CHAPTER I
INTRODUCTION
1.1 BACKGROUND OF THE STUDY:
Undoubtedly, parts of the macroeconomic goals which the
government strives to achieve are the maintenance of stable domestic
price level and full-employment. Macroeconomic performance is judged
by three broad measures- unemployment rate, inflation rate, and the
growth rate of output (Ugwuanyi, 2004).
Unemployment has been categorized as one of the 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 well-being
(Raheem, 1993).
Inflation on the other hand, has been a major problem in the
country over the years. Inflation is a household word in many market
oriented economies. Although several people, producers, consumers,
professionals, non-professionals, trade unionists, workers and the likes,
talk frequently about inflation particularly if the situation has assumed
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a chronic character, yet only selected few know or even bother to know
about the mechanics and consequences of inflation.
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.
The monetarist on the other hand, explained inflation in terms of
excessive growth of the money supply relative to real output. Their view
on unemployment, however, is framed within the context of Milton
Friedman‟s permanent income hypothesis. Based on the Permanent
Income Hypothesis (PIH), a reduction in employment and current
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receipts only affects output to the extent 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‟s curve by
A.W. Phillips, that 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 with a 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. This led to the
introduction of the Natural Rate Hypothesis.
Also, empirical analysis carried out by other economists over the
years, have in one way or the other disproved the authenticity of the
trade-off thesis as postulated by Phillips. Both high inflation rates and
high unemployment rates were discovered to co-exist, giving rise to
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what has come to be known as stagflation. These twin problems are
currently crucial elements of most Less Developed Countries‟ economic
crisis.
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 Nigerian experience of the crisis of unemployment and inflation
was delayed until the early – and mid- 1980s with the collapse of oil
prices on which the economy had become dangerously dependent on.
Before the 1980s, previous records showed that the Nigerian economy
was able to provide jobs for its increasing population, and was able to
absorb considerable imported labour in the scientific sectors. The wage
rate compared favourably with international standards, the inflation
rate was moderate, and there was relative industrial peace in most
industry sub-groups.
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The oil boom in the 1970s led to the mass migration of youths into
the urban area, 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 the inability of most industries to import
the raw materials required to sustain their output levels.
A major consequence of the rapid depreciation of the naira was the
sharp rise in the general price level (inflation), leading to a significant
decline in the real wages. The low wages in turn fuelled a weakening
purchasing power of wage earners and a decline in the aggregate
demand. Consequently, industries started to accumulate unintended
inventories and, as a rational economic agent, the manufacturing firms
started to rationalize their market prices. With the simultaneous rapid
expansion in the educational sector, new entrants into the labour
market increased beyond absorptive capacity of the economy. Thus, the
avowed government‟s objective of achieving “full employment” failed.
The research work is therefore intended to access the applicability of
the trade-off thesis in Nigeria.
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1.2 STATEMENT OF THE PROBLEM:
Anthony De Mello, 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 the Nigerian economy. Nigeria is
richly blessed with abundant human and natural resources, but still
finds itself battling with high unemployment and inflation rates, due to
years of neglect of the social infrastructures and general
mismanagement of the economy. Previous governments in their own
capacities have been embarking on various policies 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. 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).
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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% (1990) to 57.0% (1994). In 1995, inflation rate
rose to 72.8% 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
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human resources are used and serves as an index of economic
movement (positive or 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. In 2008, the rate of unemployment
was almost 14.9% and rose drastically to about 23.9% in 2011. The
unemployment rate has been rising from 1980 to 2011. A recent forecast
shows that the rate would continue to increase up to the year 2020.
In the light of the foregoing analysis, the research work will be
guided by the following question:
1. Is there any trade-off relationship between unemployment and
inflation in Nigeria?
2. Does government expenditure have any significant impact on
unemployment?
3. Do increases in the gross domestic help reduce unemployment?
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1.3 OBJECTIVE OF THE STUDY:
The primary objective of this study is to examine if there is any tradeoff relationship between unemployment and inflation in Nigeria. Other
objectives include;
a. To ascertain the impact of government expenditure on
unemployment.
b. To examine the impact of gross domestic product on
unemployment.
1.4 THE RESEARCH HYPOTHESIS:
The study will be guided by the following hypothesis;
1. Null hypothesis (Ho): There is no trade-off relationship between
unemployment and inflation in Nigeria.
2. Null hypothesis (H0): Government expenditure has no impact on
unemployment in Nigeria.
3. Null hypothesis (H0): Gross domestic product has no significant
impact on unemployment in Nigeria.
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1.5 SIGNIFICANCE OF THE STUDY:
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? These are questions
that need immediate answers, because unemployment and inflation are
current issues that is affecting our country and which is being discussed
by both experts and lay-men alike.
Therefore, 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 1986-2011 (a period of 25 years); this is to ensure updated
information and to follow the trend. The range was chosen based on
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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.
In the course of the study, the researcher tried to access the CBN
statistical bulletin of 2010, but was unable to get data for the figures of
unemployment and inflation in 2011. He therefore resorted to accessing
the internet for the missing figure for 2011. The researcher also
encountered the challenge of inadequate and incomplete information
from the internet and the school library. The researcher was also faced
with the problem of unavailability of funds to carry out the research
work.
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