Trapped in place

PAKISTAN’S unemployment rate has hovered around six to seven per cent for nearly three decades. Policymakers cite it, donors reproduce it, and policy conversations move on (at least until the next Labour Force Survey). A persistently modest unemployment rate, by any standard reading, signals a healthy labour market that is functioning well. The economy is doing great in absorbing its workforce, job-seekers are finding employment, and whatever problems remain are at the margins. This is the underlying narrative of Pakistan’s labour market from the headline unemployment numbers. But it is misleading and wrong, not because the numbers are fabricated, but because the employment rate is the wrong number to look at. The truth is that the unemployment rate numbers in Pakistan hide more than they actually reveal.

The context is key here: Pakistan’s economy does not offer any comprehensive social protection such as unemployment insurance. In the absence of social protection, Pakistani workers simply cannot afford to be unemployed. They accept whatever is available: a corner in someone else’s shop, a day’s wage at a construction site, a few acres of someone else’s land. The result is a labour force that looks employed but mostly is not — definitely not in any sense that translates into security, productivity or a return on the education their families struggled to fund. So, the meaningful questions are not whether people are working but what they are earning, under what conditions, and whether any of it is connected to the skills they spent years acquiring. These are the questions I tried to answer in a new policy paper that I presented at the Lahore School of Economics’ annual conference recently, and the findings have not left me since.

The answers that the latest Labour Force Survey (2024-25) provides are not comfortable. Nearly 87pc employed Pakistanis work in the informal economy. That figure alone puts Pakistan at the extreme end of the global distribution. What informality costs these workers is not a matter of speculation: after controlling for education, age, and location, informal workers earn roughly 31pc less than comparable workers in formal employment. That by no means is a transitional gap that growth will gradually close. What makes it worse is that urban centres are not generating formal jobs at scale either. The urban-rural difference in informality is only 12 percentage points! Even more alarmingly, formality does not seem to be something you can educate your way into. It essentially requires a formal sector large enough to actually hire you, and Pakistan’s is not. The outcome is that even among Pakistanis who hold postgraduate degrees, close to half remain informally employed.

The unemployment rate numbers in Pakistan hide more than they actually reveal.

The second thing the data makes plain is who bears the burden of this informality, and where. The gender gap in labour force participation stands at 54 percentage points. With female labour force participation of only 25pc, women are more than three times less likely to be employed than men. The more revealing number to me, however, is the geographic division. Only 12pc of urban women participate in the labour market! Not in rural Pakistan; in our cities where women have better access to education and services than their rural counterparts, they are less likely to be employed. Urbanisation is supposed to pull women into the workforce. In Pakistan, something is running the process in reverse. Rural women participate at 31pc. One positive correlation that data makes clear is a U-shaped relationship between the level of education and female labour force participation. Even though women with primary/ secondary/ high school education have lower participation rates than uneducated women, the rates increase significantly for university graduates, reaching 43pc for women with post-graduate education.

Beyond participation, working women disproportionately bear the burden of informality. The informal sector wage penalty for females is more than twice as much as that for males. Not only that, for the women who do make it into paid employment, more than 80pc of the wage gap they face relative to men cannot be explained by any difference in their observables (age, education, sector, location). The residual (gender discrimination), which is what you are left with once the measurable factors are accounted for, is doing most of the work.

The third structural fault-line the data reveals is the mismatch between education and labour market outcomes. We have spent two decades expanding universities and producing graduates the economy cannot absorb. Returns to schooling are real: postgraduate degree holders earn substantially more than uneducated workers, and each additional year of schooling raises wages meaningfully. But education barely improves the probability of finding employment in the first place. Among working-age Pakistanis with a university degree, more than a third are not employed. Among young graduates aged 15 to 29, the share of those who are neither working nor studying is higher than of those who only completed an intermediate diploma.

To me, these are not three separate problems that the micro data reveal. They point to a unified structural problem. Pakistan’s formal sector is too small and too weak to absorb the working-age population in productive employment. Informality is the mechanism through which everything else breaks down; it suppresses wages, it excludes women and concentrates the hefty wage penalties on women, and it swallows the returns that educated workers expect from their investment in schooling. When 87pc of the workforce sits outside the institutions through which rights are enforced, contracts honoured, and productivity gains can be distributed, the standard toolkit of labour market interventions achieves very little. The usual policy prescription of vocational training, registration reforms and gender mainstreaming commitments might not be wrong, but it’s not sufficient. The binding constraint in Pakistan’s labour market seems its inability to create quality formal jobs.

The writer is an associate professor of economics at the Lahore School of Economics.

X: @waqarwadho

Published in Dawn, April 20th, 2026

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