The Mediating Role of Regulatory Quality in the Political Stability-Unemployment Nexus: Evidence from Pakistan

Abstract

This study examines the mediating role of regulatory quality in the relationship between political stability and unemployment in Pakistan from 1996 to 2024. Grounded in institutional economics, we argue that effective regulatory governance is a crucial transmission channel through which political stability influences labour market outcomes. Using time‑series data and OLS regression with formal mediation analysis, the results show that both political stability and regulatory quality have significant negative effects on the unemployment rate. More importantly, regulatory quality acts as a substantial partial mediator, accounting for approximately 38.9% of the total effect of political stability on unemployment. This finding reveals that nearly two‑fifths of the employment benefits of political stability are realised through improved regulatory frameworks. The results remain robust across diagnostic tests, alternative specifications, functional forms, and estimation methods. The study concludes that in Pakistan, periods of political stability have not consistently reduced unemployment due to weaknesses in regulatory governance. Therefore, policymakers should adopt an integrated approach that consolidates political stability and implements comprehensive regulatory reforms, enhancing predictability, transparency, and private‑sector friendliness to amplify employment dividends through institutional strengthening.