Can Pakistan Economy Add 2 Million Jobs a Year?
By Riaz Haq
CA

About 20 million Pakistanis are expected to enter the labor market over the next 10 years. Can Pakistani economy add jobs at a rate of 2 million a year for the next decade to absorb all new entrants to its work force? What is Pakistan's employment elasticity? How fast must it grow to create these jobs? How much investment is needed to achieve the required growth rate?

Pakistan Labor Market
Pakistan's work force is about 68 million, according to the World Bank. Its labor force expansion is the third biggest in the world after India's and Nigeria's, according to UN World Population Prospects 2017. Pakistan's working age population in 15-64 years bracket is expected to increase by 27.5 million people to 147.1 million in 10 years, according to Bloomberg News' analysis of data reported in UN World Population Prospects 2017. Pakistan's increase of 27.5 million is the third largest after India's 115.9 million and Nigeria's 34.2 million in working age population of 15-64 years. China's working age population in 15-64 years age group will decline by 21 million in the next 10 years.

Employment elasticity
Employment elasticity is a measure of the percentage of new jobs added to the economy for each percentage point increase in GDP. Employment elasticity of 0.5 means that there is 0.5% growth in jobs for each 1% growth in GDP.
Analysis of the World Bank jobs data shows Pakistan's employment elasticity was about 0.70 in the period from 2000-2010. A little over 5% annual GDP growth enabled the economy to add jobs at a rate of 3.6% a year for the new entrants in the labor market. Since then, Pakistan's GDP growth rate has declined along with a decrease in employment elasticity to about 0.50, according to Asian Development Bank. The ADB reports says: "With an employment elasticity of GDP growth estimated to be around 0.5, economic growth of at least 7% is required to provide sufficient jobs".
Savings and Investments
Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will boost domestic savings and investments, according to a Global Development Horizons (GDH) report. Escaping the low savings low investment trap will help accelerate the lagging GDP growth rate in Pakistan, as will increased foreign investment such as the Chinese investment in China-Pakistan Economic Corridor. Increased savings and investments will not only enlarge the nation's tax base but also help create more jobs for the expected new entrants into the work force as it did in 2000-2010, according to a report titled "More and Better Jobs in South Asia".

Economic Growth Rate
Historic data suggests that it takes investment of 4% of GDP to achieve 1% GDP growth, a capital to output ratio (COR) of 4, according to Pakistani economist Mohsin Chandna. This COR ratio will require an investment of 28% of GDP to reach 7% economic growth necessary to create over 2 million jobs a year over the next decade.

Pakistan's current savings rate of around 13% will clearly not be sufficient to get to the goals of 28%. This gap will need to be filled by a combination of increased savings rate and substantial increase in foreign direct investment (FDI).
Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will significantly boost domestic savings and investment. Increased foreign direct investment such as Chinese investment in China-Pakistan Economic Corridor over the next several decades will help fill the gap between the national savings rate and investments required to reach 7% annual GDP growth to create over 2 million jobs a year.

Summary
Pakistan needs to create over 2 million jobs over the next decade to absorb new workers entering the labor market. With an employment elasticity of 0.5, it will require 7% annual GDP growth. A combination of increased domestic savings and higher foreign investment flows will be needed for investment of 28% of GDP to achieve the required economic growth for sufficient job creation in the country over the next 10 years.

 

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Editor: Akhtar M. Faruqui
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