ABSTRACT
This study is an analysis of the Phillips hypothesis and Nigeria’s economic growth. The following were the specific objectives; to ascertain whether Phillips assertion of negative relationship between unemployment and inflation holds in Nigeria; to estimate the extent to which unemployment affect economic growth in Nigeria and to determine whether there is any significant impact of inflation on economic growth in Nigeria. The study which covered the period between 1981 and 2018 employed various techniques of econometric analysis using the ex-post facto research design. The study began with a test of stationarity which was conducted using Augmented Dickey Fuller method and the findings showed that three of the variables employed were stationary at level while others were stationary at first difference. The study had two separate equations with the first equation aimed at ascertaining the validity of Phillips hypothesis in Nigeria while the second addressed the issue of how unemployment and inflation variously affect economic growth in Nigeria. The study employed the Autoregressive distributed lag/Bounds testing procedure developed by Perseran and Shin (2001) and the result showed evidence of long run equilibrium relationship between the variables employed in the two models. Specifically, the first model showed that inflation has a negative relationship with unemployment, signaling a tradeoff relationwhile the second model showed that there is a negative relationship between inflation and economic growth and a positive relationship between unemployment and economic growth in Nigeria in Nigeria. Based on the above findings, the study recommended, among others, that in putting up policies to ameliorate unemployment, caution should be applied by policy makers to ensure that such policies do not trigger very high rate of inflation.
TABLE OF CONTENTS
Title page i
Declaration iii
Certification iv
Dedication v
Acknowledgements vi
Table of Contents vii
List of Tables viii
List of Figures x
Abstract xi
CHAPTER 1
INTRODUCTION
1.1 Background to the study 1
1.2 Statement of the problem 7
1.3 Research Questions 9
1.4 Objectives of the study 9
1.5 Research Hypotheses 10
1.6 Significance of the Study 10
1.7 Scope of the Study 11
CHAPTER 2
REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 12
2.1.1
The concept of
unemployment 12
2.1.2
The concept of inflation 16
2.1.3
Some stylized facts on
inflation, unemployment and economic growth 19
2.1.4
The concept of Phillips curve 20
2.1.5
Axioms of the Phillips
curve 21
2.2 Theoretical literature review 21
2.2.1
The Phillips curve theory 21
2.2.2
The short-run Phillips
curve theory 22
2.2.3
The long-run Phillips
curve theory 24
2.2.4
The criticisms of the
Phillips curve theory 26
2.2.5
The relevance
of the Phillips curve in developed and developing economies 27
2.2.6
Policy implications of the
Phillips curve 29
2.3
Empirical Literature Review 30
2.4
Summary of Empirical Literature 33
2.5
Identified Gap in Empirical Literature 34
CHAPTER 3
METHODOLOGY
3.1 Research design 35
3.2 Theoretical Framework 35
3.3 Model Specification 37
3.4 Estimation Techniques 40
3.4.1
Pre-Estimation Test 40
3.4.2
Estimation Test 42
3.4.3
Autoregressive distributed lag(ARDL) model 43
3.4.4
Post-Estimation Test 43
3.5 Variable Definitions 46
3.6 Data Sources 47
CHAPTER 4
PRESENTATION OF DATA
AND INTERPRETATION OF RESULT
4.1 Pre-estimation Test Results 48
4.1.1
Descriptive
statistics 48
4.1.2
Unit root test
result 49
4.1.3
Test for cointegration
50
4.2 Estimation test 52
4.2.1 Autoregressive distributed lag (ARDL) model 52
4.2.1.1 ARDL estimation for model 1 52
4.2.1.2 ARDL estimation for model 2 54
4.2.1.3
ARDL estimation for model 3 55
4.2.2
ARDL cointegrating and long run form 56
4.3
Post estimation tests 61
4.3.1
Stability test 62
4.3.2
Auto correlation test 62
4.3.3
Heteroskedasticity test 63
4.4
Test of hypothesis 64
4.5
Implications of the Study 65
CHAPTER 5
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of the Study 68
5.2 Conclusions 70
5.3 Recommendations 71
REFERENCES 72
APPENDICES 78
LIST OF TABLES
Pages
2.1:
Methods of measuring Inflation 17
2.2:
Summary of empirical literature 33
3.1 A
priori expectation for model 1 38
3.2 A
priori expectation for model 1 39
3.3 A
priori expectation for model 1 40
4.1:
Descriptive statistics of variables in the model 48
4.2:
Augmented dickey fuller unit root test result 50
4.3: Bounds test result for model 1 51
4.4: Bounds test result for models 2 and 3 52
4.5: Autoregressive distributed lag (ARDL) result
for model 1 53
4.6: Autoregressive distributed lag (ARDL) result
for model 2 54
4.7: Autoregressive distributed lag (ARDL) result
for model 3 55
4.8: ARDL cointegrating & long run form
for model 1 56
4.9: ARDL cointegrating & long run form
for model 2 58
4.10: ARDL cointegrating & long run form
for model 3 60
4.11: Breusch-Godfrey serial correlation L.M
test for model 1 62
4.12: Breusch-Godfrey serial correlation L.M
test for model 2 62
4.13: Breusch-Godfrey serial correlation L.M
test for model 3 63
4.14: Breusch-Pagan Godfrey test of
heteroskedasticity for model 1 63
4.15: Breusch-Pagan Godfrey test of
heteroskedasticity for model 2 63
4.16: Breusch-Pagan Godfrey test of
heteroskedasticity for model 3 64
LIST OF
FIGURES
Pages
1.1: Inflationary and unemployment trend in
Nigeria (1981-2018) 5
2.1: Unemployment trend in Nigeria 15
2.2: Inflation trend in Nigeria 18
2.3: The Phillips curve 20
2.4: The short-run Phillips curve 23
2.5: The long-run Phillips
curve 25
2.6: Stagflation 27
2.7: Policy implications of the Phillips Curve
29
4.1: Cusum
test and cusum of squares for model 1 61
4.2: Cusum
test and cusum of squares for model 2 61
4.3: Cusum
test and cusum of quares for model 3 62
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The
achievement of economic growth and stability is an important macroeconomic
policy objective of world economies. This objective is however unachievable in
the absence of economic stability. Economies tend to experience certain
fluctuations in their path to economic growth and development. These
fluctuations which result in distortions in the economy thereby hampering the
achievement of growth and development are function of certain variables. Policy
makers thus tailor policy objectives toward reducing or possibly eradicating
the impacts of these variables in order to pave way for economic growth and
development. In line with this view, Hussain and Malik (2011) noted that policy
makers consider the level of economic indicators and dynamic relations among
macroeconomic variables because of their various impacts on macroeconomic
stability. This stability is pivotal to achieving growth and development in the
economy and also the attainment of its set out goals and objectives (Ugwuanyi, et
al., 2018).
The
rates of upsurge in general price level (Inflation) and joblessness level
(Unemployment) are usually considered when making economic policies because of
their important role as major determinants of economic stability in any
economy. Increase in the rates of either of them (Inflation or Unemployment) is
usually unhealthy for such economy. Economies
of the world thus continuously strive to keep both at minimal rates. It is
often argued that a single digit inflation rate and an unemployment rate of
about 5% are tolerable and would not affect an economy’s stability all things
being equal {Orji, et al., 2015).
In
the Nigerian economy, Unemployment and Inflation are vital macroeconomic
variables which are given top consideration during the formulation of
macroeconomic policies. The economy over
the years can be said to be in turbulent times as unfavourable digits of both
variables have constantly been recorded.
For
instance, the economy has experienced four major episodes of inflation
exceeding of 30 per cent since 1970. The first was in 1975, with an inflation
rate of 33.7 per cent. The factors responsible for this development included
drought in Northern Nigeria, which pushed up food prices as well as the
excessive monetization of the large inflow of dollars that accrued from the
crude oil boom (Babatunde S. Omotosho & Sani I. Doguwa 2018). Strategies
adopted to forestall the situation included reducing import duties on a
relatively large number of goods and raw materials, a conscious monetary policy
targeted at encouraging banks to lend more to the productive sectors of the
economy and the setting up of the Anti-Inflation Task Force, which recommended
the establishment of the Productivity, Prices and Incomes Board, thus resulting
in the gradual decline in the average inflation rate during the period 1976 –
1983. Another remarkable episode was in 1984 when inflation rate rose to a high
rate of about 41.2 per cent, owing to the expectations of imminent devaluation
of the domestic currency and monetary expansion. In response, the military
regime embarked on another round of price control, which led to a decline in
the inflation rate to 5.5 per cent in 1985 and 5.4 per cent in1986. The third
episode of high inflation occurred during 1988 and 1989 caused by fiscal
expansion of the 1988 budget, which was financed by credit from the CBN.
Increased agricultural production helped to moderate inflationary pressures in
1990 as the inflation rate fell to 8.2 per cent. The fourth inflationary
episode was the most turbulent in Nigeria’s inflationary experience as it
lasted about five years starting from 1992 and reaching an all-time high of
over 80.0 per cent in 1995. Largely responsible for this development were
monetary growth and fiscal expansion. As a response to the inflationary
pressures of the period, the government strengthened its stabilization measures
in the economy as it entrenched effective monetary policy, fiscal discipline as
well as exchange rate stability. These measures resulted in a systematic
decline in inflation rate from over 80.0 per cent in 1995 to 7.1 per cent in
2000.
Similarly,
unemployment rates have not fared better over the years. It has kept on increasing and fluctuating
especially in the recent past years, for instance in 2016, between 12.1% and
21.5% of Nigeria’s youth were without a job, and rates of underemployment are
even higher. The inability of the economy to generate enough jobs results from
the insufficient allocation of resources to the creation of new economic
opportunities, combined with a difficult business environment, which disincentivizes
domestic investment and induces capital flight. The situation of the unemployed
reached desperate levels when on 15th of March 2014, 6.5 million people visited
recruitment centres to apply for 4000 vacant positions in the Nigeria
Immigration Service. At least 16 people died in the stampede that ensued during
the process.
The
foregoing affirms that there has always been a situation of spikes in inflation
and unemployment. More so, the shock in oil price during the early 2016 which
led to economic recession in the Nigerian economy was also another major
contributor to inflation scenario in the country. With decline in oil prices in
2016, the economy’s Total Output(GDP) recorded negative figures for four
consecutive quarters in 2016: -0.36% in Q1; -2.06% in Q2; -2.24% in Q3; and
-1.3% in Q4 (CBN, 2016). Inflation rate
increased to a very high rate of 16.52% in January 2017, the highest since
September 2005 as price hike was experienced in the commodity market as the depreciation
of the naira led to the doubling in prices of consumer goods in the
economy. Till now, the nation’s economy
is yet to fully recover from the oil price shock and the resultant inflation
that followed. Prices continue to increase and are said to be “sticky
downward”, meaning once they increase they do not easily fall back even though
there is an improvement in the general economic condition.
The
recession period further aggravated unemployment in the economy by making
several firms resort to mass cost-cutting across the country. Reputable
companies like the Nestle Nigeria Plc recorded an increase in its net foreign
exchange loss from N1.7bn in 2015 to N16.2bn in 2016, Nigerian Breweries Plc
and Transnational Corporation of Nigeria (Transcorp) Plc also recorded increase
in loss of foreign exchange transactions from N752mn to N7bn and N6bn to N18bn,
respectively in same 2016. The effect on the Nigerian Breweries Plc was such
that they laid off more than 100 staff from August to October of 2016, First
Bank Nigeria Holdings Plc laid off 1,000 workers, Ecobank Nigeria Plc, 1,040;
and, Diamond Bank Plc, 200 - all in the span of two months in 2016 (CBN, 2016).
Sequel to this, with the teeming population of the nation’s labour force which
rose from 78.5 million to 79.9 million, a good population of the labour force
remained unemployed (NBS, 2016). According to the NBS record, 2016 witnessed
the worst upsurge in unemployment as it increased from 9.6% in January to
18.55% in December.
Thus,
due to the vital roles of the two variables as important determinants of growth
and also as yardsticks for the measurement of the standard and cost of living
in the economy, they are usually given top consideration during policy making..
From the foregoing, it can be deduced that there is simultaneous and constant
increase in both variables. An increase in the economy’s misery index was also
recorded to have increased from 18.02% in 2005 to 28.73% in 2016, the highest
ever. This increase accounts for the high rates of both variables in the
economy. Studies have shown that a certain nexus exists between inflation and
unemployment. Various researchers have delved into the study of the nature of
this nexus. Among them are Thornton (1802), Fisher (1926), Tinbergen (1936),
Klein and Goldberger (1955), Brown and Sultan (1957) etc. However, the study by
Phillips (1958) which was later tagged the Phillips curve resulted in the
hypothesis that negative causality exists between unemployment level and
inflation rate implying that a rise in either of them is accompanied by
decrease in the other. Furthermore, the hypothesis succinctly suggests the
existence of a trade-off between the variables. This means that a two-way
causality exists between the variables {thus, a downturn in the rate of inflation
stimulates an upsurge in the rate of unemployment and vice versa}.
The inconsistencies of this hypothesis due to its
failure to account for certain economic situations have led to its further
scrutiny by researchers resulting in its refutal on certain grounds. For
instance, the 1973-1975 recession which was propelled by simultaneous increase
in both inflation and unemployment rates in developed nations like the United
States and the United Kingdom. The failure of the Phillips hypothesis to proffer
a suitable explanation of this phenomenon brought the hypothesis under scrutiny
(Aurelien, 2017). Recently, the Nigeria scenario of simultaneous rise in these
two important macroeconomic variables has also made the applicability of the
Phillips hypothesis to the Nigerian economy somewhat questionable. The Nigerian economy constantly records
double-digits of inflation and unemployment rates. For instance, during the
second quarter of 2015, the rates of inflation and unemployment in Nigeria were
at double-digits (CBN Statistical Bulletin, 2015). Worst of all is the
unsteadiness of the inflationary trend which depicts a struggling economy with
fluctuating prices, increasing unemployment and poverty rates.
Worthy of note is the efforts of the government
over the years in ameliorating the situation which include the several
anti-inflationary policies and employment generation programmes all intended to
curb inflationary pressure and maintain a 5% natural rate of unemployment. In
this regard, we have the CBN restrictive monetary policy stance such as the
adoption of the 12% monetary policy rate from 2011 to date as one of the
measures to tame inflation to possibly single digit among other policy
objectives by the Monetary Policy Committee. The National Directorate of
Employment (NDE), the National Poverty Eradication Programme (NAPEP), the
Poverty Alleviation Programme (PAP), the Youth Enterprise with Innovation in
Nigeria (YOUWIN), the Subsidy Reinvestment and Empowerment Programme (SURE-P),
N-POWER etc were also instituted to tackle unemployment in the economy. We also
have the recent Economic Recovery and Growth Plan (ERGP) launched on March 7th,
2017. The Economic Recovery and Growth Plan (ERGP) is not a development plan
but an economic policy roadmap that encompasses the 2017 appropriation bill and
the Medium Term Expenditure Frame-work (MTEF). Among other objectives, the plan
aims to achieve:
·
A sustainable and
market-determined exchange rate regime, as pressure mounts to let the naira
float freely;
·
An inflation rate of
15.74% in 2017, 12.42% in 2018 and single digits inflation by 2020; and,
·
A reduced unemployment
rate from 13.9% to 11.23% by 2020 by creating over 15 million direct jobs
between 2017 and 2020 or an average of 3.75 million jobs per year (ERGP, 2017).
With such intervention strategies as these, the
government of the country can be said to have taken steps in the right
direction towards reducing unemployment and inflation in the economy but
despite these interventions, inflation and unemployment still persist in the
economy (Sodipe and Ogunrinola, 2011). According to the World Bank Report, the
nation’s economy is still yet to witness a positive turn-around as poverty,
unemployment and inflation continue to trouble the economy (World Bank, 2011).
This research is therefore undertaken as a review of
the Phillips curve to ascertain its applicability to the Nigerian economic
situation.
1.2
STATEMENT OF THE PROBLEM
Persistent
fluctuations and simultaneous increase in the rates of inflation and
unemployment has really bedeviled the Nigerian economy over the years. Economic
indicators have consistently been unimpressive resulting in continued economic
crisis, including high rates of unemployment and underemployment, low wages,
poor working conditions and high
inflation rate which has overtime attracted the attention of economists,
policymakers and researchers alike (Thomas, 2012). The nation’s
statistical trend analysis with special reference to the trends in economic
growth rates depicts puzzling inflation and unemployment rates since the early
1980s. Inflation rate has remained above 5%
acclaimed tolerable rate, hovering around double digits. For instance, in 1981,
the rate of inflation was 20.81% probably resulting from the post-oil boom
effect. The rate continued fluctuating intermittently dropping to single digit
but frequently recording double digits, reaching an all-time high of 72.8% in
1995. This unusual increase is attributable to excess supply of money, scarcity
of foreign exchange and severe reduction in commodity supply as well as
continuous labour and political unrest following the annulment June 1993
elections (Mordi et. al, 2007).
More
so, the investigations by researchers as to the main determinants of inflation
yielded no consensus with regard to its ultimate source, be it monetary or
structural factors. Hence, procuring an effective solution to it had not been
easy. The rates of unemployment have also been unfavourable in the economy.
Just like inflation, it has fluctuated around double digits and also
intermittently recording single digits. Recent data from the National Bureau of
Statistics (NBS) and International Financial Statistics on unemployment show
rates above 20% (NBS, 2016).
This
situation presents the Nigerian economy as one experiencing simultaneous
increase in inflation and unemployment rates and this is quite unfavourable for
economic growth. Recently, the nation’s economy was said to have slid into
recession in 2016 when it recorded negative growth rates consecutively for two
quarters affirming the adverse effects of high rates of inflation and
unemployment in the economy. One can rightly say that the economy of the nation
is experiencing stagflation as reported years ago (Nwaobi, 2009). With such an
economic situation, people’s welfare and happiness is affected negatively
inciting crimes and social vices such as drug trafficking, prostitution, and
other crimes which are related to high rates of unemployment ( Nwaobi, 2009).
It
therefore became a major problem on the part of policy makers on how to achieve
and maintain low and stable unemployment rate as well as relatively low prices
so as to achieve high economic growth. Hence, policy makers in Nigeria have put
in efforts in trying to maintain low prices of goods and services and low
unemployment rates through several anti-inflationary policies and employment
generation programmes to curb inflationary pressure and maintain a 5% natural
rate of unemployment. In this regard, we have the CBN restrictive monetary
policy stance such as the adoption of the 12% monetary policy rate from 2011 to
date as one of the measures to tame inflation to possibly single digit among
other policy objectives by the Monetary Policy Committee. Intervention
strategies such as the National Directorate of Employment (NDE), the National
Poverty Eradication Programme (NAPEP), the Poverty Alleviation Programme (PAP),
the Youth Enterprise with Innovation in Nigeria (YOUWIN), the Subsidy
Reinvestment and Empowerment Programme (SURE-P), N-POWER etc were also
instituted to tackle unemployment in the economy but despite these
interventions, unemployment still persists in the economy (Sodipe and
Ogunrinola, 2011). Even with the current Economic Recovery and Growth Plan
(ERGP) of the present administration, the nation’s economy is still yet to
witness a positive turn-around as poverty, unemployment and inflation continue
to trouble the economy (World Bank, 2011).
It
is thus very worrisome that despite these several anti-inflationary policies
and employment generating programmes by the Nigerian government to curtail
inflationary pressure and increase employment, these two macroeconomic problems
still persists. This perceived situation in the Nigerian economy seems to
portray a contradiction of the hypothesis of Phillips (1958) that one wonders
if the hypothesis holds in Nigeria. It is on this premise therefore that our
study is undertaken to investigate the Relevance of the Phillips curve
hypothesis on Nigerian economic growth between 1981 and 2018.
1.3
RESEARCH QUESTIONS
1.
What is the nature of the
relationship between inflation and unemployment in the Nigerian economy?
2.
What is the nature of the
relationship between unemployment and economic growth in the Nigerian economy?
3.
What is the nature of the
relationship between inflation and economic growth in the Nigerian economy?
1.4 OBJECTIVES OF THE
STUDY.
1.
To examine the nature of
the relationship between inflation and unemployment in the Nigerian economy
2.
To investigate the nature
of the relationship between unemployment and economic growth in the Nigerian
economy.
3.
To find out the nature of
the relationship between inflation and economic growth in Nigeria.
1.5 RESEARCH HYPOTHESES
H01:
No significant relationship exists between Unemployment and Inflation in
Nigeria Economy.
H11:
Significant relationship exists between
Unemployment and Inflation in Nigeria Economy
H02:
No significant relationship exists between Unemployment and economic growth in
Nigeria.
.H12:
Significant relationship exists between Unemployment and economic growth in
Nigeria.
H03:
No significant relationship exists between inflation and economic growth in
Nigeria.
H13:
significant relationship exists between inflation and economic growth in
Nigeria.
1.6
SIGNIFICANCE OF THE STUDY
Government and policy makers will
gain the necessary knowledge needed for running the economy. This will aid them
in formulating adequate policies for tackling inflation and unemployment in the
economy.
It
would be of valuable help to all those (Students e.t.c) who seek to understand
the inflation-unemployment relationship with reference to the Nigerian economy
and researchers intending to embark on further research on this topic as it
will serve them as a good source of information and reference.
1.7
SCOPE OF THE STUDY
The study covers the time period
1981-2018 (a period of 37 years); this is to ensure updated information and to
follow the trend. The range was chosen based on data availability and to have
adequate observation for a meaningful analysis. The study focuses on the
following variables which are essential to our research. They are; Unemployment
rate (UNEMPR), Inflation rate (INFR), Real Gross Domestic Product (RGDP), Total
Government Expenditure as ratio of GDP (TGEXGDP), Growth Rate in Money Supply
(GRM2) and Gross Fixed capital formation (GFCF).
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