaking the cyclical constraints that have historically limited the economy’s potential.

References: Ahmed & Mustafa; Ahmed et al; Asian Development Bank; BISP; Dornbusch & Fischer; Federal Board of Revenue; FAO; Friedman; Haque & Qayyum; Haque et al; HEC; Hussain & Malik; ILO; IMF; Jafri et al; Javed et al; Khan & Ahmed; PIDE; SBP; UNESCO; World Bank.

Please note that the views expressed in this article are of the author and do not necessarily reflect the views or policies of any organization.

The writer is affiliated with the Institute of Agricultural and Resource Economics, University of Agriculture, Faisalabad. Pakistan and can be reached at mahanisar222@gmail.com

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