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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 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 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
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.
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.
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).
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 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?
1.3 OBJECTIVE OF THE STUDY:
The primary objective of this study is to examine if there is any
trade-off 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.
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 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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