INFLATION AND UNEMPLOYMENT NEXUS – NIGERIA (A RESULT OF PHILIPS HYPOTHESIS)
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. The opposite of inflation is deflation. Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity allowing the central bank more leeway in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation. Economists generally believe that the high rates of inflation and hyperinflation are caused by an excessive growth .A more exact definition of inflation is a situation of a sustained increase in the general price level in an economy. Inflation means an increase in the cost of living as the price of goods and services rise. Inflation leads to a decline in the value of money. “Inflation means that your money won’t buy as much today as you could yesterday.” The inflation rate is the annual percentage change in the price level. Unemployment rate is the number of people actively looking for a job as a percentage of the labour force. The unemployment rate is defined as the percentage of unemployed workers in the total labor force. Workers are considered unemployed if they currently do not work, despite the fact that they are able and willing to do so. The study seeks to appraise inflation and unemployment nexus in Nigeria. A result of Philips hypothesis.
1.2 STATEMENT OF THE PROBLEM
Rising rates of unemployment and inflation paint a picture of unsatisfactory macroeconomic performance of the economy, a situation known as stagflation. Some economists have argued that it is not possible to have low rates of inflation and unemployment as policy outcomes, consequently policymakers ought to decide what rate of inflation should be sacrificed for an acceptable rate of unemployment. (Ekpo, 2012).The question becomes: Is there a trade-off between inflation and unemployment? If such a trade-off exists, then it follows that policy options are necessary to determine the precise tradeoff between inflation and unemployment necessary for the Nigerian economy. It is thus crucial that our policymakers determine the appropriate (acceptable) rates of inflation and unemployment for the economy.Inflation and unemployment remain burning issues in any economy. All policymakers would to a large extent, wish to have low rates of inflation and unemployment. It is often argued that a single-digit rate of inflation and an unemployment rate of about five per cent would ensure macroeconomic stability in an economy all things being equal. Macroeconomic stability is essential for growth,planning and development, hence the desirability of examining the movement of other economic fundamentals if the goal of stability will be achieved.Inflation, which connotes the general increase in the price level, is broadly an average measure because at any point in time, prices may be increasing, decreasing or constant; a persistent increase in prices hurts the economy, particularly the poor who have little or no savings to cushion rising prices.The average person in any household or family knows when the money in his possession can only purchase less quantity of goods and services than was previously possible. Generally, economic agents (households, private sector and government) would raise an alarm because their earnings have declined in real termsdue to rising prices.It is even worse when uncertainty follows price increases. (Nwaobi, 2009). The problem confronting the study is to appraise inflation and unemployment nexus in Nigeria. A result of Philips hypothesis.
1.3 OBJECTIVE OF THE STUDY
The Main Objective of the study is to appraise inflation and unemployment nexus in Nigeria. A result of Philips hypothesis
; The specific objectives include
1 To determine thelevel of inflation and unemployment in Nigeria.
2. To determine the impact of inflation on unemployment.
3 To determine the result of Philips hypothesis.
1.4 RESEARCH QUESTIONS
1 What is thelevel of level of inflation and unemployment in Nigeria?
2 What is theimpact of inflation on unemployment?
3 What is the result of Philips hypothesis?
1.5 STATEMENT OF THE HYPOTHESIS
The statement of the hypothesis for the study is stated in Null as follows
HO The result of Philips hypothesis is not applicable in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study addressesinflation and unemployment nexus in Nigeria. A result of Philips hypothesis. It provides relevant data for the effective formulation and implementation of policies which will further stimulate the economy to economic growth and development.
1.8 LIMITATION OF THE STUIDY
The study was confronted with logistics and geographical factors
1.9 DEFINITION OF TERMS
INFLATION DEFINED
Inflationis a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money. It is a loss of real value in the medium of exchange and unit of account within the economy.
MONETARY POLICY DEFINED
Monetary policy is the process of controlling the supply, availability, cost of money or rate of interest. Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy
EMPLOYMENT RATE DEFINED
This is the percentage of the labor force that is employed and also constitute one of the economic indicators that economists examine to help understand the state of the economy.
UNEMPLOYMENT RATE DEFINED
This constitutes the number of people actively looking for a job as a percentage of the labour force. The unemployment rate is defined as the percentage of unemployed workers in the total labor force. Workers are considered unemployed if they currently do not work, despite the fact that they are able and willing to do so.
TOTAL LABOUR FORCE DEFINED
This consists of all employed and unemployed people within an economy.
PHILIPPS CURVES DEFINED
The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship
. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.
REFERENCES
Abel, Andrew; Bernanke, Ben (2005). "Macroeconomics" (5th ed.). Pearson. Measurement of inflation is discussed in Ch. 2, pp. 45–50; Money growth & Inflation in Ch. 7, pp. 266–269; Keynesian business cycles and inflation in Ch. 9, pp. 308–348.
Barro, Robert J. (1997). Macroeconomics. Cambridge, Massachusetts: MIT Press. p. 895. ISBN 0-262-02436-5.
Blanchard, Olivier (2000). Macroeconomics (2nd ed.). Englewood Cliffs, N.J: Prentice Hall. ISBN 0-13-013306-X
CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION
Inflation and unemployment remain burning issues in any economy. All policymakers would to a large extent, wish to have low rates of inflation and unemployment. It is often argued that a single-digit rate of inflation and an unemployment rate of about five per cent would ensure macroeconomic stability in an economy all things being equal. Macroeconomic stability is essential for growth, planning and development, hence the desirability of examining the movement of other economic fundamentals if the goal of stability will be achieved. Inflation, which connotes the general increase in the price level, is broadly an average measure because at any point in time, prices may be increasing, decreasing or constant; a persistent increase in prices hurts the economy, particularly the poor who have little or no savings to cushion rising prices. The average person in any household or family knows when the money in his possession can only purchase less quantity of goods and services than was previously possible. Generally, economic agents (households, private sector and government) would raise an alarm because their earnings have declined in real terms due to rising prices. It is even worse when uncertainty follows price increases. (Nwaobi, 2009) In recent times however, the concern is no longer with single-digit rates of inflation (less than 10 per cent) but with the benchmark desirable for any economy. Recent research results show that the inflationary threshold for Nigeria is between 14 to 18 per cent, so why the frenzy over a singledigit rate of inflation? It is interesting to note that even very low rates of inflation (disinflation) can be harmful to an economy but the question is which rate is very low? Another interesting variable is how inflation is measured? What are the types of goods and services that enter the basket? Which method is used in computing the rate of inflation? The extent of the survey is crucial and so are several other issues. In Nigeria, the mandate of the Central Bank is to ensure price stability while the National Bureau of Statistics computes and publishes the rates of inflation for all items in the economy – food, manufacturing, transport, etc. Economists in Nigeria have shown through research that inflation in the country is caused by several factors such as increased public spending, money supply, intermittent scarcity, announcement effect, removal of petroleum subsidy, etc. Looking at the Nigerian data, the rate of inflation which stood at 21.4 per cent in 1980 plummeted to 7.2 per cent a year after but by 1983, it had jumped to almost 41 per cent. During the Structural Adjustment Program era (1986 -1992), the rate of inflation averaged 31.5 per cent. From 1995 to 2007, it averaged 12.3 per cent (a period characterized by a democratic experiment and the bold effort at a better management of the economy). During the period 2008 to 2011, the rate of inflation stood at 12 per cent. The inflationary trend shows that it has been non-linear overtime. Another disturbing but significant macroeconomic variable is the rate of unemployment. A high rate of unemployment connotes output loss to the economy. The rate of unemployment captures the percentage of those willing and able to work but cannot find employment, it captures the frequency duration and incidence of unemployment. In Nigeria, early statistics on unemployment should not be taken seriously because the data indicated that the economy was at full-employment output. However, from 1999 the rates of unemployment started making some sense, it was 13.5 per cent in 1999 and at the end of President Olusegun Obasanjo’s administration in 2007 the rate of unemployment had reduced marginally to 12.7 per cent, and from 1999 to 2007 the rate of unemployment was 13.1 per cent (still quite high) since five per cent is perceived as the accepted rate. In 2008 the rate of unemployment was almost 15 per cent but rose drastically to about 24 per cent in 2011. The unemployment rate has been rising from 1980 to 2011, a recent forecast shows that the rate would continue to increase up to the year 2020. Rising rates of unemployment and inflation paint a picture of unsatisfactory macroeconomic performance of the economy, a situation known as stagflation. Some economists have argued that it is not possible to have low rates of inflation and unemployment as policy outcomes, consequently policymakers ought to decide what rate of inflation should be sacrificed for an acceptable rate of unemployment. (Ekpo, 2012). The question becomes: Is there a trade-off between inflation and unemployment? If such a trade-off exists, then it follows that policy options are necessary to determine the precise tradeoff between inflation and unemployment necessary for the Nigerian economy. It is thus crucial that our policymakers determine the appropriate (acceptable) rates of inflation and unemployment for the economy. Recent data suggest that inflation is trending downwards while unemployment is rising. There is no doubt that the Central Bank via its monetary policy mechanism, tries to ensure price stability, but it appears that the strategies and policies employed in the labour market are not achieving the desired outcomes. Interestingly, Nigerians may not be interested whether there is a trade-off between inflation and unemployment, but the availability of jobs and low inflation rates. Since the early eighties, unemployment has assumed an alarming dimension and a crisis proportion with millions of able bodied persons who are to accept jobs at the prevailing wage rate but are unable to find placements. Thus unemployment has been regarded as one of the most challenging economic problems facing the Nigerian Policy maker. (Fatukasi, 2011). The history of inflation has a lot to tell, given an instance of the middle 1970’s when there was oil boom in the economy, there was high inflation rate yet frantic efforts to reduce the rate of inflation were not made. Rather the government imposed inflationary policies such as the Udoji’s awards that unnecessarily left money in the pockets of civil servants. Also the introduction the structural adjustment program (SAP) by Babangida, despite its much popularized potential benefits left the macroeconomic environment highly destabilizing, these were the scenarios that led Nigeria to the high rates of inflation it’s facing till date. 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, this caused import dependency of most Nigerian manufacturing enterprises that 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. Owing to this, the national unemployment rate fluctuated around 6.0% until 1987 when it rose to 7.1%, it is important to state here that the structural adjustment programmed (SAP) adopted in 1986, had serious implications on employment in Nigeria, as unemployment rate declined from 7.1% in 1987 to as low as 1.8% in 1995, after which it rose to 3.4% in 1996, and hovered between 3.4 and 4.7 % between 1996 and 2000. Recent surveys are confronted with the statistic that 40 million Nigerians are unemployed. It is indeed worrisome for a country with a population figure of about 170 million to have 40 million unemployed. (Ekpo, 2012)
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