The Friday Economist is a collaborative blog series between LUMS MHRC and the CNM Department of Economics at LUMS

Following the industrial revolution, the world witnessed transformative changes led by the rapid evolution of digital technologies. The surge in computing power, the advent of artificial intelligence (AI), the integration of robots, digitization, the Internet of Things (IoT), and the widespread adoption of block chain technology have reshaped the landscape across all major sectors.

Amidst this digital renaissance, a formidable concern looms, particularly regarding the swift progress of AI. The apprehension stems from the fact that these innovations have the potential to not only substitute human labor on a grand scale but also reconfigure the entire labor market, thereby altering the very fabric of our economic existence. This shift may, in turn, devalue a significant portion of human labor, leading to a decline in real wages and potentially leaving future generations economically disadvantaged. 
This blog post attempts an initial survey of the following issues: assess the significance of AI in Pakistan's employment sector; analyze the evolving job market dynamics influenced by AI advancements; investigate the implications on the well-being and earnings of a substantial workforce facing displacement; and evaluate the potential creation of new job opportunities in the AI domain and scrutinize the anticipated skill sets essential for future roles.

AI's Significance in Pakistan's Job Market

AI refers to the ability of machines to learn and perform tasks that would normally require human intelligence. This dynamic gives rise to uneven labor demand influenced by skills, gender, education, and various social biases. Anticipating shifts in the evolving job landscape, 23% of the jobs are likely to change until 2027, with 69 million new jobs created and 83 million eliminated. 
 

The swift progress is reshaping the employment scenario in Pakistan. This changing landscape mirrors the significant influence of technological progress and evolving economic patterns. Approximately 17% of the jobs in Pakistan are at a high risk of automation and AI. Sectors like manufacturing, customer service and agriculture, traditionally reliant on manual labor, are undergoing notable changes. While these technological strides boost efficiency and productivity, they also present challenges in the form of potential job displacement, leading to unemployment and underemployment. 

Evolving Job Market Dynamics

AI can influence Pakistan’s job market through either the substitutability effect or complementarity effect, each yielding distinct outcomes. The former effect carries a substantial displacement impact, particularly in tasks such as record keeping, accounting and customer service, where AI demonstrates a strong substitutability. Non-routine analytical tasks like medical diagnosis, legal writing, and HR functions showcase a complementary relationship with AI, enhancing job specifications and favoring highly skilled laborers. 

Certain industries are likely to face displacement due to AI's proficiency in image analysis, learning techniques, and predictive and pattern analysis. Sectors heavily dependent on manual labor may face substantial job losses, due to the routine nature of tasks, potentially resulting in a surge in unemployment and underemployment within the country's workforce. Evidently, from 2014-15 to 2020-21, employment in the agricultural sector declined from 42.3% to 37.4%, in the wholesale and retail industry, from 14.7% to 14.38% and in the manufacturing sector, from 15.4% to 14.8%. 

Conversely, sectors that predominantly involve non-routine problem-solving benefit from AI, resulting in increased employment and output. For instance, from 2014-15 to 2020-21, the construction sector observed a notable rise in employment from 7.3% to 9.5% whereas the storage and communication sector witnessed a rise from 5.4% to 6.2%. Figure 1 represents these changes.

Figure 1: Employment by Major Industries, 2014-15 – 2020-21 
Source: Pakistan’s Labor Force Survey

The impact of AI substitutability is poised to disproportionately affect occupations that predominantly employ low-skilled and blue-collar labor in Pakistan. These occupations, mainly held by individuals from the lower and middle-income classes, face higher vulnerability due to factors like lower financial status and limited educational opportunities. Workers in routine-based roles, such as clerical workers (1.4%), services and sales workers (16%), machine operators (6.9%), and elementary occupations (17.2%), collectively constitute approximately 42% of the labor force. This sizable portion is at risk of displacement due to a mismatch in skill sets and the subsequent lower demand for such roles. The unemployment rate in Pakistan surged to 9.6% in 2023, marking a rise from 4.70 million unemployed individuals in 2018-19 to 7.18 million in 2022-23. 

Furthermore, the adaption of AI has potential to significantly exacerbate gender inequality. In Pakistan, where the informal sector employs 72.5% of the labor force, women traditionally dominate roles such as cleaning, waste collection, and handicraft sales/work in manufacturing (64%) and community, social and personal services (28%). The imminent AI disruption of these sectors not only jeopardizes the stability of the informal economy, but also raises concerns about a growing gender divide in job displacements. The employment shares of males in this sector increased from 72.7% in 2018-19 to 73.4% in 2020-21, while that of females decreased from 70.5% to 65.5% in same time period. 

Women, who are a substantial part of the informal workforce, face heightened challenges in securing alternative employment opportunities, especially in rural areas, because of limited skill sets and educational preparation. A rise in unemployed women – without commensurate reskilling and other social protection programming - carries significant implication for women’s autonomy, including decisions affecting family/population management. 

Impacts on Wage Rate Amid Workforce Displacement

The displacement of a substantial percentage of the labor force due to integration of AI in the job market can have far-reaching implications for Pakistan's economic landscape. This phenomenon is likely to hinder the country’s overall growth trajectory, contributing to a high degree of job and wage polarization.
Highly skilled workers with expertise in areas complementing AI may see an increase in demand, improved job security and, consequently, increased wages and living standards. To the contrary, low-skilled workers facing job displacement may experience a decline in wage levels. Given the current economic challenges, such as the financial costs of climate disasters, structural changes in the economy due to AI interventions can be even more substantial than currently observed. 

Notably, between 2018-19 and 2020-21, real wages for service and sales workers, craft workers, and plant and machine operators experienced a decline from 5% to 8%. On the other hand, highly skilled technicians and professionals enjoyed a substantial increase in real incomes of almost 19% during this period. Evidently, there has been a substantial devaluation of wages by up to 70%, coupled with a significant decline in labor demand of unskilled workers. Consequently, these trends contribute to an increased income inequality, particularly accentuating the disparities between the owners of capital and workers, thereby worsening existing socioeconomic inequalities.

AI can also contribute to increased gender wage disparity through various mechanisms. First, if the development and deployment of AI technologies are biased or lack diversity, it may reinforce existing gender stereotypes and discrimination. This can lead to the creation of AI systems that unintentionally favor or prioritize certain groups over others. Second, the automation of routine tasks, often associated with jobs predominantly held by women, may result in wage stagnation for female workers. Additionally, the skills required to engage with and benefit from AI technologies may disproportionately favor traditionally male-dominated fields, exacerbating the gender gap.

The gender wage disparity in the nation is estimated to be 34%, surpassing the worldwide average of 23%. Figure 2 illustrates a clear disparity in the monthly earnings distribution between male and female workers in 2020-21, emphasizing a substantial income gap, where men predominantly occupy higher-paying positions compared to women. Of those earning less than PKR 15000 per month, 61.0% are females, while 32.6% are male. Compare this with the higher wage category, where the majority earns PKR 15,000 or more, 67.4% are male, and only 39.9% are female. 

Figure 2: Gender Wage Disparity, 2020-21 
Source: Pakistan’s Labor Force Survey

Future Job Opportunities and Essential Skills

Addressing the challenges posed by AI requires a focus on education and reskilling initiatives. Encouraging skill development, for both male and female workers, especially in areas where AI complements human abilities, can mitigate job displacement and support sustainable economic growth. But most of this will require a paradigmatic shift in socio-economic and cultural assumptions about skills education and its prospective value, whether in domestic or export-led international trade for Pakistan. 

As we step into a future shaped by AI, the demand for roles that collaborate effectively with AI technologies is on the rise. Professions in data science, artificial intelligence programming, and ethical AI governance present promising job avenues. Essential skills such as adaptability, critical thinking, and digital literacy will be indispensable for individuals seeking success in this rapidly evolving technological landscape.

Rimsha Arif, Teaching Fellow, Department of Economics, LUMS  
Ayleen Naushahi, Undergraduate Junior, Department of Economics, LUMS