Impact of inflation and unemployment on Nigeria economy
1.1 Background to the Study
Undoubtedly, parts of macro-economic goals which the government strives to achieve are the maintenance of stable domestic price level Macro and full employment. Economic performance is judged by three broad measure; unemployment rate inflation rate and growth rate of output (Ugwuanyi 2004). Unemployment and inflation are issues that are central to the social and economic life of every country. Unemployment has been categorized as one of serious impediments to social progress. Apart from representing an enormous waste of a country’s manpower resources, it generates welfare loss in terms of lower output thereby leading to lower income and wellbeing (Raheem 1993).
Inflation on the other hand, is a malady as well as pervasive economic phenomenon whose effects are felt to differing degree by every citizen. Inflation is a household word in many market on oriented economies, Although several people, trade unionists, producers ,consumers, professionals and non-professionals ,workers and the like talk frequently about inflation particularly if situation has assumed a chronic character. Yet only selected few know or even bother to know about the mechanics and consequences of inflation.
Prior to emergence of what become to be known as unemployment and inflation trade-off or Phillips curve in 1958, unemployment and inflation were considered and treated in economics as distinct subject. Keynes for instance described inflation as excess of expenditure over income at full employment level, we contended that the greater expenditure, the larger the inflationary gap and the more rapid the inflation. As for unemployment Keynesian economics hold that an increase in employment reduces income, which reduces consumption or investment.
Classical economists view inflation as alternation in money supply. They believed that when money supply goes up, the price level of various commodities goes up as well. They view employment as natural rate of unemployment which is also called equilibrium level of unemployment in a particular economy.
The monetarist on the other hand, explained inflation in terms of excessive growth of money supply relative to real output. Their view on unemployment however is framed with Milton Friedman’s permanent income hypothesis (PIH), a reduction in employment and curve receipts only affects output to extend that the anticipated income declines. Each school of thought offered its own policy solutions. There were however, no major attempts made to examine inflation and unemployment simultaneously. It was not until 1958, following the introduction of Phillip curve by A.W. Phillips, the traditional economics began to examine unemployment and inflation. Simultaneously, thereby postulating a trade off between inflation and unemployment; a lower inflation rate must be willing to put up higher level of unemployment and vice-versa. However, economists such as Milton Friedman and Edmund Phelps disapproved Phillips curve thesis stating that the trade off between unemployment and inflation only existed in the short run and that in the long run, the Phillips curve is vertical and this led to introduction of natural rate hypothesis.
Also, empirical analysis carried out by other economists over the years; have in one way or the other disapproved authenticity of the trade off thesis postulated by Phillips. Both inflation rate and high employment were discovered to co-exist, given rise to what is known as stag-inflation. These twin problems are currently crucial element of most less developing countries economic crisis. The existing literature refers to unemployment and inflation as constituting vicious circle that explains endemic nature of poverty in developing countries. And it has been argued that continuous improvement in productivity, which brings about adequate supply of goods and services as the surest way to breaking vicious circle.
The Nigeria experience crisis of unemployment and inflation was delayed until the early and mid 1980s with collapse of oil price on which the economy has become dangerously dependant on. Before 1980s, previous records showed that the Nigeria economy were able to provide jobs for its increasing population and was able to absorb considerable imported labour in the scientific set-up. The wage rate compared favourable with international standards, the inflation rate was moderated and there was relatively industrial peace in most industrial sub-group. The oil boom in the 1970s had to the mass migration of youths into urban areas seeking to get work. However, following the recession experienced in the 1980s, the available data revealed that, the problem of unemployment started to manifest, precipitating the introduction of the Structural Adjustment Programme (SAP), the rapid depreciation of the naira exchange rate and inability of most industries to import the raw materials required to sustain their output levels.
A major consequences of rapid depreciation of Naira was the sharp rise in general price level (inflation), leading to a significant decline in aggregate demand. Consequently, industries start to accumulate unintended inventories and as a rational economic agent, the manufacturing firms started to rationalize their market price. With the simultaneous rapid expansion in the educational sector, new entrants into the labour market increased beyond absorptive capacity of the economy. Thus; the vowed government’s objective of achieving full employment failed.
1.2 Statement of the Problem
Antony Demelb, in his famous book titled `Awareness’ stated that life is a banquet and the tragedy is that most people are starving to death. This situation is prevalent in Nigeria economy. Nigeria is richly blessed with abundant human and natural resources but still find herself battling with unemployment and inflation rates, due to years of neglect of social infrastructure and general mismanagement of economy. Previous government in their own capacities have tried to control inflation and reduce the level of unemployment in the country. However government efforts have not yielded the desired results as these problems are known to be skyrocketing rather than plummeting.
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. 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).With the adoption of the structural adjustment programme (SAP) in 1986, there was a temporal reduction in fiscal deficit as government removed subsides and reduce her investment in the economy but as structural adjustment programme (SAP) policies gathered momentum, there was a fall in growth rate of gross domestic product (GDP) in 1990 from 8.3%to 1.2% in 1994 with inflation rising from 7.5%(1990) to 57%(1994).In 1995, inflation rate rose to 72.8% due to increased lending rate, the policy of guided deregulation and lagged impact of fiscal indiscipline.
The increase in unemployment in Nigeria on other hand has resulted to decrease in consumption due to low income earned by citizens, thereby resulting to low production. The inability of firm to sell their goods, forces them to reduce their output, this has led to decrease in the economic growth of nations. Unemployment also has social consequences as it increases the rate of crime. Also, being without a job in Nigeria entails loosing self respect and self esteem. The proportion of workers who are unemployment shows how well a nation’s human resources are utilized and serves as an index of economic movement (positive and negative). In 1999, the unemployment rate was 17.5 % while at the end of President Olusegun Obasanjo’s administration in 2007. The rate of unemployment had reduced marginally to 12.7%from 1999 to 2007, the rate of unemployment averaged at 13.1% still quite high, since 5% is perceived as the accepted rate.
1.3 Research Questions
In the light of the foregoing analysis, the research work will be guided by the following questions.
- Is there long run relationship between unemployment, inflation and economic growth in Nigeria?
- Is there any trade-off relationship between inflation and unemployment in Nigeria economy?
- To what extent does inflation and unemployment impact on economic growth of Nigeria?
1.4 Objective of the Study
The general objective of the study is to empirically examine the impact of inflation and unemployment on Nigeria economy. Other specific objectives include:
- To estimate the long run relationship between unemployment, inflation and economic growth.
- To ascertain whether Phillips curve hold in Nigeria.
- To examine the impact on gross domestic product (GDP) of unemployment and inflation.
1.5 Research Hypotheses
The study will be guided by the following hypothesis:
- There is no long run relationship between unemployment, inflation and economic growth in Nigeria.
- There is no trade-off relationship between inflation and unemployment in Nigeria.
- Inflation and unemployment do not have significant impact on economic growth of Nigeria.
1.6 Significance of the Study
Why has unemployment and inflation continued to rise despite the substantial increase in nation’s GDP? Is it that the successive government neglected the issue of unemployment and inflation or has twin problem defiled all economic theories? These are questions that need immediate answer, because unemployment and inflation are current issue that is affecting our country and which are discussed by both experts and laymen. Therefore, the study will be paramount important to the following:
MACROECONOMISTS: The result of the study would help macroeconomists in making decision as it will equip them with knowledge and skills needed to take the pressing issue of unemployment and inflation in our country.
FINANCIAL ANALYST AND CENTRAL BANKER OFFICIALS: It will help them in understanding the responsiveness of GDP to change in general price level and unemployment and thus come with relevant policies so as to keep price at reasonable rate that stimulate production and provide unemployment.
POLICY MAKERS: It is necessary for policy makers to clear doubt as many studies on the long run relationship between inflation, unemployment, and economic growth remain inconclusive, several empirical studies confirm the existence of either a positive or negative relationship between the economic variable.
FUTURE RESEARCHERS: Future research will find the work useful and of valuable help as a reference materials.
1.7 Scope of the Study
The research work intends to study unemployment and inflation effects within Nigeria economy .The study will cover the time period 1980- 2012. This is to ensure updated information and to follow the trend .The range was chosen on data availability and to have adequate observation for a meaningful analysis.
1.8 Limitations of the Study
In the effort to accomplish the task of producing this work, the researcher grappled with various shades of problems, which include:
DEART OF LITERATURE: The material constraint was as a result of researcher’s inability to get data from the figures of unemployment and inflation in 2012 from CBN statistical bulletin of 2011 and this led to collecting inadequate and incomplete information from school library and internet.
LACK OF FINANCE: The research work were limited by finance, this significantly affected the study of the research work. The inflationary trend of Nigeria economy could not help matter either.