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EXAMINE THE RELATIONSHIP BETWEEN THE UNEMPLOYMENT RATE AND INFLATION IN NIGERIA,TESTING PHILIPS CURVE

ABSTRACT

From 1980 to 2012, this study looked into the relationship between unemployment and inflation in Nigeria. Unemployment was calculated as a function of inflation, money supply as a percentage of GDP, and total government expenditure as a percentage of GDP in the model. The causality test, VECM test, and co integration test were utilized as statistical tests. The study discovered that: I Inflation had a considerable impact on unemployment in Nigeria both in the long and short run during the time under consideration, based on the above tests. (ii) The variables in the model have a causal link that is significant. The study concluded that the government should use discretionary policy to minimize unemployment by increasing government spending while maintaining money supply stability.

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY:

The government’s macroeconomic aims include, without a doubt, maintaining a steady domestic price level and achieving full employment. Three broad metrics of macroeconomic performance are used to assess it: unemployment rate, inflation rate, and output growth rate (Ugwuanyi, 2004).

Unemployment has been labeled as one of the most important roadblocks to social advancement. Apart from being a huge waste of a country’s labor resources, it results in a loss of welfare in the form of lower output, which leads to lower income and well-being (Raheem, 1993).

Inflation, on the other hand, has long been a big issue in the country. In many market economies, the term “inflation” is well-known. Despite the fact that a variety of people, including producers, customers, professionals, non-professionals, trade unionists, employees, and others, routinely converse,

The monetarist, on the other hand, interpreted inflation as a result of excessive money supply expansion in relation to real output. Their perspective on unemployment, on the other hand, is informed by Milton Friedman’s perpetual income hypothesis. According to the Permanent Income Hypothesis (PIH), a decrease in employment and current receipts only has an effect on output to the extent that expected income decreases.

Each school of thought proposed its own set of policy recommendations. There were no substantial initiatives, however, to look at inflation and unemployment at the same time.

 

It wasn’t until 1958, after Phillips’ curve was introduced, that

Traditional economics began to look at unemployment and inflation at the same time, resulting in the postulation of a trade-off between the two: a lower inflation rate must be willing to put up with a higher level of unemployment, and vice versa. However, economists like Milton Friedman and Edmund Phelps disagreed with Phillips curve theory, claiming that the trade-off between unemployment and inflation only existed in the short run and that the Phillips curve is vertical in the long run. The Natural Rate Hypothesis was born as a result of this.

Furthermore, empirical research conducted by different economists over the years has challenged the validity of Phillips’ trade-off thesis in one way or another. High inflation and high unemployment rates have been proven to coexist, resulting in

Unemployment and inflation are two challenges that affect any country’s social and economic life. Unemployment and inflation, according to existing literature, form a vicious spiral that explains the endemic character of poverty in emerging countries. And it’s been suggested that the surest way to break the vicious circle is to keep improving productivity, which leads to an adequate supply of products and services.

The decline of oil prices, on which the economy had become dangerously dependent, delayed Nigeria’s experience of unemployment and inflation until the early and mid-1980s. Previous statistics revealed that the Nigerian economy was able to supply work for its growing population before to the 1980s.

The wage rate was competitive with worldwide standards, inflation was mild, and most industry sub-groups experienced relative industrial peace.

The oil boom of the 1970s prompted a major movement of young people into cities in search of work. However, following the recession of the 1980s, available data revealed that the problem of unemployment began to emerge, prompting the implementation of the Structural Adjustment Programme (SAP), the rapid depreciation of the naira exchange rate, and the inability of most industries to import the raw materials needed to maintain output levels.

The quick devaluation of the naira resulted in a dramatic rise in the general price level (inflation), resulting in a large drop in real wages. Low wages, in turn, fueled wage earners’ declining purchasing power and a drop in aggregate demand. As a result, industries began to acquire unwanted inventories, and manufacturing firms began to rationalize their market prices as a rational economic agent. With the rapid expansion of the educational sector, the number of new entrants into the labor market surpassed the economy’s absorption capacity. As a result, the government’s stated goal of “full employment” was not met.

As a result, the goal of this study is to see if the trade-off thesis can be applied in Nigeria.

De Me, Anthony

STATEMENT OF THE PROBLEM:

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