Unemployment and its Effects on Economy. A Case Study

Table of Contents

Abstract

Introduction

Statement of Problem

Objective

Research Hypotheses

Literature and Theoretical Review

Keynesian Theory of Employment

Methodology

Model Specification

Result and Discussion

Conclusion and Recommendation

References

Abstract

This study was carried out to examine the causes of unemployment in Nigeria and its effects on the economy of the country. Data were sourced from the Central Bank of Nigeria, Statistical Bulletin (2017), National Bureau of Statistics (NBS), Internet, CIA site, Index Mundi and past studies. The study covered period of 18 years, 1999 to 2017. EViews version 7 was used to analyse the data gathered, while Ordinary Least Squares (OLS) method was adopted. This study discovered that the unemployment in Nigeria is the major contribution to the poverty level in the country. Money supply and credit to private sector were recognised to have significant effect on unemployment level in the economy. It is also discovered that gross domestic product and unemployment rate in Nigeria has positive relationship which is an indication that growth in GDP does not amount to overall development in Nigeria. This study recommend that government should make credit available to private sector, increase money in circulation and try to reduce external debt which drain away the wealth of the nation through interest payments to reduce poverty rate in Nigeria.

Key Words: poverty rate, unemployment rate, gross domestic product, external debt, money supply

Introduction

Studies have shown that countries all over the world are faced with different economic problems. In order to solve the problems, the government or its agencies take various actions and enact laws and policies. The unemployment rate in Nigeria is alarming and deserves paying attention to.

Unemployment can be defined as a situation where people who are willing and capable of working are unable to find suitable paid employment (Fajana, 2000). Further in his work, Fajana posit that, the higher rate of unemployment in an economy, the higher the level of poverty and associated welfare challenges. Nigeria is hugely endowed with energy resources that include oil, natural gas, coal, biomass, solar, wind and hydro resources among others. However despite this huge endowment, Nigeria is also an energy deficient country whose economy suffers tremendously from the shortage of energy supply (Iwayemi, 2008). Fuel scarcity in the economy and falling electricity supply create dual energy crises for Nigeria (Iwayemi, 2008). Thus leading to failure of many companies such as Dunlop Nig., Eternit Nig. Ltd., Sapale,Michellin Ltd., and others.

Nigeria as a nation has experienced several forms of economic, political and social unrest. In recent times, unemployment which is caused by individuals and government forces had joined the list of the social evils we experience in Nigeria today. The issue of unemployment has become a world-wide phenomenon and deserves urgent attention, its impact is more devastating in developing nation (Wamukonya, 2003).

Feridum & Akindele (2006); George & Oseni (2012); Ezie (2012) and Ede, Ndubisis, & Nwankwo (2013), identify unemployment as one of the major challenges confronting the Nigerian Economic Development. The menace of unemployment in Nigeria both now and the past years has been an issue of great concern to economists, policy makers, economic managers, individuals, government and many others (Bello, 2003).

In 2016 ranking, International Labour Organisation ranking shows that the unemployment rate of people 15 and above was 30.70%. According to George & Oseni, (2012) in the past two decades, successive governments in Nigeria have made futile attempts to address the issues of unemployment. Despite the fact that Nigerian economy is growing, the proportion of Nigerians living in poverty is increasing yearly (Kale, 2012).

Statement of Problem

Nigeria has now taken over as the nation with the highest number of extremely poor people (report by Brookings Institution, 2018). According to Brooking report, Nigerians in extreme poverty increases by six people per minute. The report revealed that at end of May 2018, Nigeria had about 87 million people living in extreme poverty while India that used to be the nation with highest number of people living with poverty number has 73 million people living in extreme poverty (Vanguard News June 25th, 2018).

Nigeria depends so much on revenue from oil and gas and pay little attention to other sector that any crisis in the oil sector do cause major damage to the nation’s economy. According to the Minister for state Petroleum Resources, Ibe Kachikwu (2017) 350,000 Nigerians lost their jobs due to oil crisis in 2016.

Creating employment opportunities is crucial for economic development and poverty alleviation. Most developing countries struggle with high unemployment or underemployment. In the light of these problems, this work set to access the impact of unemployment on Nigeria economic.

Objective

The objectives of the study are:

1). To examine the causes of unemployment in Nigeria and its effects on the economy of the country.
2). To examine the effect of unemployment on the nation’s economy.
3). To suggest way forward in reducing the problem of unemployment in Nigeria.

Research Hypotheses

To achieve objectives of this study, the following research hypotheses were formulated:

1). Unemployment in Nigeria do not have effects on the economy of the country.
2). Government is not making any effort to tackle the problem of unemployment in Nigeria.

Literature and Theoretical Review

Unemployment has been recognised as one of the greatest challenges facing the Nigeria economy and it has maintained a rising trend over the years. The total labour force in Nigeria is made up of all persons aged 15-64 years excluding students, home keepers, retired persons and stay-at-home to work or not interested. The classical school of thought that provided the earliest thinking on economic issues did not fail to give a central point of reflection on the undesirability of unemployment. The Keynesian revolution of the 1930‘s, which commanded the explosive attack on economic orthodoxy apparently, treated unemployment as a central issue of great concern. Following the path of the predecessors, economists at all times and in all ages have expressed various degrees of concern over the threat of the monster called unemployment. The population of every economy is divided into two categories, the economically active and the economically inactive. The economically active population or working population refers to the population that is willing and able to work, including those actively engaged in the production of goods and services (employed) and those who are unemployed (Njoku & Ihugba, 2011) as cited by Aiyedogbon & Ohwofasa, 2012 in their work entitled “ Poverty and youth Unemployment in Nigeria, 1987-2011”.

Uddin & Uddin (2013) looked into the causes, effects and solutions to youth unemployment problems in Nigeria. They found that unemployment in Nigeria among youths are caused by six major problems which according to them include Boko Haram, rapid population growth, Niger Delta Militant, armed robbery, prostitution and child trafficking. They recommend that the government should invest heavily on education to enable the youth become self-reliance instead of job seekers through skills development and training.

Some scholars have posit that unemployment is a major challenge confronting most economies. Ayodele (2001) is of the opinion that the development of Nigerian economy as an emerging market, is technically a function of adequate provision and supply of electricity power. Also, Okafor (2008) argues that poor power generation represents a major setback for the Nigeria’s industrial development.

George & Oseni (2012) studied the impact of electricity power on unemployment rates in Nigeria. The study covers the period of 1970 to 2005. They found that power supply to the industrial sector was lower than the supply for residential consumption. The study also establishes that the major cause of unemployment in Nigeria can be traced to inadequate and unstable power supply to the industrial sector. The study recommend that government and the policy makers should invest more in electricity power generation and ensures that the industrial sector is given a higher priority in the supply of electricity if the high unemployment rate is to be abated.

Ayoade & Agwu (2016) investigated the past interventional efforts made by Nigerian government in addressing the problems of unemployment in the country and their effectiveness at encouraging the entrepreneurship sense in the country with a view to facilitating job creation for the teaming Nigerians job seekers. The study revealed that several intervention programmes introduced by successive governments in the country had failed to produce the expected results and the reasons identified for the failure was largely the issue of corruptions and bureaucratic bottleneck vis-avis inconsistencies in government policies, political instability and lack of entrepreneurial skill by majority of unemployed Nigerians. The study recommend that government should encourage entrepreneurship by providing an enabling environment and infrastructures coupled with the introduction of relevant entrepreneurial educational programmes in all institutions of learning and loans should be made available without interests.

Asaolu & Oladele (2006) stated that infrastructural decay is a major problem confronting Nigeria and that electricity generation is one of the instances of the infrastructural decay in Nigeria.

Rabiu (2009) argue that for three decades, inadequate quantity, quality and access to electricity service remain a big challenge to the Nigerian economy and the resolution of the challenge would boost the economy, reduce unemployment and the resultant social vices.

Dinkelma (2008) studied the effect of energy crisis on unemployment in South Africa, and discovered that energy crisis reduces unemployment among the rural dwellers especially among women who engaged in home made goods and services.

Alemu (2015) studied the structural nature of jobless growth in Nigeria and found that, under business as usual scenario, the country need to grow by double digit to create 1.8 million jobs annually, equivalent to those that newly enter the labor force every year. He recommends that in the short term, more jobs can be created by targeting support in sectors with proven high employment absorption capacity, demonstrated by their high employment multiplier; in the medium term, by promoting Domestic Value Chain Development/value addition guided by existing backward linkages and forward linkages; and in the longer term through a concerted effort that channels support to weakly integrated but deserving sectors to ensure their integration with other sectors of the domestic economy.

Hassan (2015) studied the impact of GDP growth rate on poverty reduction in Nigeria. The study revealed that the there is a weak relationship between the unemployment rate and the Nigerian Gross Domestic Product (GDP) growth rate and that instead of an inverse relationship, it was positive. The study holds that when citizen cannot work to earn they will remain poor, in other words GDP growth has not impacted positively on the poor through job creation sufficient enough to reduce the percentage of the unemployed and the incidence of poverty.

Khan & Khan (2010) studied Pakistan and discovered that power shut down to textile industries worsened unemployment while study by Aqeel & Butt (2001) argued that a proper energy (electricity and gas) growth consumption policy in Pakistan would stimulate economic growth resulting in expanded employment opportunities in the country.

Statistics have shown that small and medium-sized enterprises (SMEs) including macro-businesses are the highest employers of labour in Nigeria (Barros, Ibiwoye & Managi, 2011). One of the major challenges of SMEs in Nigeria is the high cost of electricity generation from private electricity power generators (Onugu, 2005, Aremu & Adeyemi, 2011) as a result of the inadequate and erratic supply from the Government source. The SMEs and macro-businesses (barbing and hair salons, electronic repairs, business centres, welding, vulcanizing, etc.) cannot run profitably on power generating sets in a highly competitive and open economy like Nigeria because of the high costs of fuel and maintenance as cited by George & Oseni, 2012 in their work entitled “the relationship between electricity power and unemployment rates in Nigeria”.

Keynesian Theory of Employment

Keyness theory of employment (1936) is widely accepted by modern economists. Keynes has invented new tools and techniques of economic analysis such as consumption function, multiplier, marginal efficiency of capital, liquidity preference, effective demand, etc. In the short run, it is assumed by Keynes that capital equipment, population, technical knowledge, and labour efficiency remain constant. According to Keynesian theory, volume of employment depends on the level of national income and output. Increase in national income would mean increase in employment. The larger the national income of a nation the larger the employment level and vice versa. That is the reason, the theory of Keynes is termed ‘theory of employment’ and ‘theory of income’.

Keynesian theory of unemployment deals mainly with situations satisfying the following description: There is excess supply in the labour market. All conditionally profitable production possibilities are utilized. The supply of products is equal to the quantity produced, and also equal to the demand for products. The nominal wage rate is inflexible downwards, and therefore the economy is in equilibrium in spite of the fact that there is excess supply in the labour market.

Methodology

This study employed the Ordinary Least Squares (OLS) while data used covered the period 18 (1999-2017). Data were extracted from the Central Bank of Nigeria, Statistical Bulletin (2017), Nigerian Bureau of Statistics, internet, CIA site, Index Mundi and past studies. EViews version 7 was used to analyse the data gathered.

Model Specification

UEMR = f(PR, GDP, CPS, TS, ED, MS, INF).(1)

In stochastic term, equation (1) becomes:

LPGR = β0 + β1PR + β2LGPD + β3LCPS +β4LTS +β5LED + β6LMS β7INF + ε…..(2)

Description of Variables

UEMR = Unemployment rate

PR = Poverty Rate

LGDP = Natural Log of Gross Domestic Product

LCPS = Natural Log of Credit to Private Sector

LTS = Natural Log of Total Savings

LED = Natural Log of External Debt

LMS = Natural Log of Money supply (money in circulation)

INF = Inflation rate

Ε = Error term

Result and Discussion

Table 1: Result

Abbildung in dieser Leseprobe nicht enthalten

Source: Researchers’ Computation using EViews 7 (2018)

From table 1, the result of the coefficient indicate that there is positive relation relationship between poverty rate (PR), money supply (LMS), gross domestic product (LGDP), external debt (DLED) credit to private sector (DLCPS), inflation (INF) and unemployment rate (UEMR). Poverty rate and unemployment rate has a statistical significant relationship with the probability value of 0.0323 and t-statistic value of 7.22. Credit to private sectors (DLCPS) also has a significant relationship but not enough to conclude that it affect unemployment. The correlation coefficient of 0.52 is an indication that the variables to a reasonable extent affect unemployment while there are some other variables that also affect unemployment rate which are not considered in this work. The results of LMS at 0.0612 and DLCPS at 0.0593 indicate that money supply and credit to private sector has a reasonable effect on unemployment rate. The positive relationship between unemployment is an indication that growth in GDP does not lead to increase in per capita income, that is, development is not even which clearly explain the reason for consistent growth in the poverty rate despite the increase in the GDP of the country. The result of F-statistics of 34.61 indicates that the model statistically fits well and the probability is also significant at 0.0034 given 0.05 level of significant. The value of Durbin-Watson statistic of 1.97 indicate that the model is free from the problem of serial correlation, therefore can be used to make statistical decisions.

Table 2: Augmented Dickey-Fuller Unit Root Test

At level

Abbildung in dieser Leseprobe nicht enthalten

Source: Researchers’ Computation using EViews 7 (2018)

Table 3: Augmented Dickey-Fuller Unit Root Test

At first Difference

Abbildung in dieser Leseprobe nicht enthalten

Source: Researchers’ Computation using EViews 7 (2018)

The unit root test was conducted at the level and first difference to test for serial correlation within the variables using Augmented Dickey-Fuller test. At the level poverty rate (PR), Total Savings (LTS), money supply (LMS), gross domestic product (LGDP), and inflation (INF) were not suffering from serial correlation but unemployment rate (UEMR), external debt and credit to private sector were not stationery and was subjected to first difference and all the variables became stationary at first difference and were used at the level they became stationary.

Table 4: Correlation Matrix

Abbildung in dieser Leseprobe nicht enthalten

Source: Researchers’ Computation using EViews 7 (2018)

The result of the correlation matrix show a relatively low relationship between many of the variables except poverty rate (PR) which has a high correlation of 0.829 with the unemployment rate. This means that as unemployment rate increases, poverty rate also increase with it vice versa.

Table 5: Descriptive

Abbildung in dieser Leseprobe nicht enthalten

Source: Researchers’ Computation using EViews 7 (2018)

The mean of the poverty rate is high and has high standard deviation which indicate that the rate at which poverty level in the country increases is very high which is accordance with the recent report by Brookings Institution (2018) that states that the increase in the poverty rate in Nigeria is very high. The study stated that in every minutes, six (6) Nigerian become poor. Also the standard deviation of inflation shows a very high deviation which is an indication that inflation rate increases in high dimension in the economy. The probability result of poverty rate and inflation rate is high also. This high rate in poverty rate is an indication that many Nigerians are not productive and not engaged in productive activities that can reduce poverty rate coupled with the consistent increase in the inflation rate that is affecting the economy of the country.

Conclusion and Recommendation

Previous studies from different economy have been conducted in the area of this study and decisions has been made using different variables. Okafor (2011) stated that corruption has robbed the country of developing a vibrant economic base. He further stated that funds that ought to be used for development projects have been misappropriated, diverted, or embezzled and stashed away in foreign banks, while some incompetent and corrupt bureaucrats and administrators in the public enterprises and parastatals have liquidated these organizations. Study by Aqeel & Butt (2001), Dinkelma (2008) Rabiu (2009), Khan & Khan (2010) and George & Oseni (2012) posit that power supply is the major cause of unemployment.

Uddin & Uddin (2013) conclude that unemployment in Nigeria among youths are caused by six major problems include Boko Haram, rapid population growth, Niger Delta Militant, armed robbery, prostitution and child trafficking.

This study therefore, based on the result of the regression analysis, conclude that unemployment in Nigeria is caused by a large number of factors. This study discovered that the unemployment in Nigeria is the major contribution to the poverty level in the country. Money supply and credit to private sector were recognised to have significant effect on unemployment level in the economy. It is also discovered that gross domestic product and unemployment rate in Nigeria has positive relationship which is an indication that growth in GDP does not amount to development in Nigeria which could be attributable to other factors which are not considered in this study but in the study by Hassan (2015) conclude that the effect is due to overdependence of the country on one sector of the economy, which is oil sector.

This study recommend that government should look more closely to the problem of unemployment and take urgent action to curb its effects on the economy. Government should make credit available to private sector, increase money in circulation and try to reduce external debt which drain away the wealth of the nation through interest payments to reduce poverty rate in Nigeria.

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