Full Project - EFFECT OF INFLATION AND ECONOMIC GROWTH ON UNEMPLOYMENT IN

Full Project – EFFECT OF INFLATION AND ECONOMIC GROWTH ON UNEMPLOYMENT IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND TO THE STUDY

Unemployment and inflation are issues that are central to both the social and economic life of every country. The existing literature refers to unemployment and inflation as constituting a vicious circle that explains the endemic nature of poverty in developing countries. And it has been argued that continuous improvement in productivity- which brings about the adequate supply of goods and services – is the surest way to breaking the vicious circle.

The effect of inflation and economic growth on unemployment in Nigeria had been unstable for the period under review. The highest growth rate of GDP was recorded in 1990 follow by 2003 with the growth rate of 11.6% and 10.2% respectively; while the least rate was recorded in 1987 with the growth rate of -0.69%, which shows negative growth rate of GDP in Nigeria. The growth rate of the GDP was positive from 1986, negative in 1987, positive again from 1988 to 2016 (CBN, 2016).

Gross domestic product growth rate is used as proxy for economic growth in this study and it is generally perceived that when economic growth takes place in the country, it increases the pace of economic activity in the country, due to the employment increases. The increase in employment opportunities will enhance the purchasing power of the people in the country and as a result, consumption increases which leads to raise aggregate demand and hence inflation in the country (Thayaparan, 2014).

Prior to the emergence of what became to be known as the unemployment and inflation trade-off or Phillips curve in 1958, unemployment and inflation were considered and treated in economics as distinct subjects. Keynes for instance described inflation as the excess of expenditure over income at full-employment level. He contended that the greater the aggregate expenditure, the larger the inflationary gap and the more rapid the inflation. As for unemployment, the Keynesian economists hold that an increase in unemployment reduces income, which reduces consumption, and reduces aggregate output. As a result, employment can be increased by increasing consumption or investment.

According to Emeka (2013) Nigeria’s economy is churning along after the problems of liquidity and banking sector meltdown that nearly crushed the financial market. The economy is progressively in recovery and it looks like the confidence of Nigerian consumer is gradually rebounding. But we cannot say for sure the exact figure because quantification of confidence has not been documented nor recorded. According to him, without doubt the monetary policy coming from the Central Bank of Nigeria (CBN) has a positive outlook on the economy which has been growing at the rate 7.3% and attracting investments mostly in petroleum sector. The revised estimate for real Gross Domestic Product (GDP) by the National Bureau of Statistics (NBS) indicates that the economy grew by 7.23% first quarter of 2010 as against 6.7% it had earlier projected for the quarter; at the end of 2010 the economy was growing at the rate of 7.6%. This is impressive compared to the world economy that has been expected to be growing at the rate 3.9% in 2010 as result of the global recession.

Nigerian economy dip from 7.44% recorded in the fourth quarter of 2009 however, it is an increase from 4.50% in the corresponding quarter of last year. NBS attributes the 2.73% increase in real GDP to expansion in oil production following relative peace in the Niger Delta region, although the non-oil sector remained key driver of growth. The Bureau in the latest report on GDP estimates that the economy on nominal basis expanded to N6,399,716.09 first quarter of 2010 up from N5,004,850.00 recorded during the corresponding quarter 2009, indicating an increase of N994,866.09. Nigerian government can greatly strengthen the impressive growth by provision of social infrastructures particularly social security and steady electric power.

1.1. STATEMENT OF THE PROBLEM

The problem of inflation in Nigeria was brought about by the oil glut in 1981, which resulted into balance of payment deficits leading to foreign exchange crisis that necessitated various measures of import restrictions. These restrictions reduced raw materials for domestic production and spare parts for machinery operation. The resultant shortage of goods and services for local consumption spurred the inflation rate to rise from 20% in 1981 to 39.1% in 1984 (Itua, 2000). The inflation rate rose to a whopping 72.9% by 1995, this was however managed as the inflation rate fell and stood at 8% by 2014 but rose again to 9.6 by the end of 2015 (NBS, 2015).

With the adoption of the Structural Adjustment Programme (SAP) in 1986, there was a temporal reduction in fiscal deficits as government removed subsidies and reduced her involvement in the economy. But as the effects of the Structural Adjustment Programme (SAP) policies gathered momentum, there was a fall in the growth rate of Gross Domestic Product (GDP) in 1990 from 8.3% to 1.2% in 1994, with inflation rising from 7.5% in 1990 to 57.0% in 1994 (Itua, 2000). In 1995, inflation rate rose to 72.9% due to increased lending rate, the policy of guided deregulation, and the lagged impact of fiscal indiscipline.

The increase in unemployment in Nigeria, on the other hand, has resulted to decrease in consumption, due to low income earned by the citizens, thereby resulting to low production- the inability of firms to sell their goods, forces them to reduce their output. This has led to decrease in the economic growth of the nation.

Unemployment also has social consequences as it increases the rate of crime. Also, being without a job in Nigeria, is as good as losing your self-respect and self-esteem among the people of your age bracket. The proportion of workers who are unemployed shows how well a nation’s human resources are used and serves as an index of economic movement (positive or negative).

1.2. OBJECTIVES OF THE STUDY

The general objective of the study is to examine the impact of inflation and economic growth on unemployment rate in Nigeria. Specifically, this study seeks;

To ascertain the impact of inflation rate and economic growth rate on unemployment in Nigeria.
To check for the existence of causal relationship between economic growth and unemployment as well as inflation rate and unemployment in Nigeria.
To analyze the unemployment situation in Nigeria and make policy recommendations to help reposition the economy.

1.3. RESEARCH QUESTIONS

The study seeks to answer the following questions:

Does inflation and economic growth have any significant impact on unemployment in Nigeria?
Do they exist causal relationship between economic growth and unemployment as well as inflation and unemployment in Nigeria?
What needs to be done to improve the unemployment situation in Nigeria?

1.4. RESEARCH HYPOTHESIS

The research seeks at testing the following hypothesis:

Null hypothesis (H0): Economic growth has no significant impact on unemployment in Nigeria.
Null hypothesis (H0): Inflation has no significant impact on unemployment in Nigeria.
Null hypothesis (H0): There exists no causal relationship between economic growth, inflation and unemployment in Nigeria.

1.5. SIGNIFICANCE OF STUDY

This study seeks to expose the relationship (if any) between effect of inflation and economic growth on unemployment in Nigeria. It will seek answers to questions such as: why has unemployment and

inflation continued to rise despite the substantial increase in the nation’s GDP? Is it that successive governments neglected the issue of unemployment and inflation or has the twin

problems defied all economic theories? As a result of this, the study will prove to be a valuable addition to the wealth of knowledge on the subject matter.

This study will also update the already existing knowledge in the subject field, bringing fellow researchers and policy makers up to speed on the current unemployment situation in Nigeria.

Also, this study will be of paramount importance to economic decision-makers, as it will equip them with the knowledge and skills needed to tackle the pressing issue of unemployment and inflation in our country. Also, to those who would like to carry out further research on this topic, it would be of valuable help in the course of their research.

1.6. SCOPE OF THE STUDY

The research work intends to study unemployment and inflation situation within the Nigerian economy. The study will cover the time period 1981-2016 (a period of 36 years); this is to ensure updated information and to follow the trend. The range was chosen based on data availability and to have adequate observation for a meaningful analysis.

1.7. LIMITATIONS OF THE STUDY

When carrying out research in social sciences, the data that one generally encounters are non-experimental in nature, that is, not subject to the control of the researcher. Therefore, this lack of control may create special problems for the researcher in pinning down the exact relationship that exists between unemployment and inflation in Nigeria.

There was also the problem of dearth of relevant information in carrying out the study. This did not however hinder the researcher from doing justice to the study.

1.8. OPERATIONAL DEFINITION OF TERMS

Unemployment: Unemployment can be defined as the difference between the amount of labour at current wage rate and working conditions and the amount of labour not hired at these levels (Briggs, 1973). However, Gbosi (1997) defined unemployment as a situation in which people who are willing to work at the prevailing wage rate are unable to find jobs. Unemployment according to World Bank, is a number of an economically active population who are without work but available for and seeking for work, including people who have lost their jobs and those who have voluntarily left work (World Bank, 1998).

Inflation: Inflation can simply be defined as too much money chasing too few goods, or can be alternatively defined as the persistent increase in the general price level of a nation. Inflation is commonly measured using the Consumer Price Index (CPI). The consumer price index measures the changes in the price level of consumer goods.

Economic Growth: Economic growth is defined as the general increase in the real value of goods and service that are produced in an economy over a given period. It is the capacity of a country to produce goods and services, compared from one-time period to another. It can be measured using Real GDP, GNI or Real GDP per Capital.

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Full Project – EFFECT OF INFLATION AND ECONOMIC GROWTH ON UNEMPLOYMENT IN NIGERIA

Full Project – EFFECT OF INFLATION AND ECONOMIC GROWTH ON UNEMPLOYMENT IN NIGERIA

Full Project – EFFECT OF INFLATION AND ECONOMIC GROWTH ON UNEMPLOYMENT IN NIGERIA

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