EFFECTS OF UNEMPLOYMENT AND INFLATION ON ECONOMIC GROWTH IN NIGERIA

EFFECTS OF UNEMPLOYMENT AND INFLATION ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1     Background to the study

The Nigerian economy has remained largely underdeveloped despite the huge human and natural resources. The country is richly endowed with various mineral types all over the country. Huge amount is generated annually from petroleum products. More than 40 types of solid minerals have been identified in over 500 locations in the country Musa(2010). Yet the per capita income is low, unemployment and inflation rates are high. There are many socio-economic challenges. The economy has continued to witness economic recovery which is immediately followed by economic recession and depression.

The situation in Nigeria is disturbing. The various macroeconomic policies by government have been unable to achieve sustained price stability, reduction in unemployment and sustained growth cannot be achieved. The poor state of the economy has confirmed the need to manage the economy effectively. The essence of macroeconomic management underlines the rationale for the existence of government as a vital economic agent. However, it appears that government intervention has not been able to cure the ills in the Nigerian economy.

The continued economic crisis, with the associated problems of high inflationary pressure, high exchange rate, and debt overhang, adverse balance of payment and high inflation rates is difficult to explain. Against a high rate of unemployment and underemployment, a large public sector, low wages and poor working conditions has been persistent high inflation rates in Nigeria. Also, underemployment and unemployment is a prominent feature of the Nigerian economy. Consequently, the full potentials of labour-surplus economy have not been fully exploited.

In the 1960s and early 1970s, the Nigerian economy provided jobs for most Nigerian and absorbed considerable imported labour while inflation rates were low. The wage rate compared favourably with international standards and there was relative industrial peace in most of the years. Following the oil boom of the late 1970s, there was mass migration of people, especially the youth, to the urban areas seeking for jobs. Following the downturn in the economy in the early 1980s, the problems of unemployment and inflation increased, precipitating the introduction of the Structural Adjustment Programme (SAP). The rapid depreciation of the naira exchange rate since 1986 and the inability of most industries to obtain adequate raw materials required to sustain their output levels fuelled inflation. There was rapid depreciation of the naira which caused sharp rise in the general price level, leading to a significant decline in real wages and increased poverty. The low wages contributed to a weakening of the purchasing power of wage earners and declining aggregate demand. Consequently, industries started to accumulate unintended inventories.

1.2     Statement of the problem

Economic growth in Nigeria has been poor since 1986 when SAP (Structural Adjustment Programme) was introduced. Economic growth in Nigeria was not encouraging between 1986 and 2012. The continuous economic crisis reflected in high inflationary pressure, high level of corruption, exchange rates distortions, debt overhang, high rates of unemployment to mention a few. Unemployment and inflation are two twin evils that have eaten deep into the fabric of the Nigerian economy over the years.

The trends in economic growth rates, unemployment rates and inflation rates in Nigeria from 1986-2012 have been puzzling. The data obtained from the Central Bank of Nigeria (CBN), 2013 Statistical bulletin revealed that by 1986 economic growth rate stood at 3.1 percent, in 1987 the value became negative -0.69 implying retrogression and was the least ever achieved for the period under review; the highest economic growth rates achieved was 11.36 in 1990 after which the rates has been abysmally until in 2003 when the growth rates hits 10.2 percent; from 2003 economic growth rate has been less than 10 percent, in 2012 the growth rate recorded was 6.58. The trend in economic growth has been fluctuating over the years under review.

The trends in unemployment and inflation rates in Nigeria from 1986-2012 was also puzzling. The trend revealed that by 1986 unemployment rate was 5.3 percent while inflation rate was 5.4 percent. Both unemployment rates and inflation rates were not stable but fluctuating over time. The lowest rates of unemployment and inflation recorded were 1.8 percent and 0.2 percent in 1995 and 1990 respectively. Unemployment reaches 24.7 percent by 2012 while inflation reaches the highest in 1999.

The main goals of macroeconomic policies were the achievement of high, rapid and sustained economic growth, stable low unemployment and relative price stability but the trends above shows the contrary. Among the main and major problems of policy makers were how to achieved and maintain low and stable unemployment rate as well as relatively low prices so as to achieve high economic growth.

Studies by (Garba, 2010, and Olowononi and Audu (2012), have examined the nature and causes of unemployment in Nigeria and found disturbing trends. There are very few studies which have been undertaken regarding the effect of unemployment and inflation on economic growth in Nigeria. Some of the existing studies used basically descriptive statistics (see Olowononi and Audu (2012). Aminu and Anono, (2012), Bakare, (2012) and Rafindadi, (2012) conducted similar studies and their findings were controversial especially in the area of impact of the two twin‟s evils (unemployment and inflation) on the growth of the Nigerian economy. Bakare found negative relationship between unemployment, inflation and growth, Rafindadi (2012) found negative non-linear relationship between unemployment and output growth while Aminu and Anono found positive relationship between inflation and economic growth in Nigeria. Another study was also conducted in the same vein in China by Chang-Shuai Li and ZI-Juan Liu (2012) on unemployment rate, economic growth and inflation.

The results revealed that unemployment impacted negatively on growth while inflation impacted positively on growth in China. The puzzling trends of economic growth rate, unemployment rate, and inflation rates in Nigeria and the controversial results obtained in the empirical results provide the need to examine the relationship between unemployment, inflation and economic growth in Nigeria.

1.3 Research questions

Arising from the research problems are the following questions:

1. What is the relationship between economic growth, unemployment and inflation?
2. What is the causes, effects and trends of inflation in Nigeria?
3. What are the trends, structure and causes of unemployment in Nigeria?

1.4     Objectives of the study

The main objective of the study isto examine the impact of unemployment and inflation on economic growth in Nigeria.

The specific objectives of this study include the following:-

• To estimate the relationship between economic growth, unemployment and inflation.
• To analyse the causes, effects and trends of inflation in Nigeria.
• To assess the trends, structure and causes of unemployment in Nigeria.

1.5     The Hypothesis to be tested is as follows:

Null hypothesis (Ho)

Ho: Unemployment and inflation have no effect on economic growth in Nigeria.

Alternative hypothesis (H1)

H1: Unemployment and inflation have effect on economic growth in Nigeria. 5

1.6     Significance/justification of the study

The adverse effects of unemployment and inflation on economic growth has attracted the attention of government and researchers the world over. Among the main and major problems of policy makers are how to maintain low and stable unemployment as well as relatively stable prices so as to achieve high economic growth. Several studies were conducted on the impact of unemployment and inflation on economic growth in Nigeria.

The significance of this study lies on the fact that huge amount of resources (human and capital) are unemployed which could cause poor economic performance. This thesis will help policy makers to establish the extent of the effect of unemployment and inflation rates on economic growth. This thesis will improve the body of existing literature and also serve as a policy document. The problems of high level unemployment and inflation need to be addressed in order to improve economic growth.

1.7     Scope and limitation of the study

The thesis covers 1986 to 2012. This period is chosen because structural adjustment programme (SAP) began in 1986. In the course of the study, the major factors that were responsible for high unemployment and inflation were investigated. The major limitations to this study were the unreliable data on unemployment and inflation rates. Therefore, the interpretation of results obtained from any computations that uses the data must be done with caution. Sometimes there are conflicting data on the same variable from different sources.

1.8     Organization of the studies

This thesis is organized into five chapters. Chapter one which is the introduction started by providing a background of the subject matter, the problems and objectives follow. These are  followed by hypotheses, rationale and scope of the study as well as the organization of the chapters. Chapter two presents related literature concerning conceptual literature, theoretical, and empirical literature. Chapter three contained the research methodology, which consist of the sources of data, model specification and methods of data analysis, while the results and discussion are presented in chapter four. Chapter five contains the summary, conclusions and recommendations of the study. They are followed by references.