Abstract

This study investigates the relationship between Inflation, Employment and Economic Growth in

Nigeria from 1970 to 2012 because of the problem of rising unemployment in a period of falling

inflation and above 6% growth. The main objectives were to estimate relationships between

Inflation, employment and economic growth and to infer the policy implications of the

relationships. The study used secondary data and employed GMM technique to estimate the

relationships. The study finds that: unemployment is positively correlated with growth contrary

to Okun‟s Law of a negative relationship; inflation is negatively correlated with unemployment

as stipulated by the Phillips curve; inflation is negatively related to growth and significant and

the Phillips relationship is unstable over time. The study concludes that lower inflation is

associated with increased growth and growth is non employment generating. It further concludes

the existence of a Phillips relationship which is not stable over time. From these findings, the

study recommends the need for policy makers to face the challenge of making growth

employment generating.

xvi

CHAPTER ONE

1.0 GENERAL INTRODUCTION

1.1 Background of the Study

The key objectives of macroeconomic policies are the attainment of full employment,

maintenance of relative stability in domestic prices, achievement of sustainable level of

economic growth, maintenance of balance of payments equilibrium and exchange rate stability.

These objectives can change from time to time depending on the economic fortunes and

problems of a particular country. Obviously the subject matter of macroeconomics is of crucial

importance because in one way or another macroeconomic events have an important influence

on the lives and welfare of everybody. To Brain (2006), in the long run, real economic growth is

the means by which the nation achieves higher living standards. It is difficult to overstate just

how important satisfactory macroeconomic performance is for the well-being of the citizens of

any country. An economy that has successful macroeconomic management should experience

low unemployment and inflation, and steady and sustained economic growth or if not vice versa.

To Jerry (2011), faster economic growth might be considered desirable, as would lower

unemployment and inflation rates. However, there may be limits to how compatible those goals

are. The success of macroeconomic policy cannot be measured by just one of these variables in

isolation, because they are interdependent. Understanding that there may be limits that influence

the behaviour of these variables is critical.

Inflation is one of the macroeconomic problems the Nigerian economy is facing. The average

inflation rate from 1990 to 1998 is 33.3% and from 1999 to 2006 is 13.3%. From 2007 to 2012,

the average rate is 11.01%. Inflation rate has been fluctuating over the years. From CIA World

1

Facts 2011, Nigeria‟s inflation rate is the 7th in the world where Venezuela is ranked first

(30%for 2010). It is undoubtedly that these problems are a major cause of the general weakness

of the Balance of Payments and the foreign reserves, and if continued it would almost certainly

make the present rate of exchange untenable (Vikesh and Subrina, 2004).

Economic growth is much dependent on a number of factors especially for an economy like

Nigeria which had witnessed various levels of decline in growth of some sectors (NBS, 2011).

The economy is broken down into two broad groups namely: oil and non-oil sectors. In terms of

contribution to real Gross Domestic Product, the Oil sector contributed 14.84 percent to real

GDP in 2011, down from 15.70 percent it contributed in 2010 (NBS, 2011). According to NBS

(2011), Real Gross Domestic Product (GDP) on an aggregate basis is 7.36 percent in 2011 as

against 7.98 percent in the previous year. The economy grew at an average of 6.5 percent

between 2000 and 2012.

Unemployment is also one of the most critical problems Nigeria is facing. Nigeria is endowed

with diverse resources, both human and material. However, years of negligence and adverse

intervention policies have led to the under utilization of human resources. These resources have

not been effectively utilized in order to yield maximum economic benefits. Within the past five-

year period there has been an average of about 1.8 million new entrants into the active labour

market per year (NBS, 2011). The rate of unemployment in Nigeria stands at 23.9% for 2011

(NBS, 2011). To Sodipe and Ogunrinola (2011), economic growth is not the only solution to

curb unemployment in Nigeria, as official statistics illustrate that previously unemployment did

not always decline with e