Impact of Inflation and Unemployment on Economic growth of Nigeria

Impact of Inflation and unemployment on Nigeria economic growth 1981-2017. Inflation and unemployment impact economic the economy through reduction in purchasing power, rising unemployment, rising poverty, lower aggregate demand, poor foreign and domestic investment, poor economic growth among others. All will be discussed in the research work.



1.1 Background of the Study

The word inflation and unemployment ring bell in the market economy of the world today. Unemployment and inflation are of great importance in any macroeconomic decision making. These variables are subject of social and economic life of every country. Thus, Unemployment and inflation are termed as continuous and unpleasant situation that describe the endemic nature of a country’s economy. Inflation is a monster that threatens although some author argues that it moderate is required for sustainable economic growth; however it is noted that inflation is inimical to economic growth. The problem of inflation and unemployment surely is not a new phenomenon because it has remained a major problem in the country over the past few years. The effect of inflation (price instability) and unemployment in the economic growth and development of the Nigerian economy cannot be over-emphasized. The Nigerian economy has remained largely underdeveloped despite the huge human and natural resources. 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.

Impact of Inflation and unemployment on Nigeria economic growth 1981-2015.

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).

The fluctuations in the economy have confirmed the need to manage the economy effectively. The essence of macroeconomic management underlines the rationale of the government as a vital economic agent. However, it appears that government intervention has not been able to cure the ills in the economy.

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).

Impact of Inflation and unemployment on Nigeria economic growth 1981-2015.

In the 1960s and 1970s, the Nigerian economy provided jobs for almost all job seekers and absorbed considerable imported labour while inflation rates were low. The wage rate compared favourably with international standards and there was relative industrial peace in most of the years. Following the oil boom of the 1970s, there was mass migration of people, especially the youth, to the urban areas seeking for jobs. Following the downturn in the economy in the early 1980s, the problems of unemployment and inflation increased, precipitating the introduction of the Structural Adjustment Programme (SAP). The rapid depreciation of the naira exchange rate since 1986 and the inability of most industries to import the raw materials required to sustain their output levels have inflation. A major consequence of the rapid depreciation of the naira was the sharp rise in the general price level, leading to a significant decline in real wages and increased poverty. The low wages in turn contributed to a weakening of the purchasing power of wage earners and declining aggregate demand. Consequently, industries started to accumulate unintended inventories.

Unemployment and inflation are two intricately linked economic concepts. Over the years there have been a number of economists trying to interpret the relationship between the concepts of inflation and unemployment. There are two possible explanations of this relationship – one in the short term and another in the long term. In the short term there is an inverse correlation between the two. As per this relation, when the unemployment is on the higher side, inflation is on the lower side and the inverse is true as well.

The relationship between unemployment and inflation is also known as the Phillips curve. In the short term the Phillips curve happens to be a declining curve. The Phillips curve in the long term is separate from the Phillips curve in the short term. It has been observed by the economists that in the longrun the concepts of unemployment and inflation are not related.

As per the classical view of inflation, inflation is caused by the alterations in the supply of money. When money supply goes up the price level of various commodities goes up as well. The increase in the level of prices is known as inflation.  According to the classical economists there is a natural rate of unemployment, which may also be called the equilibrium level of unemployment in a particular economy. This is known as the long term Phillips curve.

The Keynesians have a different point of view compared to the Classical. The Keynesians regard inflation to be an aftermath of money supply that keeps on increasing. They (Keynesians) deal primarily with the institutional crises that are encountered by people when firms increase prices, firms make huge profit by increasing the prices of the goods and services that are provided by them. Also government increases money supply so that the economy may keep on functioning. In order to meet this demand the government keeps on supplying more money.

Impact of Inflation and unemployment on Nigeria economic growth 1981-2015.

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

It is therefore assumed that unemployment would stay at a fixed point irrespective of the status of inflation. Generally speaking if the rate of unemployment is lower than natural rate, then the rate of inflation exceeds the limits of expectations and in case the unemployment is higher than what is the permissible limit then the rate of inflation would be lower than the expected levels.

Impact of Inflation and unemployment on Nigeria economic growth 1981-2015.

Each school of thought offered its own policy solutions. There were however, no major attempts made to examine inflation and unemployment simultaneously.

1.2 Statement of the Problem

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).

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.

Impact of Inflation and unemployment on Nigeria economic growth 1981-2015.

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).

  1. Is there any trade-off relationship between unemployment and inflation in   Nigeria?
  2. Does inflation-unemployment has impact on the economic growth of Nigeria?
  3. Is there any observed long-run relationship between economic growth and inflation-unemployment?

1.3 Research Questions

In the light of the foregoing analysis, the research work will be guided by the following question:

To what extent has Inflation and unemployment impacted on the economic growth of Nigeria?

  1. Is there any trade-off relationship between unemployment and inflation in Nigeria?
  2. What is the empirical relationship between Inflation, Unemployment and Economic growth?
  3. Is there any observed long-run relationship between inflation, unemployment and economic growth?

Impact of Inflation and unemployment on Nigeria economic growth 1981-2015.

1.4 Objectives of the Study

The broad objective of this study is to examine the impact of inflation and unemployment in Nigeria with the view of examining the effect of inflation and unemployment on economic growth. The specific objectives of this study include:

  1. To investigate the impact of inflation and unemployment on the economic growth of Nigeria.
  2. To examined the trade-off between inflation and unemployment in Nigeria.
  3. To empirically investigate if there is any observed long-run relationship between inflation, unemployment and economic growth.

1.5 Statement of the Hypotheses

The study will be guided by the following hypothesis;

H0: Unemployment and inflation have no significant impact on Nigeria’s economic growth.

H0: Unemployment and inflation have no causal relationship in Nigeria.

H0: Unemployment and inflation have no long-run relationship with Nigeria’s economic growth.

1.6 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. The impact of Inflation and unemployment on the sustainable economic growth of any nation cannot be over-emphasized.

Impact of Inflation and unemployment on Nigeria economic growth 1981-2015.

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.

1.7 Scopes and Limitations of the Study

The scope of this study is centered on the impact of inflation and unemployment on Nigeria economic growth. The research work is also centered on fourth-two year’s duration from 1981-2016.The regression was also based on time-series data extracted from central bank of Nigeria statistical bulletin.

It is worthy to note that every research work posses a lot of problems and limitations. However, the difficulties encountered includes, inadequate and non-availability of relevant data owing to the fact that inflation and unemployment in most underdeveloped countries e.g. Nigeria is not evenly distributed and thus varies from one place to another, financial constraint, High cost of transportation and the difficulty in locating the various research centers. The time allowed for the completion of this work was short, coupled with the fact that academic work were in progress.

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