Post on 26-Nov-2014
I. INTRODUCTION
Unemployment is one of the developmental problems that face
every developing economy in the 21st century. Unemployment is
defined as the condition of having no job or being out of work or
proportion of people which are able to work and actively searching
jobs but they are unable to find it. IMF report (1998) defines
‘unemployment is measured annually as percentage of labour force
that can’t find a job’. International Labour Organization (2001)
defines unemployment as situation of being out of work or need a
job and continuously searching for it in the last four week or
unemployed ( age 16 or above) but available to join work in the next
two weeks. People who voluntarily do not want to work, full time
students, retired people and children are not included in
unemployed category.
International statistics portray that industrial and service
workers living in developing regions account for about two-thirds of
the unemployed. (Patterson et al, 2006). The Nigerian economy
since the attainment of political independence in 1960 has
undergone fundamental structural changes. The domestic structural
shifts have however not resulted in any significant and sustainable
economic growth and development.
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Dramatic increase in the level of unemployment is a big
headache in less developed countries in particular and advance
countries in general. A number of social problems are driven by high
growth of unemployment, for example Harvey & Blenna (1998)
studied unemployment and social problems and they concluded that
unemployment gave rise to crimes, suicides and poverty rates.
Unemployment suffers workers, workers’ families and even
countries because lost of job means loss of income both at individual
level and national level. Available data show that the Nigerian
economy grew relatively in the greater parts of the 1970s, with
respect to the oil boom of the 1970s, the outrageous profits from the
oil boom encouraged wasteful expenditures in the public sector
dislocation of the employment factor and also distorted the revenue
bases for policy planning.
This among many other crises resulted in the introduction of
the structural adjustment programme (SAP) in 1986 and the current
economic reforms. The core objective of the economic structural
reform, is a total restructuring of the Nigerian economy in the face
of population explosion (Douglason et al, 2006). However, these
economic and financial structural reforms put in place have not
yielded significant results. In the light of this, this paper seeks to
econometrically examine the determinants of unemployment in
Nigeria.
2
We shall consider the key concepts in our study,
unemployment in Nigeria, in previous and recent times, and throw
lights on the factors which exert effects on the level of
unemployment in Nigeria, while we also recommend how these
factors can be manipulated in order to reduce unemployment in
Nigeria, which will invariably result in reduced poverty, improved
standard of living, improved productivity, and an overall
improvement in economic performance among other benefits.
STATEMENT OF PROBLEM
In a context of declining growth and economic restructuring,
the employment situation in Africa has become critical and labour
absorption problematic. In particular, the problem of what is
generally referred to as unemployment has increasingly come to be
recognized as one of the serious socio-economic problems currently
confronting many developing countries, especially those in Africa
(Curtain, 2000; ILO, 1999).
In Nigeria, since the early eighties, unemployment has
assumed alarming and disturbing dimensions with millions of able-
bodied persons who are willing to accept jobs at the prevailing rates
yet unable to find placements (Onah, 2001). According to the Labour
Force Survey conducted by the Federal Office of Statistics in
December 1997, Nigeria had a composite unemployment rate which
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stood at 3.2% compared with 3.4% in the corresponding period of
1996 (F.O.S., 2001). Similarly, the urban and rural unemployment
rates declined from 6.1% and 2.8% in December 1996 to 6.0% and
2.6% in December 1997. The composite registered unemployment
rate for December 1998 stood at 3.2% but declined to 3.1% in 1999,
whereas the urban unemployment rate in December 1998 was 4.9%
but increased to 5.8% in 1999. The rural unemployment rate
declined from 2.8% in December 1996 to 2.5% in 1999 December. In
December 2000, the composite unemployment rate increased to
4.7% and similarly the urban and rural unemployment rates
increased to 7.2% and 3.7% respectively compared with previous
years.
These facts and figures clearly highlights the need for us to
identify the determinants of unemployment in Nigeria, so as to
create an understanding of the prevailing factors affecting the level
of unemployment in Nigeria. It is in line with this that this study will
seek to provide answers to the following research problem:
i. Does population growth affect unemployment level in Nigeria?ii. Does foreign direct investment affect the level of unemployment in
Nigeria?iii. Does inflation affect have any effect on unemployment?OBJECTIVES OF STUDY
This study will seek to fulfil the following:
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i. To evaluate if population growth affects the level of unemployment in Nigeria
ii. To evaluate if foreign direct investment affects the level of unemployment in Nigeria
iii. To evaluate if inflation affects the level of unemployment in NigeriaRESEARCH HYPOTHESIS
H0: Foreign direct investment does not affect the level of unemployment in Nigeria
H1: Foreign direct investment affects the level of unemployment in Nigeria
II. LITERATURE REVIEW
OVERVIEW OF THE NIGERIAN ECONOMY
For all its vaunted wealth of mineral resources and the highly
visible and vocal manufacturing sector, the Nigerian economy is still
basically agricultural, dominated for the most part by peasant small
holder farms. At independence in 1960, the proportion of the Gross
Domestic Product accounted for by agriculture (defined broadly to
include crops, animal husbandry, fishing and forestry) and
petroleum stood at 67.0 per cent and 0.6 per cent respectively; by
1974 the proportions had been reversed to 23.4 and 45.5 per cent
respectively. In 1984, the shares of agriculture and petroleum went
down further to 15.5 per cent and 28.0 Per cent respectively. The
contribution of manufacturing and government has doubled in the
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period 1960 to 1984 although to a still relatively low level of 11.0
per cent arid 7.0 Per cent respectively. As at the end of 1993, the
share of agriculture (at 1984 factor cost) had climbed up once again
to 38.10 Per cent of GDP with petroleum oil going down to 12.66
from the 13.47 Per cent in 1992; the share of manufacturing had
stabilised since 1988 at around 8 to 9 per cent.
Although petroleum continues to dominate the public finances
and foreign exchange resources of Nigeria, the sector is, in reality,
an enclave economy employing less that 100,000 Nigerians directly
in production. Outside of transportation and, perhaps, a small
section of the industrial sector, the petroleum economy has very
little linkage with Nigerian production. It buys little or nothing from
the manufacturing or agricultural sector, transfers little or no
technology to either agriculture or manufacturing.
Agriculture, on the other hand, together with trade provides
the bulk of the employment for Nigerians, provides the bulk of the
needs of the household sector but supplies only a small part of the
needs of manufacturing. In a similar vein, until recently when it
began to make use of locally made fertilizers and pesticides, it
bought very little from manufacturing. Iii effect, the three main
sectors agriculture, manufacturing and mining have no inter-
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linkages in production and each therefore operates almost like an
island unto itself.
The oil boom of the 1970s and early 1980s raised the
consumption levels of both domestic and foreign goods. It led to the
neglect of agriculture and to the increasing import dependence of
the manufacturing sector; with capital goods production accounting
for less than 15 per cent of total manufacturing output, Nigeria has
had to depend on imports not only for equipment and machinery
and for intermediate goods and raw materials but even for food. The
sudden decline in oil prices in the mid 1980 s, which has persisted to
date, the near insatiable demand for imports and the weakening of
the supply base have combined to generate severe internal
pressures and external disequilibria. In addition, time governments,
at both federal and state level, have shown themselves unable to
reduce the size and scope of their expenditures and budget deficit.
The Obasanjo regime (1976 - 1979) had bequeathed to the
incoming Shagari government, in October 1979, an external debt of
$6.8 billion; by the end of the Shagari administration in December
1983, the stock of external debt stood at $18.5 billion. The
succeeding Buhari government pushed it up further to $21.2 billion
by 1985. The debt burden measured by the ratio of debt service to
export proceeds stood at 20.4 per cent in 1978, 15.4 per cent in
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1980, 30 per cent in 1981 and 61.5 per cent in 1982. It was rising to
hit 107 per cent in 1983/84. With the population assumed to be
growing at 2.5 per cent per annum and debt service running at
some 4 per cent of the Gross Domestic Product, it means that just to
maintain the living standards of time people at a stand still, the
economy would be required to grow at a minimum of 6.5 per cent
per annum on a sustainable basis.
The balance on external account showed a small deficit for
most of the period between 1960 and 1970; it then recorded a very
large surplus in 1973 and 1974. Within two years, the government of
General Gowon (1966 - 1975) nearly succeeded in wiping out this
surplus in short order; three years later, by 1978, the account had
turned to a large deficit of $3.696 billion. By deferring the external
obligations through a readily recognisable financial screen, General
Obasanjo left a surplus of $5.870 billion in 1979/80. By 1981, time
Shagari administration had turned the tables into a deficit of $5.3
billion thereby creating time environment for an austerity package
in 1982. But these were shortlived. It took General Buhari s
draconian measures in 1984 to reverse the tide to a modest surplus
in 1984. However, by 1985, it was rapidly becoming clear that the
accumulation of innumerable regulations administered by
innumerable persons had literally brought the economy to a
standstill.
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The Babangida administration that swept itself into office in
August 1985 was quick to recognise this dilemma. After an
extensive, even if illinformed, public debate on IMF supported model
of structural adjustment, the government introduced what it
ostensibly regarded as its own home-grown programme of structural
adjustment. The year 1986, therefore, marked the beginning of
economic deregulation with the objectives of:
a. restructuring and diversifying the economic base of the
economy and reducing the dependence on oil;
b. achieving fiscal balance and reducing the deficit in the balance
of payments in the medium term;
c. Laying the foundation for non inflationary growth in the
medium and long term.
The thrust of the measures for deregulation was to promote
competition and efficiency through greater reliance on market
forces. These encompassed the following:
a. The abolition of import licensing in September, 1986;
b. The partial removal of exchange controls in September 1986,
reduction of government borrowing, and strengthening the use
of Treasury Bills as an effective tool of monetary control;
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c. The removal of restrictions on commercial banks to engage in
equipment leasing and relaxation of restrictions on equity
participation in companies by banks; and
d. The adoption of indirect tools of monetary control (that is, the
use of cash reserve requirements, liquidity ratios, the discount
rate and Open Market Operations) and the establishment of
discount houses.
The reform of the banking system was undertaken in part to
strengthen and enhance the performance of the supervisory and
regulatory framework and in part to improve the reliance of the
banking industry on market forces. Among these reforms were the
granting of autonomy to the Central Bank, the promulgation of the
Central Bank of Nigeria and the Banks and Other Financial
Institutions Decrees in 1991, the establishment of the Nigeria
Deposit Insurance Corporation, and the issuance of prudential
guidelines and regulations by the Centra1 Bank to the banking
institutions.
1986 AND AFTER
The decade before the Babangida regime, that is the
administration of Obasanjo, Shagari and Buhari, was an age of
prohibitions in which the economy was almost being choked to
death by controls. The Babangida era was, on the other hand, an
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age of transition; it dismantled the controls exercised on the
economy by politicians and bureaucrats for over four decades. The
gains were most impressive and noticeable in the first three years of
structural adjustment; thereafter the profligacy of government
spending and the nature of its financing from 1990 to 1993 wiped
out the progress already made. The following achievements of the
first three years of the Structural Adjustment Programme (SAP)
must, however, be recorded:
a. on the External Sector, the Current Account deficit fell to $2.1
billion in 1986, and to only $73 million in 1987 turning into a
surplus of $1.1 billion in 1989, $5.2 billion in 1990 but down to
$1.3 billion in 1991 and $748 million in 1993;
b. External Debt service that stood at 23.4 per cent in 1986,
climbed to 30.2 per cent in 1988 but had to be held down by
public policy to 27.5 per cent in 1989; it jumped to 40 per cent
in 1990, threatened to hit 61 per cent in 1992 and 29.3 per
cent and 30.1 per cent in 1993 and 1994, respectively;
c. Public expenditure remained restrained until 1988; thereafter
it became reckless with budget deficit representing some 8.8,
9.2, and 12.6 per cent respectively of the Gross Domestic
Product in the three years 1989 – 1991 and 10.1 and 12.3 per
cent respectively in 1992 and 1993. Concomitantly, money
supply (Ml) rose by 17.1 per cent in 1987, 24.8 per cent in
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1988 and on the average, by 41.5 per cent between 1988 and
1991; it rose further by 66.4 per cent in 1992 and 54.6 per
cent in 1993. Broad money (M2) grew by an average of 28 per
cent between 1988 ad 1991, and rose by 57 per cent between
1991 and 1992 and by 52.8 per cent between 1992 and 1993;
d. the Consumer Price Index, measuring the movement in the
genera1 price level with 1985 as base, rose to only 181.2 in
1988, but had jumped to 330.9 in 1991, 478.4 in 1992 and
751.9 per cent in 1993 (Table 1.3). The acute inflation
represented by these numbers is compounded by the growing
unemployment which had changed qualitatively since the 70’s:
in the 70’s the bulk of the unemployed had completed only up
to primary school level and took some six weeks for job search,
but by the mid 80 s the bulk of the unemployed had completed
their University education and took some two years or over to
find a job; and
e. By 1988, industrial capacity utilisation stood at only 41.7 per
cent; it fell to 37.6 percent in 1989 and further to 38.2 in 1991;
for 1993 it is put by the Manufacturers Association of Nigeria at
under 30 per cent. In effect, Nigeria is moving from the non-
industrialisation of the colonial and immediate post colonial era
to a period of de-industrialisation.
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The incessant increase in the demand for foreign exchange,
caused by the high level of liquidity in the system as a result of
excess government spending, and the dwindling level of export
earnings caused by fall in oil prices and the stagnation of non-oil
export, resulted in a 16% average annual depreciation in the Naira.
Such persistent and precipitous depreciation, however, failed to
induce any significant increase in non-oil export as was pontificated
when SAP was introduced. Efforts to stem the surging demand for
foreign exchange, through monetary contraction, failed to have a
lasting effect and to prevent the widening of the gap between the
official and parallel market rates. In February 1993 a new rule was
introduced, in which each bank s allocated share of foreign
exchange was made proportional to its holding of Naira deposits at
the Central Bank of Nigeria. That arrangement caused a withdrawal
of virtually all excess liquidity from the financial system for most of
the time. When all efforts to stabilise the foreign exchange rate
failed, the present government, in 1994, fixed the rate at about
N22.00 to $1.00 and re-introduced exchange controls and the direct
allocation of foreign exchange to priority sectors.
The deregulation of interest rates in 1991 engendered very
keen competition in the banking industry, with banks adopting new
strategies to attract deposits and encourage savings. However, the
rapid and significant shifts in interest rates were causes for serious
13
concern because such high rates could and did retard productive
investment and growth. The Central Bank was obliged to modify
policy of total deregulation of interest rates, and to request banks to
justify their interest rates by reference to their actual cost of funds.
In 1994, the authorities felt that the prevailing interest rate levels
were out of equilibrium and counterproductive and re introduced
interest rate ceilings of a maximum of 15 per cent for deposit l a
maximum of 21 per cent for lending.
UNEMPLOYMENT
The population of every economy is divided into two
categories, the economically active and the economically inactive.
The economically active population (labour force) 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. Whereas,
unemployed refers to people who are willing and a capable of work
but are unable to find suitable paid employment. The next category,
the economically inactive population refers to people who are
neither working nor looking for jobs. Examples include housewives,
full time students, invalids, those below the legal age for work, old
and retired persons.
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The unemployment rate is expressed as a percentage of the
total number of persons available for employment at any time.
Unemployment is a problem that each society faces, and each
society must find a way to beat it. Unemployment is one of the
developmental problems that face every developing economy in the
21st century. International statistics portray that industrial and
service workers living in developing regions account for about two-
thirds of the unemployed population. Nigeria, since the attainment
of political independence in 1960 has undergone various
fundamental structural changes. These domestic structural shifts
have however not resulted in any significant and sustainable
economic growth and development.
Available data show that the Nigerian economy grew relatively
in the greater parts of the 1970s, with respect to the oil boom of the
1970s; the outrageous profits from the oil boom encouraged
wasteful expenditures in the public sector dislocation of the
employment factor and also distorted the revenue bases for policy
planning. This among many other crises resulted in the introduction
of the structural adjustment programme (SAP) in 1986 and the
current economic reforms. The core objective of the economic
structural reform is a total restructuring of the Nigerian economy in
the face of a massive population explosion. However, these
15
economic and financial structural reforms put in place have not
yielded significant results.
According to Briggs (1973) unemployment is the difference
between the amounts of labour employed at current wage and
working conditions, and the amount of labour not hired at these
levels, however, Gbosi (1997) defined unemployment as a situation
in which people who are willing to work at the prevailing wage rate
are unable to find jobs. “The unemployed is a member of an
economically active population, who are without work but available
for and seeking for work, including people who have lost their jobs
and those who have voluntarily left work (World Bank, 1998). The
natural rate of unemployment is the average rate of unemployment
around which the economy fluctuates. In a recession, the actual
unemployment rate rises above the natural rate, in a boom, the
actual unemployment rate falls below the natural rate
TYPES OF UNEMPLOYMENT
The main types of employment are structural, frictional,
seasonal, cyclical, residual, technological and disguised
unemployment.
Structural Unemployment
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Structural unemployment occurs when there is a change in the
structure of an industry or the economic activities of the country. As
an economy develops over time the type of industries may well
change. This may be because people's tastes have changed or it
may be because technology has moved on and the product or
service is no longer in demand.
The main causes are as follows:
Changes in demand - if there were to be a decrease in the
demand for a produce (due to changes in people’s taste or
cheaper imports available) and if this change were more
permanent, the supply of such a product must be reduced.
Fewer workers would then be required. Retrenched may not be
readily absorbed into other industries and thus become
unemployed.
Changes in supply - the faster the changes taking place in
people's tastes and demand and supply, the more structural
unemployment there may be and an industry has to adapt
more quickly to change due to depletion of raw materials
required.
The regional structure of industry - if industries that are dying
are heavily concentrated in one area, then this may make it
much more difficult for people to find new jobs. Both the
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shipbuilding and mining industries were heavily concentrated
and some areas have taken many years to adapt and reduce
the level of structural unemployment. This type of
unemployment is also known as the chronic unemployment or
the Marxian or long-term unemployment. It is mostly to be
found in the underdeveloped countries of Asia and Africa. This
type of unemployment is due to the deficiency of capital
resources in relation to their demand. The problem in the
underdeveloped countries is to get rid of this age-old chronic
unemployment by accelerating the process of economic
growth. In other words, structural unemployment results from
a mismatch between the demand for labour and the ability of
the workers.
Frictional Unemployment
This type of unemployment is caused by industrial friction,
such as, immobility of labour, ignorance of job opportunities,
shortage of raw materials and breakdown of machinery, etc. Jobs
may exist, yet the workers may be unable to fill them either because
they do not possess the necessary skill, or because they are not
aware of the existence of such jobs. They may remain unemployed
on account of the shortage of raw materials, or mechanical defects
in the working of plants. On average it will take an individual a
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reasonable period of time for him or her to search for the right job.
This creates unemployment while they look and this type of
unemployment is normal and temporary in nature. The more
efficiently the job market is matching people to jobs, the lower this
form of unemployment will be. However, if there is imperfect
information and people don't get to hear of jobs available that may
suit them, then frictional unemployment will be higher. Therefore,
the better the economy is doing, the lower this type of
unemployment is likely to occur. This is because people will usually
be able to find a job that suits them more quickly when the economy
is doing well.
Seasonal Unemployment
This is due to seasonal variations in the activities of particular
industries caused by climatic changes, changes in fashions or by the
inherent nature of such industries. The ice factories are closed down
in winter throwing the workers out of their jobs because there is no
demand for ice during winter. Likewise, the sugar industry is
seasonal in the sense that the crushing of sugar-cane is done only in
a particular season. Such seasonal industries are bound to give rise
to seasonal unemployment.
Cyclical Unemployment
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This type of unemployment (also known as Keynesian
unemployment or the demand deficient unemployment) is due to
the operation of the business cycle. This arises at a time when the
aggregate effective demand of the community becomes deficient in
relation to the productive capacity of the country. In other words,
when the aggregate demand falls below the full employment level, it
is not sufficient to purchase the full employment level of output.
Less production needs to be carried out which ultimately leads to
retrenchment of workers. Cyclical or Keynesian unemployment is
characterized by an economy wide shortage of jobs and last as long
as the cyclical depression lasts.
Disguised Unemployment
This type of unemployment is to be found in the backward and
the underdeveloped countries of Asia and Africa. The term
‘disguised unemployment’ refers to the mass unemployment and
underemployment which prevail in the agricultural sector of an
underdeveloped and overpopulated country. For example, if there
are four persons trying to cultivate an area of land that could be
cultivated as well by three persons, then only three of these persons
are really fully employed and the remaining fourth person
represents disguised unemployment. The people in underdeveloped
countries are outwardly employed but actually they are
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unemployed, the reason being that agricultural production would
suffer no reduction if a certain number of them are actually
withdrawn from agriculture. This can also be seen when the growth
of the labour force exceeds the amount of investment made. The
lack of investment is due to shortages in real factors such as
shortage of skilled labour, managers, right type of entrepreneurs,
etc. As a result, there is over supply of labour available and these
excess labours are ‘employed” (to be exact, underemployed) in jobs
when there are already enough workers. Therefore, the marginal
productivity of such labour is low. This type of disguised
unemployment is caused by the chronic shortage of capital
resources in relation to the rapidly growing population.
KEY CAUSES OF UNEMPLOYMENT
There are many causes for unemployment, and it is vital that
we understand them all to be effective in combating this great social
evil. Only by offering solutions to tackle the causes of
unemployment can we really solve the problem; treating the
symptoms is not enough and will have the same effect as a
painkiller: you numb the pain but the problem doesn’t go away and,
what’s more worrying, painkillers are addictive, and so are solutions
for the symptoms of unemployment as opposed to the causes.
Recessions
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When the economy is not growing, then jobs aren't being
created and unemployment rises. Combating recessions is done
through a prudent fiscal policy that includes incentives to invest and
to spend money, including lower taxation and interest rates.
Recessions are a reason why Conservatives want sustainable growth
with a prudent fiscal policy. Recklessness in public finances means
that a recession strikes harder and does a lot more damage.
Over-Regulation
Over-regulation is an important cause for unemployment. Too
much burden on a business’ shoulders and that business cannot
afford to expand and, with its expansion, to create more jobs.
Because of this, if you are unemployed, it will be almost impossible
for you to find work, and this will be especially critical for students
and for anyone who finds him or herself out of work when they are
middle aged. There is too much paperwork involved to do anything;
there are too many regulations that stifle job creation efforts. This
leads to a two-tier system, usually, with those who are already
employed having a job for life, and those who do not have a job are
unable to find anything, and are forced to live on welfare. There are
too few job offers for the demand, a shortage that leads to poverty
and chronic unemployment. This means that adding burdens to the
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economy will not create new jobs. It will, in fact, make the amount of
new jobs being created decrease.
Skills
To be able to handle a certain job, a person needs a set
number of skills. If the person does not have the skills for a job, then
he or she either gets training or he or she is unable to get that job.
When the types of jobs in a certain area change, then people
without the right skills are either able to move to a different area or
they are unable to find work. In the meantime, these new jobs are
filled up with new people, who do have the skills these require. A
technology shift can lead to this sort of unemployment, which is
structural in nature. The wrong approach to this problem would be
to keep the old jobs going forever, because that situation is
unsustainable. A lot of money will be spent and the people get to
keep their jobs, but they are not given the possibility to improve
their situation. The way to solve this issue is through training.
Lack of Information
A source of unemployment that cannot be overlooked is the
lack of information about available jobs. If people don’t know that
jobs are there, then they will not take them. It is also important that,
when people do know about possible employment opportunities for
them, they are able to take them. Dissemination of information is
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fundamental in any market, and in the job market it is fundamental
as well. The obvious solution for this problem is to be able to bring
information to the people who need it. Job centers do that, and the
more efficient they are, the more effective they are.
EFFECTS OF HIGH RATES OF UNEMPLOYMENT
High and persistent unemployment has presented a major
challenge for the economy in two major areas. One such area, it has
eroded the funding base and secondly, it has increased the
demands on government through the use of welfare programs
because of the consequences for poverty and inequality resulting
from high unemployment. The following is an analysis of the effects
that unemployment has on the economy. One such effect is the
social costs, these include increasing poverty, personal hardships,
depression, decay of unused skills, increase in crime (mostly among
the young) as well as family disputes and broken marriages.
Unemployed individuals become more and more dissatisfied and
resort to riots and demonstrations.
Secondly, the economic costs that are produced from
unemployment. Due to unemployment, the economy’s GNP will be
less than the potential GNP, that is to say; what is possible of full
employment. This difference is known as the GNP gap. The gap is
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positive but can be slightly negative if the actual GNP exceeds
potential GNP and this can be possible only when the employed
labour works overtime or firms run their plants beyond their efficient
level of capacity. Unemployment is an economic problem involving
loss of output and income.
UNEMPLOYMENT IN NIGERIA
According to the Central Bank of Nigeria (2003) the national
unemployment rate, rose from 4.3 percent in 1970 to 6.4 percent in
1980. The high rate of unemployment observed in 1980 was
attributed largely to depression in the Nigerian economy during the
late 1970s. Specifically, the economic downturn led to the
implementation of stabilization measures which included restriction
on exports, which caused import dependency of most Nigerian
manufacturing enterprises, which in turn resulted in Operation of
many companies below their installed capacity.
This development led to the close down of many industries
while the survived few were forced to retrench a large proportion of
their workforce, furthermore, the Nigerian Government also placed
an embargo on employment. Specifically, total disengagement from
the Federal Civil Service rose from 2, 724 in 1980 to 6,294 in 1984
(Odusola, 2001). Owing to this, the national unemployment rate
fluctuated around 6.0% until 1987 when it rose to 7.1 percent. It is
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important to state here, that SAP adopted in 1986, had serious
implications on employment in Nigeria, as unemployment rate
declined from 7.1 percent in 1987, to as low as 1.8 percent in 1995,
after which it rose to 3.4 percent in 1996, and hovered between 3.4
and 4.7 percent between 1996 and 2000 (Douglason et al, 2006).
According to a 1974 survey, reported by Aigbokhan (2000)
graduate unemployment accounted for less than 1 percent of the
unemployed, in 1974, by 1984, the proportion rose to 4 percent for
urban areas and 2.2 percent in the rural areas. Graduate
unemployment, (Dabalen et al, 2000) accounted about 32% of the
unemployed labour force between 1992 and 1997. It is impressive to
note here that, in 2003, Nigerian’s unemployment rate declined
substantially to 2.3 percent. This decline was attributed to the
various government efforts aimed at addressing the problem
through poverty alleviation programmes. Recently, the Federal
Government accepted World Bank's figure of 40 million (28.57%)
unemployed people in Nigeria.
Though there were no details of how the Bank arrived at that
figure, the admission by the Minister of Labour, Prince Adetokunbo
Kayode that we do have such an unemployment crisis is enough to
give credence to the report. We recall that two years ago, the
Federal Government disclosed that about 70 percent of Nigeria's
26
population lived below the poverty line, but since then no concrete
measures have been taken to address the situation. Suddenly we
are confronted with the statistic that 40 million Nigerians are
unemployed. It is indeed worrisome for a country with a population
figure of 140million (as indicated in the 2006 Census report) to have
40million unemployed. But we wonder why the minister should rely
on World Bank to ascertain the country's unemployment figures
rather than obtain same from the federal office of statistics.
Notwithstanding the reliability or otherwise of the figures, the good
thing is that those at the helm of affairs are beginning to show
concern about the growing rate of unemployment and poverty in
this country and may decide to act now.
While acknowledging efforts made by previous administrations
to tackle the problem of unemployment, we however disagree with
the minister for attributing the present statistics to the current
global economic meltdown. Over the years, hundreds of factories
that hitherto provided employment to multitudes of graduates and
artisans have collapsed. In one year, over 100 textiles factories
closed shop across the country and the trend continues. Why? This
is because energy supply which serves as the main engine of
production has been comatose, thus forcing surviving industries to
depend on power generators while the country becomes a dumping
ground for all imported items. Many artisans such as furniture
27
makers, welders, aluminium window fitters, tailors, etc who cannot
afford power generators are today out of work.
In desperation, a large chunk of Nigerian youths have taken to
riding commercial motorcycles while others went into street hawking
just to keep body and soul together. The country is faced with a
gross abuse and under utilization of human resources with direct
impact on national productivity and competitiveness. Brain drain in
all professional callings has become the order of the day, while the
Manufacturers Association of Nigeria (MAN) which used to play a key
role in policy formulation and implementation has been reduced to a
gathering of complainants. Another disturbing aspect of the whole
phenomena is the state of our educational system which has forced
some employers of labour to reserve spaces for Nigerians with
foreign qualifications. This is because our higher institutions are
steadily producing graduates whose skills are suspect, thus making
it difficult for them to get recruited. This brings to the fore, the need
for Guidance and Counseling tutorials in our schools, in order to
prepare, guide and encourage students to read courses that could
guarantee them employment after graduation.
POLICIES TO MINIMISE UNEMPLOYMENT IN NIGERIA
28
Government policies to reduce unemployment must be based
upon the types and causes of unemployment that are prevalent. It
may be worth glancing back to that section to remind yourself of the
major kinds of unemployment; however, we will go into more detail
in this section. General policies such as cuts in direct taxes so
should be effective across any kind of unemployment, as it increases
the appeal of any job to any potential employee.
Real Wage Unemployment
This is unemployment as a result of a kind of market failure, a
failure of the labour market to respond to changes in demand. If
demand for workers rises, it is logical that they will demand greater
real wages similarly, if demand falls, workers should expect to suffer
lower real wages for the same work. Real wage unemployment is
usually caused by a combination of:
Strong trade unions - giving employees greater power over
deciding wage conditions with the threat of industrial action
(strikes etc.) With strong unions, firms will not be able to
reduce wages when demand is low, leading to bankruptcy
(unemployment) or layoffs of workers (unemployment)
Wage 'stickiness' - Employees on long term contracts will
have a fixed wage over a long period of time. If a downturn in
29
demand occurs, wages cannot fall immediately in response -
they are 'sticky'
Minimum wage - This is a characteristic of most modern
economies, guaranteeing every worker a minimum standard of
living. Whilst this is undoubtedly wonderful, if the minimum
wage is set too high, the labour market is once again
inflexible
Government policies to tackle this form of unemployment are
invariably unpopular for workers, as their wage levels are
threatened to the benefit of firms and businesses. However, it is
largely appreciated that, for example, overly strong trade unions can
utterly paralyze an economy. Policies to combat real wage
unemployment include trade union reform (reducing their powers);
increasing firms' ability to change wages and encouraging shorter
term contracts and ensuring that the minimum wage level does not
adversely impact the economy.
Frictional Unemployment
Remember, this is unemployment generated through
incomplete information of the labour market. This can be solved in
two main ways. Firstly, increasing the knowledge of the local
vacancies through government funded 'job centers’ could reduce
time between jobs. Secondly, increasing the incentive to search for
30
suitable jobs (such as reducing unemployment benefits and lower
taxes on wages) could serve the dual purpose of increasing
incentives to search for work, and making more vacancies
acceptable to the unemployed individuals.
Cyclical Unemployment
It is worth noting that this form of unemployment can also be
known as Keynesian or demand-deficient unemployment. Over the
economic cycle demand changes, and regardless of how flexible
wages are, unemployment will rise of fall. There are clear links
between the rate of economic growth and the level of
unemployment. It is clear that in a depression, unemployment will
rise, as demand for good and services falls. This could result in a
negative multiplier effect, without government intervention. Policies
to reduce the impact of Keynesian unemployment include:
Increased government spending - this includes reductions
in taxes. Increased government expenditure or money supply
will cause an outward shift in AD, and may create a multiplier
effect. Theoretically, government spending to pay workers to
dig huge trenches and fill them in again will help, as it
increases national income. However, targeted policies to
increase the quality of infrastructure or levels of investment
will be more effective. Also, reductions in direct taxes will
31
encourage more people into work, and also increase the level
of disposable income, hopefully leading to a positive multiplier
effect
Reduction of interest rates - remember that a fall in
interest rates can also stimulate AD. A fall in interest rates
encourages consumption and investment. Reflating Aggregate
Demand by using macro-economic policies to increase the
level of aggregate demand. It might also encourage foreign
investment into the economy from foreign multinational
companies. In the diagram below we see an increase in
aggregate demand leading to an expansion of aggregate
supply. Because of the increase in demand for output, the
demand for labour at each wage rate will grow - leading to an
increase in total employment.
32
Not every increase in demand and production has to be met by
using more labour. Each year we expect to see a rise in labour
productivity (more output per worker employed). And, businesses
may decide to increase production by making greater use of capital
inputs (machinery and technology).
Geographical Unemployment
Naturally, policies to reduce geographical unemployment will
seek to decrease geographical immobility of labour. This is the
inability of people to relocate from areas with low demand for
labour, to areas with high demand for labour. Policies to reduce
geographical unemployment include:
Regional Incentives - this is regional policy to increase the
incentives for new businesses to locate in areas of high
unemployment, thus reducing regional variations in
unemployment caused by geographical immobility
Reducing geographical immobility - is the second and
more direct method of combating geographical
unemployment. It aims to reduce geographical immobility by
reducing barriers to free movement of workers (such as no
border controls and cheap housing). This is more difficult
within a country as the barriers are often social in nature, such
as family ties.
33
Structural Unemployment
This is the inability of workers to change the kind of
employment (for example from manufacturing to IT) they are in. Left
without intervention, this could lead to dangerous long term
unemployment, whereby workers find it increasingly difficult to find
jobs as they become less desirable the longer they are unemployed.
Policies to reduce occupational unemployment include:
Retraining - incentives for both companies to retrain and
employees to take part in training to make them more
attractive and useful to firms. Governments may also directly
take part in retraining projects where unemployment levels as
a result of structural unemployment are very high
Reducing geographical immobility - could result in no need
for retraining programs, as worker could simply move to an
area in which their skills are in high demand. This works
providing the costs associated with reducing geographical
immobility are lower than those required for occupational-
orientated projects such as retraining, and that their skills are
in demand somewhere.
National Directorate of Employment (NDE)
One of the steps taken by the Nigerian government to reduce
the problem of unemployment in Nigeria was the establishment of
34
the National Directorate of Employment (NDE), which was
established in November 22, 1986. The objective of NDE was to
promptly and effectively fight unemployment by designing and
implementing innovative programmes, which are directed towards
the provision of training opportunities through the guidance and
management support services to graduate farmers and small scale
entrepreneurs. The objectives of NDE spanned across the following
programmes:
• Agricultural development programme
• Youth employment and vocational skills development programme
• Special public works
• Small scale industries and graduate employment programme
The aim of the agricultural programme is to generate
employment for graduates, non-graduates and school leavers in the
Agricultural sector, with emphasis on self employment in agricultural
production and marketing. The programme is monitored by a team
of Agricultural professionals in the Agricultural department of the
directorate. However, factors which includes inadequate funding and
late release of funds from the federation account among others,
have impaired the effectiveness of the NDE agricultural programmes
(Chinedum, 2006). As stated earlier, this study seeks to recommend
35
the informal sector as a medium of reducing unemployment in
Nigeria, while outlining some of the pointers needed in making the
objectives achievable.
National Economic Employment and Development Strategy
(NEEDS)
The National Economic Employment and Development
Strategy (NEEDS) was introduced in March 2004, in order to confront
the various macroeconomic imbalances, social challenges and
structural problems in the Nigerian Economy. One of the principal
goals is to build a modern Nigerian that maximizes the potential of
every citizen so as to become the largest and strongest African
economy, and a force to be reckoned with in the world. To achieve
this goal NEEDS, as a development strategy anchored on the private
sector is to engineer wealth creation, employment generation and
poverty reduction, however, for NEEDS to achieve its objectives
there’s need to design many integrated programmes that can
generate employment for women and youths to enhance growth and
development (Adebayo, 2006). As it is a medium – termed reform
based development strategy, and action plan for the period 2003-
2007, the impact of NEEDS is yet to be felt, in combating
unemployment problem and this further points to the need to seek
36
help in the informal sector in order to drastically reduce
unemployment.
III. EMPIRICAL LITERATURE
Ozturk L. & Akhtar.I. (2009) took an comprehensive approach
to unemployment by using VAR of “ Variance Decomposition and
Impulse response function analysis”. He was interested in studying
interrelationship among Foreign Direct investment, Export, Gross
Domestic product and unemployment in Turkey for the period of
2000-07. They found only two counteracting vectors in the system,
showing long run relationship. They concluded that foreign direct
investment did not lead to reduce unemployment in Turkey. GDP is
positively affected by variations in exports but is insignificant. So
they did not found any evidence of export led growth in Turkey.
Again, Variations in DGP was no attached with reduction of
unemployment.
Marika Karanassou.et.al (2007) analyzed labour market
dynamically to find relationship between capital stock and
unemployment. They used indirect transmission channels of the
effects of capital stock for estimating single equation unemployment
model. The major variables they used were interest rates and
investment ratios. They introduced different approaches especially
by direct estimation of the model of “Employment theory of Chain
37
response” for the effects of capital stock on labour market. They
concluded that capital stock is the key determinant of
unemployment.
Aleksander.et.al (2009) focused on studying long run
relationships among money supply, interest rate and unemployment.
They concluded that these variables are positively related at low
frequencies. They developed such a framework where money and
unemployment were modelled by using micro details based on
“search and bargaining theory”. They provided a unified theory for
analysis of labours and goods markets. As people hold a sizable
amount in unemployment so the use of monetary theory can be on
basis of search and bargaining or may an alternative ad hoc plan.
Mark C. Foley (1997) used Russian People’s longitudinal survey
for studying determinants of unemployment in early stages of
economic transition in Russia. He used a discrete-time waiting model
along with competing risk and heterogeneity models. He concluded
that married women experience longer unemployment period than
married man. Older worker face higher unemployment period as
compared to younger worker. Persons with lower education were
forced to have longer unemployment spell.
Kupets. O.V (2005) studied determinants of unemployment in
Ukraine between 1997 & 2003. He used Ukrainian Longitudinal
38
Monitoring Survey 2003, to investigate an individual conditional
probability about leaving unemployed to employ. Effects of
unemployment benefits on unemployment were not conformed.
Again, Multivariate Analysis suggested that long term unemployment
reduction policies should focus more on less educated & older
workers and residents of rural areas.
Elameskov. et al (1998) focused on relationship between
unemployment and taxation in OCED countries for the period of
1983-1994. He used Hausman specification test & concluded that
impact of taxation on unemployment is positive and exogenous in
short run where as in long run, relationships are simultaneously
determined. Main conclusion is taxation as a major determinant of
unemployment in long run.
Shu-Chen Chang (2006) applied VAR method of variance
decomposition and impulse response function analysis for studying
relationship among economic growth, trade, foreign direct
investment (FDI) and unemployment in Taiwan. The result showed
that export and economic growth effect FDI inflow positively
however export expansion has negative impact on FDI outflow.
Study confirmed no relationship between FDI and unemployment
where as negative relationship between unemployment and
economic growth was obvious and confirmed.
39
Izraeli and Murphy (2003) studied influence of degree of
industrial diversification on unemployment rates and per capita
income in seventeen states. The result showed that a state with
more diversified base has lower unemployment rate. Evidence on
the relationship between per capita income and industrial
diversification remained inconclusive.
Though a lot of work has been done on relationship between
unemployment and other set of macroeconomic variables but less
attention is paid to determinants of unemployment i.e. what are the
major determinants of unemployment? This paper proceeds to
employ simple econometrics technique of Regression analysis for
analyzing economy.
IV. METHODOLOGY AND MODEL ESTIMATION
a. Data Collection
Basically, data used in this work were obtained from secondary
sources of data collection and theses include textbooks, journals,
articles, statistical bulletins and other publications. The information
obtained from these sources was applied in analysis carried out in
this study, and also found use in the building up of literature.
b. Model Specification
The model specified for this study was used to evaluate the
determinants of unemployment in Nigeria; this would be considered
40
from period 1990 – 2009. From literature, it is possible to identify
some of the possible determinants of unemployment in Nigeria to
include inflation, population growth and foreign direct investment.
The functional form of the model is specified as follows:
UR = F (INR, PG, FDI)
Where UR stand for unemployment rate, PG represent population
growth, FDI is for Foreign Direct Investment and INR denotes
Inflation rate.
In the empirical form, the model is specified as:
UR = 0 + 1 INR + 2 PG + 3 FDI + Ui
Here the UR is used as dependent variable, while INF, PG and
FDI are used as explanatory variables in the models. The 0 is the
intercept, 1 to 3 are the unknown parameter (i.e the slopes) and
the U, is the random term (stochastic variable)
THE APRIORI EXPECTATION
= ≠ 0
1 > 0
2 > 0
3 > 0
41