EFFECTS OF UNEMPLOYMENT AND INFLATION ON ECONOMIC GROWTH IN NIGERIA, 1986-2012

Abstract

This thesis investigates the effects of unemployment and inflation on economic growth in Nigeria between 1986-2012 through the application of Ordinary Least Square (OLS) technique in estimating the effects of unemployment and inflation on growth, Augmented Dickey-Fuller test and Phillip‟s-Perron test statistics were employed to test the presence of unit root in the series, after which Johansen cointegration test was employed to test the existence of long-run relationship between economic growth and the independent variables. The results of unit root suggest that all the variables in the model were stationary. The Johansen cointegration result shows that there exist 2 cointegrating equations, implying the existence of long run relationship between economic growth, unemployment and inflation. The results also reveal that unemployment impacts negatively on economic growth while inflation rate impacts positively on economic growth. However,, only the coefficient of unemployment was found to be significant. The hypothesis test result using f-statistics reveals that unemployment and inflation jointly affect economic growth at 1 percent and 5 percent respectively, with values of 5.8900 in model II and 4.0637 in model III. This therefore, implies that a good performance of the Nigerian economy in terms of growth may be achieved with lows rate of unemployment and inflation in the country. Based on the coefficients of unemployment -4.6727 and inflation 0.0246 in model III, it follows that 1 percent reduction in unemployment would increase economic growth by 4.6727 percent, while 1 percent increase in inflation would increase economic growth by 0.0246 percent; hence a major policy implication is that concerted effort should be made to reduce unemployment and stabilize the prices of goods and services (inflation) so as to achieve high, rapid and sustained economic growth rate 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.