Inflation and Unemployment Trade off in Nigeria Phillip Curve

Inflation and Unemployment Trade off in Nigeria an empirical analysis of Phillip Curve theory in Nigeria economy. Download the full project work with abstract and reference.

CHAPTER ONE

INTRODUCTION

  • Background to the Study

Inflation and unemployment remain burning issues in any economy. All policymakers would, to a large extent wish to have low rates of inflation and unemployment. It is often argued that a single-digit rate of inflation and an unemployment rate of about five per cent would ensure macro-economic stability in an economy all things being equal. Macroeconomic stability is essential for growth, planning and development, hence the desirability of examining the movement of other economic fundamentals if the goal of stability will be achieved.

Inflation, which connotes the general increase in the price level, is broadly an average measure because at any point in time, prices may be increasing, decreasing or constant; a persistent increase in prices hurts the economy, particularly the poor who have little or no savings to cushion rising prices. The average person in any household or family knows when the money in his possession can only purchase less quantity of goods and services than was previously possible. Generally, economic agents (households, private sector and government) would raise an alarm because their earnings have declined in real terms due to rising prices. It is even worse when uncertainty follows price increases. (Nwaobi, 2009)

In recent times however, the concern is no longer with single-digit rates of inflation (less than 10 per cent) but with the benchmark desirable for any economy. Recent research results show that the inflationary threshold for Nigeria is between 14 to 18 per cent, so why the frenzy over a single-digit rate of inflation? It is interesting to note that even very low rates of inflation (disinflation) can be harmful to an economy but the question is which rate is very low?

In Nigeria, the mandate of the Central Bank is to ensure price stability while the National Bureau of Statistics computes and publishes the rates of inflation for all items in the economy – food, manufacturing, transport, etc. Economists in Nigeria have shown through research, that inflation in the country is caused by several factors such as increased public spending, money supply, intermittent scarcity, announcement effect, removal of petroleum subsidy, etc. Looking at the Nigerian data, the rate of inflation which stood at 21.4 per cent in 1980 plummeted to 7.2 per cent a year after but by 1983, it had jumped to almost 41 per cent. During the Structural Adjustment Program era (1986 -1992), the rate of inflation averaged 31.5 per cent. From 1995 to 2007, it averaged 12.3 per cent (a period characterized by a democratic experiment and the bold effort at a better management of the economy). During the period 2008 to 2011, the rate of inflation stood at 12 per cent. The inflationary trend shows that it has been non-linear overtime.

Another disturbing but significant macroeconomic variable is the rate of unemployment. A high rate of unemployment connotes output loss to the economy. The rate of unemployment captures the percentage of those willing and able to work but cannot find employment; it captures the frequency duration and incidence of unemployment. In Nigeria, early statistics on unemployment should not be taken seriously because the data indicated that the economy was at full-employment output. However, from 1999 the rates of unemployment started making some sense, it was 13.5 per cent in 1999 and at the end of President Olusegun Obasanjo’s administration in 2007 the rate of unemployment had reduced marginally to 12.7 per cent, and from 1999 to 2007 the rate of unemployment was 13.1 per cent (still quite high) since five per cent is perceived as the accepted rate. In 2008 the rate of unemployment was almost 15 per cent but rose drastically to about 24 per cent 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.

Rising rates of unemployment and inflation paint a picture of unsatisfactory macroeconomic performance of the economy, a situation known as stagflation. Some economists have argued that it is not possible to have low rates of inflation and unemployment as policy outcomes, consequently policymakers ought to decide what rate of inflation should be sacrificed for an acceptable rate of unemployment. (Ekpo, 2012).

The question becomes: Is there a trade-off between inflation and unemployment? If such a trade-off exists, then it follows that policy options are necessary to determine the precise tradeoff between inflation and unemployment necessary for the Nigerian economy. It is thus crucial that our policymakers determine the appropriate (acceptable) rates of inflation and unemployment for the economy. Recent data suggest that inflation is trending downwards while unemployment is rising. There is no doubt that the Central Bank via its monetary policy mechanism, tries to ensure price stability, but it appears that the strategies and policies employed in the labour market are not achieving the desired outcomes. Interestingly, Nigerians may not be interested whether there is a trade-off between inflation and unemployment, but the availability of jobs and low inflation rates.

Since the early eighties, unemployment has assumed an alarming dimension and a crisis proportion with millions of able bodied persons who are to accept jobs at the prevailing wage rate but are unable to find placements. Thus unemployment has been regarded as one of the most challenging economic problems facing the Nigerian Policy maker. (Fatukasi, 2011). Against this background therefore, this study intends to do a critical study of the relationship that exist between inflation and unemployment in Nigeria.

1.2       Statement of Problem

So far, there has been a lingering thought over many Nigerians to know the aided causes of inflation and unemployment in Nigeria. For instance, to know the factor that was responsible for the high rate of inflation and unemployment in Nigeria, especially as the unemployment rate moved from 1.6 percent in 1978 to 10.2 percent in 1983. On the other hand, the inflationary rate moved from 13.3 percent in 1978 to 23.2 percent in 1983. Again, to determine the relationship between them (inflation and unemployment) at least from the period of 1981 to 2014, since Gbosi (1990) empirical evidence of 1977 to 1985 showed that there was a positive relationship between both of them (inflationary rate and unemployment rate). So it will be necessary and sufficient to be testing their relationship at a chosen interval, since the Nigeria economy, like other economy is associated with elements of dynamism (that is, subjected to socio-economic evolution or change). However, testing their relationship between the periods of 1981 to 2014 is necessary and sufficient.

In the Britain case of 1958, there was that observation from the A.W.H. Philips empirical evidence, which showed a trade-off between inflation rate and unemployment rate, thus inflationary control can be used to control or determine the level of unemployment condition-meaning that the Britain inflationary condition has an impact over their unemployment condition between the period of 1862 to 1957, the data he used was of 1942 to 1956.

Relating this Britain experience to Nigeria case as arose the problem of finding if the Nigeria inflationary condition has an impact over the unemployment condition within the period that is under review (1989 to 2014).

Generally, whatever comes out as a result will be useful in economic policy formulation. And it is all these problems discussed above that will form the epicenters of this study.

1.3 Research Questions

From the above discussions, the research questions are:

  1. Does Philips hypothesis hold in the Nigeria case?
  2. Is there any longrun relationship between Inflation and Unemployment?

1.4       Objectives of the Study

The objectives of the study include:

  1. To deduce if the Philips hypothesis holds in Nigeria..
  2. To verify if there is a longrun relationship between inflation and Unemployment
  • Research Hypotheses

In line with the above objectives, the study sought to test the following hypotheses.

H0: Philips hypothesis does not hold in Nigeria

H0: There is no longrun relationship between Inflation and unemployment

1.6       Significance of the Study

This study is potentially useful as an ex post evaluation that is relevant for policy purposes to macroeconomic policy makers in the economy. In addition, it shall contribute to the literature on economic growth, inflation and employment relationship. Furthermore, it shall contribute to the understanding of the employment, inflation and growth dynamic relationship which might also be instrumental to avoiding or at least alleviating cycles. Knowledge of relation would lead to modification of the objectives (to attaining a particular policy) to make them consistent since an economic relation is only the result of fairly regular patterns of human behaviour. This will further lead to some modification of institutions or behaviour which would alter relation so as to permit some more desirable combinations of consistent aims (Phillips, 1962). In his 1962 article, Phillips stressed the importance for policy makers of acquiring information about the nature of the quantitative relationship between employment growth, inflation and output growth in order to take appropriate policy measures. This study therefore shall serve as a guide for Nigerian macroeconomic policy makers when designing tools, targets, and measures for achieving macroeconomic objectives and goals. The aim is to avoid more damaging effect of inappropriate policy formation and direction. The result of the study shall also be of importance to the Federal Government and Central Bank of Nigeria in developing policies that will positively affect the nation and bring about development base on performances of macroeconomic aggregates.

1.7       Scope and Limitations of the Study

The research work intends to study unemployment and inflation situation within the Nigerian economy. The study will cover the time period 1981-2015 (a period of 34 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. 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.

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