Relationship Between Unemployment and Inflation(1980-2012)

Relationship Between Unemployment and Inflation(1980-2012)

CHAPTER ONE

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;

To ascertain the impact of government expenditure on Unemployment
To examine the impact of gross domestic product on Unemployment

CHAPTER TWO

REVIEW OF THE RELATED LITERATURE

THEORITICAL LITERATURE

UNEMPLOYMENT:

Unemployment has no precise definition in economics literature. To the layman, unemployment means a state of joblessness, while to economists; it is seen as the percentage of the labour force that is without job but is able, willing, and qualified to work. In other words, no matter how unemployment is defined; the underlying philosophy is that those who are expected to work are indeed not working (Gbosi, 2004).

The level of unemployment in a nation is measured by calculating the unemployment rate, i.e.

Unemployment Rate (U) = Number of people unemployed X 100

Labour force 1

TYPES OF UNEMPLOYMENT:

Structural Unemployment: This reflects the time taken to acquire human capital. Workers who find out that their skills and experience have become obsolete or unneeded, thus find out that they have no marketable talents. They are structurally unemployed until they adapt or develop skills that employers want. Structural unemployment may also occur as a result of changes in production techniques.

Frictional unemployment: This unemployment occurs because it takes time for workers to move from one job to another. While it may be the case that some workers find new jobs before leaving their old jobs, a lot of workers leave or lose their jobs before they have another work lined up. The retrenched workers most look around for a good job. During this period, they are regarded to be frictionally unemployed.

Seasonal unemployment: This is due to seasonal variations in the activities of particular industries caused by climatic changes, changes in fashion or by the inherent nature of such industries. For instance, workers that work in construction companies remain unemployed during the raining season.

Cyclical Unemployment: This type of unemployment (also known as Keynesian unemployment) results from the operation of the business cycle. If there is a decrease in the quantity of goods demanded or there is over-production which results in fall in prices, industries will be affected, which will lead to lay-off of workers. The workers affected will suffer from cyclical unemployment. Therefore, cyclical unemployment occurs when there is a fall in demand.

CHAPTER THREE

RESEARCH METHODOLOGY

MODELSPECIFICATION:

A model is an abstraction from reality. It is an abstraction from reality because; it is very difficult to carry out a research using all the factors that exist in a real life situation. The usefulness of model building in economics is to simplify the complexities of real life. Koutsoyiannis (1977:12) opines that in attempting to study any relationship between variables, it is very important to express the relationship in mathematical form which is to specify the model with which the economic phenomenon will be explored empirically.

In an attempt to explore empirically on the relationship between unemployment and inflation in Nigeria, a model will be employed. In the model, inflation, Gross Domestic Product (GDP), interest rate, and government expenditure will be regressed on unemployment; in order to ascertain the impact of the explanatory variables on the explained variable.

CHAPTER FOUR

PRESENTATION OF RESULT AND DATA ANALYSIS

PRESENTATION OF REGRESSION RESULT

The regression result of the data used in the analysis is presented below, which is in accordance with the model specified in the previous chapter.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION, AND POLICY RECOMMENDATIONS

SUMMARY OF FINDINGS:

The research work is centered on unemployment and inflation in Nigeria. Its main objective was to ascertain if the trade-off thesis holds in Nigeria. To achieve this, various data on unemployment and inflation were collected from 1986-2011, also other variables such as government expenditure, interest rates, and the gross domestic product were included. These variables were then subjected to multiple regression analysis, using OLS estimator, with unemployment as its dependent variable. The summary of the findings are given below;

Inflation was found to conform to the a priori expectation, by having a negative sign. Its significance test revealed that inflation has a significant impact on unemployment in
Interest rate and gross domestic product conformed to the a priori expectation, by having positive and negative signs, respectively. Furthermore, the result also revealed that both variables have no significant impact on unemployment, when they were subjected to the individual significance test.
Government expenditure on the other hand, did not conform to the a priori expected When subjected to the individual significance test, it was found that it has a significant impact on unemployment.
The goodness of fit test revealed that inflation, government expenditure, interest rate, and gross domestic product explain 1% of the dependent variable (unemployment), which is a good sign.

CONCLUSION:

Unemployment and inflation poses a serious problem in any economy. Studies carried out by most economists revealed that in the quest to reduce unemployment, rising inflation may be risked. A. W. Phillips‟ research work (1958) attested to this fact of trade-off relationship. However, some other economists led by Milton Friedman challenged the trade-off relationship thesis, saying that it existed only in the short-run, that in the long run, the Phillips curve is vertical without any sign of trade-off relationship. Friedman used the term „natural rate of unemployment‟ in his analysis to denote the rate at which the actual rate of inflation equals the expected rate of inflation.

The researcher in other to validate the existence of a Phillips curve carried out various tests, using the Nigerian economy as a case study. The result of the test revealed that unemployment and inflation are inversely related, thus confirming the existence of the Phillips curve in Nigeria, with inflation having a significant impact on unemployment in Nigeria.

POLICY RECOMMENDATIONS:

The trade-off relationship between unemployment and in inflation poses a dilemma for our policy formulators, since in order to reduce unemployment, the inflation rate in the economy tends to rise. Thus, of great importance is the need for constructive and well-specified policy recommendations that will help to ameliorate the situation of unemployment and inflation in Nigeria. Below are some policy prescriptions, which will help alleviate the current problems of unemployment and inflation in Nigeria.

Government should strive to develop the agricultural sector which has great potentials to increase the supply of farm products and other basic necessities of life. The increased supply will reduce prices and increase in employment generation. To achieve this, various specific agricultural policy measures should be promoted and pursued
Massive investments should be carried out in the real sector of the economy, by establishing job-creating industries, which will help to reduce the level of unemployment in the country, increase output, reduce prices of goods and services, and thus, reducing the level of inflation in the
The free flow of information between employers and employees should be enhanced, through the reduction in the cost of job or employee search by means of job data banks, thus resulting to increased efficiency in the labour market. Similarly, training and educational programmes should be increased and geared towards innovations and productivity, thereby, reducing the rate of unemployment in the economy.

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