Beyond Direct Effects: How Vocational Education Mediates the Impact of Educational Spending and Trade on Unemployment in Pakistan

Abstract

This study examines the mediating role of vocational education in the relationship between government education expenditure, trade openness, and unemployment in Pakistan, using time-series data from 1990 to 2024. The results of a three-stage OLS mediation model show that secondary vocational pupil enrollment (SEVP) acts as a significant transmission channel. Government spending on education reduces unemployment, with approximately 17% of its effect transmitted indirectly through increased vocational enrollment. Trade openness also lowers unemployment, with about 25% of its effect operating through vocational education. Notably, population growth exhibits indirect-only mediation: its overall effect on unemployment is not statistically significant, but when vocational enrollment is considered, the direct effect becomes strongly negative, suggesting that population growth can reduce unemployment only when accompanied by skills development. Vocational enrollment itself has a substantial direct impact on reducing unemployment, and the full model explains 82.2% of the variation in unemployment rates. Results are robust across diagnostic tests, quantile regressions, and subsample analyses. These findings indicate that weak linkages between educational expenditure, trade, and employment in Pakistan result from inadequate investment in vocational training. Policy implications indicate the need for performance-based funding for technical and vocational education and training, as well as the integration of skills development into trade and industrial strategies.                                                                                                    

Keywords: Unemployment; Vocational Education; Mediation Analysis; Human Capital; Trade Openness; Pakistan