International Business Research; Vol. 5, No. 11; 2012 ISSN 1913-9004 E-ISSN 1913-9012 Published by Canadian Center of Science and Education 54 Fiscal Decentralization and Employment in Pakistan Muhammad Zahir Faridi 1 , Imran Sharif Chaudhry 1 , Imran Hanif 1 & Fahad Nuzair Ansari 1 1 Department of Economics, Bahauddin Zakariya University Multan, Pakistan Correspondence: Imran Hanif, Department of Economics, Bahauddin Zakariya University Multan, Pakistan. E-mail: imranhanif.bzu@gmail.com Received: July 2, 2012 Accepted: August 24, 2012 Online Published: October 16, 2012 doi:10.5539/ibr.v5n11p54 URL: http://dx.doi.org/10.5539/ibr.v5n11p54 Abstract Study emphasis that a successful fiscal decentralization process is a way to increase the participation of citizens in local level development and economic activities. Study explores that the fiscal decentralization has positive effect on employment generation while the negative relation with inflation and indirectly supports the positive relation with economic growth. Improvement in educational activities and economic integration promote employment activities in the state and fiscally decentralized economy has greater ability to promote these activities then the unitary governments. So, fiscal decentralization is a successful tool to promote employment activities, meanwhile it discourages the rise in nominal wages which contributes to higher inflation rate. Keywords: employment, expenditure, fiscal decentralization, labor force, Pakistan, revenue 1. Introduction Fiscal decentralization is concerned with fiscal issues that mean to distribute fiscal powers and responsibilities of the national (Central) government to the sub National Government and local government (NeyaptI, Bilin) August, 2005. Fiscal decentralization is currently an important policy weapon in the world, especially in Asia to improve economic efficiency. Fiscal decentralization can help in better targeting and can eliminate unnecessary engagement of the central government. In the words of Bird and Smart (2002), “for services to be effectively provided, those receiving transfers need a clear mandate, adequate resources and sufficient flexibility to make decisions”. Decentralization is the process through which the responsibilities as well as resources from national to sub national governments are developed (Rondinelli, 1981). In the developing and transitional countries special arrangements on fiscal equilibrium between central and sub-national governments are needed. Fiscal decentralization in Pakistan has been given a lot of attention recently. Pakistan ranked sixth in the most populous countries of the world with annual growth rate of 2.05 percent. Pakistan’s population stood 169.9m till 2009. Among them total working age population was 121.01m with a size of the employed labor 52.71m as of 2008-09 census. As far as labor force is concerned Pakistan ranked tenth in the world according to the Labor Force Survey 2008-09. The labor force is established 53.72 million with the participation rate of 32.8 percent in which 50.79 million are employed of the total labor force while 2.93 million are unemployed. This leads the unemployment rate at 5.5 percent. Looking at the unemployment trend in the past present study makes an effort to explore some confined facets to overcome the problem of unemployment. Different studies with different themes have been conducted on fiscal decentralization. Some of them measured fiscal decentralization in terms of economic growth, some measured fiscal decentralization with economic development. The theme of this study is to determine the effect of Fiscal Decentralization on employment generation or abatement in Pakistan. The study is divided into six sections. Empirical review of some relevant primeval studies is presented in second section. In third section, data and methodological issues, sources of data and description of variables have been described. Model specification is conversed in section four. The results of estimation are briefly illustrated in fifth section and finally in section six, the conclusion of the study has been presented. 2. Review of the Relevant Literature A lot of studies have been conducted that have measured the various aspects of economy and its relationship to Fiscal decentralization. These studies highlighted the impact of fiscal decentralization on public sector