An Empirical Analysis Of The Effect Of Economic

Published Date: 02 Nov 2017

INTRODUCTION

BACKGROUND TO THE STUDY

Nigeria is an economy characterized by several policies which are aimed at correcting adverse conditions limiting its growth and possibly its survival as a nation. Some of these policies however lack good formation, implementation and monitoring. This is evident even in current policies of power transformation, foreign direct investment encouragement and other past plans and programmes of the government.

Simple economics explains that there are certain macroeconomic objectives that every economy should seek to achieve. These include full employment, price stability, balance of payment equilibrium and economic growth. Economies of the world however rank these objectives prior to themselves, depending on the level of development of such economy.

For example, it is evident that the Central Bank of Nigeria had in time past invested its policy measures on stabilizing the price level. This to a large extent is described has one of the means by which growth can be increased and unemployment reduced. In other words, the goal of increasing the level of employment among other macroeconomic objectives is an important one in many developing nations where unemployment and underutilization of resources has led to rising rate of poverty.

Given that there are several visions and continuous establishment of agencies and parastatals within the Nigerian economy more than other nations of the world, the achievement of impressive growth and acceptable employment level remains in prospect. High rate of unemployment, unimpressive growth rates and poverty among other miseries of the populace, are the order of the day.

Facts gotten from publications for the Nigerian economy as analyzed by Adebayo and Ogunrinola, 2006 and the National Bureau of Statistics 2010(NBS), shows a high rate of unemployment and underemployment, for instance, the rate of unemployment was 12% in March 2005; it rose to 19.7% in March 2009 while the rate of underemployment was around 19% in 1998.

This rate of unemployment can be considered high based on the overall performance of the Nigerian economy as at that time. As a matter of emphasis, among the youths in the 15-24 age brackets, the rate of unemployment was observed to be over 40% according to the 2010 edition of the Labour Force Sample Survey of the National Bureau of Statistics.

It is important to note that the study of employment and economic growth cannot be separated from their respective determinants. As explained in 2001 by Fofana N. F. in his work, "Employment and Economic Growth in the Cote d'Ivoire: An Analysis of Structural Determinants", the issue of real output and employment growth in developing nations is a requirement for poverty reduction and a more equitable income distribution. This means that other economic indices are tied to the basics of employment and factors affecting it.

In the light of the above therefore, Adebayo and Ogunrinola, 2006; Oladeji, 1994; Omotor and Gbosi 2006 explained that many studies on Nigeria’s employment situation have been devoted to unemployment and its determinants and/or its impacts on economic growth. These studies mostly conclude on the nature of employment and may also suggest reasons and solutions to the curse of unemployment.

Oni, 2006; Patterson et al 2006 also opined that "Though from a quick look at the Nigerian data on employment level and real GDP, it appears that the recent economic growth trends and patterns have been insufficient to make any appreciable impact on employment generation and poverty reduction, but this has not been sufficiently investigated empirically in the literature".

It is thus needful to find out categorically the causal effect between employment and economic growth based on available data collected by various data gathering establishments.

STATEMENT OF RESEARCH PROBLEM

The major problem identified in the Nigerian context is that of these increases in these economic growth indicators, unemployment has really been a major cause for concern. Policies and policy target to curb unemployment have really not been working and various labor market laws and policy have not really worked.

In macroeconomics analysis growth has been described to have positive relationship with the level of employment. According to various economic principles this has been proven. Of such principle is the okun’s law which states that has the economy grows by say 3%, the rate of unemployment is to reduce by 1% and vice versa. But the reverse has been the case in the Nigerian context. The economy in recent times has been experiencing growth but the level of unemployment has been increasing both among the youth and among working class adults.

The various theoretical literatures read shows that the nexus between the employment rate and the level of growth as stated in the paragraph above is a positive one, contradicting the Okun’s law. This stated fact is shown by the recent figures on both employment and economic growth. The rates of economic growth for 2010 to December, 2012 are as follows: 7.76% to 6.99% respectively and those of unemployment from 2010 to 2012 are as follows: 19.7% to 23.9% respectively (Source: www.tradingeconomics.com/ Nigeria Bureau of Statistics).

These growth figures shown above tell us about the break from the norm that the Nigerian economy is passing through. But in a normal economy the increased level of growth is supposed to boost the level of income, level of investment, level of consumption and savings and eventually the level of employment. But the reverse has been the case in the Nigerian context: the employment generation rate keeps falling, the unemployment rate keeps rising and the growth rate has to some extent increased consistently with minimal fluctuations.

The problem that this research wishes to deal with has to do in details with the nature and dynamics of this growth; what has influenced it overtime? Why has it that this increased growth has had no significant effect on the rate of employment generation? And finally how these increases in growth can be exploited to get maximum growth in employment generation rate.

1.3 RESEARCH QUESTION

Thus, given the above problems, the research questions are;

What are the major relationships between employment generation and economic growth?

What are the effects of economic growth rates on employment generation and how wide is the gap between the two economic objectives?

How is this gap going to be reduced?

Which is the best macroeconomic model and strategy to adopt to curb unemployment Nigeria?

RESEARCH OBJECTIVES

The major objective of the study is to empirically investigate whether employment increases or unemployment decreases with increasing economic growth rate.

The specific objectives of the study are:

To model the rate of economic growth in Nigeria with respect to its effect on employment rates and policy.

To examine the role of various policy regimes in busting the economic growth and also policies to increase the rate employment in the economy.

To review the various types of employment and the employment strategies with respect to various job types and how it has affected growth.

To show various trends in the data of both economic growth and unemployment, look at the various gap analysis and then model ways of reducing the gaps identified between economic growth and employment.

To provide policy recommendation(s)

RESEARCH HYPOTHESES

The research aims at testing the following hypotheses:

Hypothesis 1

Ho: αi=0 There is no relationship between economic growth and employment rates.

Ha: αi ≠ 0 There is a relationship between economic growth and employment rates.

Hypothesis 2

Ho : αi=0 There is no significant effect of economic growth on employment.

Ha : αi ≠ 0 There is significant effect of economic growth on employment.

1.6 JUSTIFICATION OF THE STUDY

Many occurrences about the fluctuations between the economic growth rate and the increasing level of unemployment as influenced researchers in recent times to study the great influence of the growth rate on the level of employment in the Nigeria economy. Due to the fact that the Nigerian economy is becoming increasingly sophisticated hence the need to study the relationships between this two concepts since it has been stated in various literature that both economic indicator has very high influence on other economic variables like the exchange rates stability, price stability etc. Various studies from the review of theoretical literature, has shown that the rate of unemployment is growing likewise the rate of growth in the economy. This prompted the study to further advance the study on the impact of the latter on the former and also to know more about the impending issues which have also been mentioned in other literatures.

1.7 ORGANIZATION OF THE CHAPTERS

This project is divided into five chapters. The first chapter gives a general introduction of the study, the statement of the research problem, objective(s) of the study, research hypothesis, and the justification of the study. Chapter two is the review of related concepts; theoretical and empirical literature, while chapter three presents the research methodology. Chapter four is presentation of data, interpretation and analysis of result. Finally, chapter five presents the summary, conclusion and recommendation. Other miscellaneous details are presented in the appendix.

1.8 SCOPE OF THE STUDY

This research work describes why, how and if there is a major impact of economic growth on the rate of unemployment in the Nigerian economy. This also will examine the role of government in curbing unemployment through various policies from 1990 till date.

SECTION 2

2.1 CONCEPTUAL LITERATURE

2.1.1 THE GROSS DOMESTIC PRODUCT (GDP)

The GDP is defined as the measure of the goods and services produced within a country at a particular point in time. It measures the output of individuals within an economy. It is also includes factors payments to abroad as opposed to Gross National product which includes factor payments from abroad. The GDP of an economy depends on two factors; the amount of the factors of production it possesses, that is in labour and capital and its ability to turn inputs into output. (Mankiw, 2010). The quantity of labour available to the economy is measured using the constant returns to scale production function. This is due to the fact that constant returns to scale reflect reality because it will allow us to analyze all quantities in the economy relative to the size of the labour force. The GDP data can be used to measure the standard of living of individuals in the economy (i.e. using GDP per capita or GDP per person).

The GDP of a country can be measured using the three main approaches which are mentioned below in brief:

The Income Approach which includes remunerations to factors of production such as wages and salary, dividend payments by a firm to shareholders, interest payments excluding interest on government loan because it is just a mere circulation of the GDP, undistributed corporate profits, indirect taxes and direct taxes.

The Expenditure Approach measures the total expenditure on domestically produced goods and services. The components included in the expenditure approach includes; individual consumption expenditure, the firm’s investment expenditure, the government expenditure on public goods and then the net exports. The private consumption expenditures includes expenditure on durables and non- durables and services. The investment expenditure includes; expenditure on the business fixed investment, residential fixed investment (investment on housing units by consumers and landlords) and inventory of manufactured but not sold goods, (Mankiw, 2010).

The Value Added Approach which measures the value added at each stage of the production process. Adding intermediate goods to the calculation of the GDP will lead to double counting so it is not included in the calculation of the GDP.

GDP is either measured in constant prices or in current market prices (nominal or real GDP measures). The GDP measured in constant prices is more appropriate because it does not include the effect of inflation or it has already been adjusted for. But that measured in current prices includes inflation and this is usually higher than that of the one measured in constant prices using a particular year as base year. The nominal GDP can rise as prices of consumer goods and services rise and also as the quantities of the goods themselves rise. But the real GDP is affected only by a rise in quantities of goods while price remain constant.

The table below represents the GDP figures for the Nigeria from 1990 to 2011:

Table 1.1: The Gross domestic product in both constant and current prices

YEAR

GDP at constant Prices (million #N)

GDP at current prices (million #N)

1990

267,549.99

281,580.26

1991

265,379.14

329,070.74

1992

271,365.52

555,445.51

1993

274,833.29

715,241.91

1994

275,450.56

945,557.02

1995

281,407.40

2,008,564.02

1996

293,745.38

2,799,036.11

1997

302,022.48

2,906,624.88

1998

310,890.05

2,816,405.99

1999

312,183.48

3,312,240.87

2000

329,178.74

4,717,332.08

2001

356,994.26

4,909,526.48

2002

433,203.51

7,128,203.11

2003

477,532.98

8,742,646.65

2004

527,576.04

11,673,602.22

2005

561,931.39

14,735,323.95

2006

595,821.61

18,709,786.46

2007

634,251.14

20,874,172.36

2008

672,202.55

25,424,947.72

2009

718,977.33

2010

776,332.21

2011

834,161.83

Sources: Nigeria Bureau of Statistics and Federal Bureau of Statistics

The above table reveals to us the constant and current GDP of Nigeria for the year 1990 to 2011. This shows that the Nominal GDP is higher in magnitude than the real GDP.

The Real GDP can be calculated thus:

Real GDP = Nominal GDP

GDP Deflator

In some countries however the GDP is measured using the constant prices of goods and services or base year as weights but in advanced countries like the United States of America the Chain weighted average method is used to measure real GDP. In this chain weighted average method the prices used to compute real GDP are changed over time.

ECONOMIC GROWTH

Economic growth of a particular country is measured in terms of growth in real GDP. The real GDP figures are used because the constant prices tend to give a more stable measure of GDP. This growth rate is always measured in real terms which are described as inflation adjusted terms.

According to Investopedia, economic growth is described as an increase in the capacity of capacity of an economy to produce goods and services, compared from one period of time to another which can either be measured in nominal or real terms.

In Nigeria in recent years the GDP as to some extent grown from 7.68% in 2012 and but in December, 2012 the GDP level as fell a little to 6.99%.

Real GDP=C+I+G

The economic growth can either be long term or short term growth. The growth in GDP is divided into growth in both potential output and actual output which will be defined below;

2.1.2 POTENTIAL OUTPUT

It has to with percentage increase in the capacity of the economy to produce which is always measured annually.

In the online business dictionary it is defined as the total Gross domestic product that could have been produced by an economy if all its resource were fully employed. Potential output is the estimated growth you foresee based on parameters like sales, promotion, and market.

Also Wikipedia defined it as the highest output of real gross domestic product output that can be sustained over a long period of time.

2.1.3 ACTUAL OUTPUT

This has to with the actual level of output produced in an economy in particular time, also usually measured annually.

Online business dictionary also defined it as the amount of commodities that a firm actually produces, as opposed to the amount that it could produce if it were to run at full theoretical capacity.

2.1.4 UNEMPLOYMENT AND EMPLOYMENT

Unemployment has to do with the total number of able men and women who continue the labour force present in an economy. It is defined in business dictionary as the total number of able bodied men and women of the working age seeking paid work. Unemployment statistics vary according to how the employment is defined and who is deemed fit to be part of the workforce.

According to Investopedia (2013), unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of an economy. The total number of unemployed person present in an economy is described as the unemployment rate which is measured in percentage. Presently in the Nigerian economy the unemployment rate is very high coupled with the fact that the economy is witnessing growth. The unemployment rate as at December, 2011 was 23.9% (NBS). There are the determinants of unemployment which are based on region been under consideration.

2.1.5 DETERMINANTS OF EMPLOYMENT

The determinants of employment and also unemployment vary from countries to country. Nigeria about which we carrying out this research shows that there are various kinds of employment; which ranges from the formal employment and the informal employment, the self-employed to the civil servants i.e. the workers in government parastatals. The determinant of unemployment in Western Europe was given by a Professor of Economics in London school of Economics.

The following are the major determinants of employment in Western Europe:

Job matching services:

In most countries including Nigeria there are enterprises that are saddled with the responsibility of reducing the level of non availability of information on adequate jobs. These enterprises are involved in pasting of job adverts on newspapers and magazines and sometimes they do select suitable candidates to send in relation to certain vacancies.

Training:

One of the major elements in which jobs are made available is through adequate training of people. But this has been advocated as been the most unsuccessful of them all. People are trained through schools and even there in job training. Training serves as a signal to industries of an individual’s qualification for a particular or to fill a particular post or position. Training also increases the potential and skill of the person been trained and it leads to high productivity for the firm.

Youth measures:

Statistically proven it has been shown that youth measures to boost employment has been one of the least effective of the measures just because youths are more involved in youth activities like training as well as direct provision of work.

The then government of the United Kingdom gave more attention to its new deal on unemployed young people. The major aspect of the deal is the combination of benefit withdrawal after six months with a guarantee to find for each young person still unemployed at that stage, a job, a training scheme etc.

Subsidised Placement:

Subsidies to business enterprises taking on the unemployed people appear relatively helpful to the unemployed workers concerned, but these measures are none the less the most difficult to evaluate. It is always difficult to tell if the business enterprise concerned is a new business or one which would have existed anywhere. Using then chart below we illustrate the number of subsidized employment and participant inflows as a percentage of the labour force, 1994.

Table 1.2

Subsidies to regular Employment in private sector

Direct Job Creation (Public or Non-Profit)

Beligium (1993)

0.6

3.0

Denmark

0.1

1.1

Finland

1.9

3.8

France (1993)

0.5

1.7

Germany

0.2

1.0

Spain

0.1

0.8

Sweden (1993-1994)

0.7

3.0

Source: OECD (1995)

Employment Protection:

This covers the various administrative processes employers are required to go through (usually by law) prior to dismissing a worker, and include for instance requirements for writing warnings, period of notice, contractual procedures in relation to unfair dismissal and severance payment.

2.1.6 TYPES OF UNEMPLOYMENT AND EMPLOYMENT

There are various types of unemployment which have been described in various works and also which have been mentioned in different textbooks and by different economic scholars based on physical and human attitude to work. Employment types are based on different regions of the world.

The type of employment based on particular region is explained briefly below:

The human resources divisions of the World Health Organization (W. H. O) the recommended types of employment are thus

Regular Full Employees:

This type of employees involves those who are scheduled to work 8 hours per day from Monday to Fridays on a regular basis and expected to work for at least one year.

Regular Three-Quarter time Employees:

These are employees who are scheduled to work 30 hours per week but less than 40 hours per week, on a regular basis and they are expected to work for at least a year.

Regular Part Time Employees:

This type of employment requires that employees be employed for at least one year but work for 20 hours per week but less than 30 hours per week on a regular basis.

Temporary Full Time Employees:

This type of employment requires that the employees work for at least three months but less than a year for 8 hours per day, Monday to Friday.

Casual Employees:

The employees are not scheduled to work some particular fixed hour per day or week on a continuing and they are not fixed to work for a specific period say three consecutive months.

Following the same vain are the types of unemployment prevalent in many economies today. They are:

Demand Deficit Unemployment

This is also referred to as the cyclical unemployment which is more related to recession periods. During recessions as the demand of many individuals in the economy falls, signals a sent to the employers of labour who in turn cut back production to avoid excess accumulation of manufactured but unsold stocks which will then lead to the cut down of the number of individuals employed to produce one unit of a commodity.

According to Richard Pettinger (2007), cyclical unemployment occurs when the economy is producing below capacity. Jodi Beggs (2013) described cyclical unemployment has been associated with business cycles occurring in the economy.

Frictional Unemployment:

This type of unemployment is the simplest of all the types of unemployment. This unemployment is associated with when people are between jobs. When they quit one job and are in search of another. The period between their quitting that job and getting another one is referred to as the frictional or search unemployment. The reasons for the frictional unemployment are imperfect information on availability of jobs and it takes time for unemployed workers to come in contact with employers with vacancies.

In the light of this, it is assumed that the labour market is constant at a particular point in time. But this doesn’t mean there are no entrants into the market, daily there are new comers into the labour market (e.g. new graduates). Some unemployed workers will be coming into the labour market while there those who already employed but are getting out of the labour force. It can therefore be concluded that the level of frictional unemployment depends on the entry and exit of workers into the labour market and the speed at which those seeking and searching for jobs get employed (Gbosi; 1998; 2005)

Jodi Beggs (economics.about.com; 2013), stated that Frictional unemployment occurs because it takes workers time to search for another job after leaving one job.

Structural Unemployment:

This type of unemployment has to do with when there are structural changes in the economy. There are two main reasons for these structural changes in the economy; the first is that there might be changes in the pattern of demand in certain industries. There might be decline in some industries while in others there are increases. The second is that there might be technological changes or change in the technique of producing commodities.

The structural unemployment often occurs in various regions of the country.

Jodi Beggs (2013) reasoned that this type of unemployment might be due to fact that some labour markets have more labour than there are jobs available, and for some reason wages don’t decrease to bring the markets to equilibrium.

According to Richard Pettinger in his blog on 4th of March 2007, this type of unemployment occurs when there is a mismatch of skills in the labour market caused due to geographical immobility’s, occupational immobility’s, technological changes and structural changes in the economy.

In the words of Solomon (1980), structural unemployment occurs when individuals go look for work in locations that has no industry that can make use of their skills and also this is so because the individuals have only the wrong skills or qualifications to offer available employers.

It was then observed that teenagers who move from rural areas to the urban regions do not have the required skills to get gainful employment. It then can be concluded that structural unemployment poses a more serious problem than the frictional unemployment to the Nigerian economy. This is because Nigeria’s continuously rising unemployment rate and also there has been high rate of migration from rural areas down to urban centres in search of jobs. Most a times the reason for the immigrants not getting jobs is because they do not have the required skills or they do not have enough experience or related experience, then this immigrants become structurally unemployed. And also it has been noticed that most of those affected by the structural unemployment are mostly the teenagers (Gbosi; 2005).

Real wage Unemployment:

This occurs when wages are driven above the market clearing level by trade unions who use their monopoly power to do this or when government set national minimum wage too high.

It can also be referred to as the classical unemployment. This type of unemployment occurs when the wage in the labour market is at disequilibrium. In this situation the wages will be sticky downwards.

Seasonal Unemployment:

This situation occurs when in certain seasons of the year some types of workers are demanded for. It occurs when labour demand fluctuates with seasons. In Preserve Articles.com (2011), it is stated that it is a type of unemployment in which certain industries employ workers for a particular season then they are dispersed at the end of the season.

Then on a final note we distinguish between voluntary unemployment and involuntary unemployment. The voluntary unemployment has to do with when individuals do not work or desire to work at going or prevalent or prescribed wage rate in the economy. The involuntary unemployment has to do with when workers desire to work or are laid off work or fired from their present job.

It was observed by Elrenberg and Smith (1982) that the demand for workers is high during the planting season and it falls after the planting season until the harvesting season. And also the demand for construction workers during the rainy season but it rises during the dry season.

Technological Unemployment:

In words of Gbosi (2005), the technological unemployment is a situation in which people are been replaced by machines. He also advanced that as a country becomes more technologically sophisticated they tend to use more machines for the production of their goods and services.

It is defined in the American heritage dictionary (2005), as the unemployment caused by displacement of humans by machines.

The technological unemployment can occur as a result of either been replaced by machines or when their work is made easier requiring less amount of workers. Most times technological unemployment can be studied under the structural unemployment but also the technological unemployment can be studied in isolation (wise geek.com/ 2013).

2.1.7 Reasons for Unemployment

In the classical analysis of the market they advocated that there is price flexibility. This price flexibility is basically discussed with prices of commodities and prices of labour (wages) in view. But looking at this scenario in reality price takes time to adjust to changes in the economy. For instance the minimum wage legislation in 2011 that placed a ceiling of 18,000 naira on the wages of mainly public sector workers, the prices could not adjust immediately to factor in the new wage ceiling, so governments could pay while others could not. And so some industries if they cannot meet the wage ceiling they cut back the amount of workers they employ. This little analysis of the minimum wage legislation shows that the in reality within the short run the wages of workers are not flexible but rigid. So therefore the wage flexibility assumption is used in the long run while that of wage rigidity by the Keynesians is used in short run analysis.

Having seen this, in some textbooks and some works the main reasons for unemployment is categorized into four. Adawo et al. in their work identified four major causes or reasons of unemployment, which are:

Recession: During the periods of recession the economy is not creating jobs, but it is creating more of unemployment.

Over regulation: Some government regulations hamper the growth of businesses thereby reducing their ability to employ more capable hands into the business. One of such regulations includes the Minimum wage legislation.

Efficiency wages: the assumption of efficiency wages is that there is a cost and benefit for a firm which pays higher wages. Some of the benefits identified are those advanced by Yellen (1984) and Katz (1986) as quoted by Romer (2001). A worker who gets more pay tends to be more productive because his nutritional intake has increased thereby making him healthier. The second point is that, with high pay a worker tends to be more responsible in delivering his services to the firm in the face of imperfect supervision. And also when wage is high an employee can decide not to take the risk of moral hazard by idling and been caught and fired.

Wage rigidity: wage rigidity as to do with the inability of wages to adjust until labour supply equals labour demand. Reasons for the inflexibility in wages is due to the fact that in reality labour is heterogenous (that is skilled, semi – skilled and unskilled labour), different types labour attract wages and information in the market is not perfect (i.e there is information asymmetry). When real wage is above the level that equilibrates the supply and demand for labour the quantity of labour supplied will exceed the quantity of labour demanded. The real wage rigidity reduces the rate job finding and raises the level unemployment.

Unemployment resulting from wage rigidity and job rationing is sometimes called the structural unemployment. The reason why people are not getting jobs is because there is a fundamental mismatch between the number of people who want to work and the number of jobs that are available. At the going wage, the number of labor supplied exceeds the number of labour demanded, so many simply waiting for jobs to open up.

Wage rigidity is mostly caused by minimum wage legislation and labour union’s collective bargaining.

But these four classifications have been categorized in Mankiw (2010) to be under the two major classifications which are the Job search and Wage rigidity. Both over regulation and recession are explained under Job search while efficiency wage is explained under wage rigidity because it is one of the causes of wage rigidity.

Job Search – It takes time to match workers and the jobs they require. This has been explained above as caused by information asymmetry about jobs and individuals seeking the jobs and then that the geographical mobility of workers is not instantaneous (that is jobs requiring individuals to move from a specific location to another. But in various nations of the world the government and media agencies have taken it upon themselves to disseminate information concerning job vacancies and also the governments have provided retraining programs to help train workers to ease the transition of workers from declining industries to growing industries.

Gbosi (2005) mentioned that Bad educational planning, bad economic policy, global economic crisis, predominance of small – scale enterprises, imperfect flow of market information, rapid population growth, financial sector distress and unstable political environment.

2.1.9 MEASURING UNEMPLOYNENT AND EMPLOYMENT

This section seeks to define and also give the various ways in measuring so concepts which will be introduced in this section. Some the concepts are labour force, the number of employed and unemployed in Nigeria and how they can be calculated plus data from the federal office of statistics and the Nigerian Bureau of statistics.

2.1.9.1 Labour Force

The labour force is defined as those in the population of an economy who actively involved in one job or the other or searching for jobs. In Nigeria the ages considered part of the labour force is between the ages of 18 to 65.

Gbosi (2005) defined it as all persons who are between the ages of 15 and above who are working or searching for paid work. From the above definition we get the other elements contained in the calculation of the labour force which includes the number of employed and unemployed persons in an economy.

We start the calculation of the labour force by using some notations such as using L as the labour force, U as the number of unemployed workers and E as the number of employed workers. The labour force is the sum of the number of employed and unemployed workers in an economy. This denoted by:

L= E + U

The number of employed persons is those who worked as paid employees during the time of the survey, they worked in their own business or they worked as unpaid workers in a family member’s business. It can also include those who are temporarily out of jobs due to illness, vacation or bad weather.

Table 1.3

For example the data below shows the number of employed

Year

Number of Unemployed

Number of Employed

Labour force

2006

50,388,650

7,067,051

57,455,701

2007

51,763,909

7,530,374

59,294,283

2008

52,074,137

9,117,563

61,191,700

2009

50,709,317

12,440,517

63,149,835

2010

51,224,115

13,946,515

65,170,629

2011

51,181,884

16,074,205

67,256,090

Source: Nigeria Bureau of Statistics

The number of unemployed persons has to do with those who are not employed and were available for employment and they had tried getting job during previous four weeks. It also include those who were laid off and waiting for to be recalled to a job.

There those who do not belong to these two (2) categories. They include those not in the labour force and those who are discouraged. Those who are not in the labour force include full time student, homemakers or retirees. And those who are want to work but have given up searching for jobs are put in the category of discouraged workers and they are counted as not been part of the labour force.

From the calculation of the labour force the number of employed and unemployed can also be calculated:

For the number of employed (E) = L – U; and

For the number of unemployed (U) = L – E.

There are other calculations that can be made after the labour force has been calculated. We can also calculate the labour force participation rate

Labour participation rate = ­­­­­­­­­­­­­labour force x 100

Adult population

Then the unemployment rate = Unemployed x 100

Labour force

The natural rate of unemployment is the average rate of unemployment around which an economy fluctuates. It is the rate of unemployment towards which the economy gravitates in the long run, given all the labor market imperfections that impede workers from instantly finding jobs (Mankiw, 2010).

According to Mankiw (2010), there are certain things that determine the rate of unemployment in a particular economy; the rate of job separation and the rate of job finding. The rate of job separation is the rate at which individuals in the economy looses their jobs or the rate at which individuals in the economy become unemployed. While the rate of job of finding in an economy as to do with the rate at which individuals find paid employment or get into jobs. The rate of job separation and job finding determines the rate of unemployment, the higher the job finding, the lower the rate of unemployment and vice versa. And also, the lower the rate of job separation the lower the unemployment rate.

More often in the Nigeria context the rate of job separation (rate at which individuals lose jobs) is high due to the so rigidities such as unavailability of job matching the skills of the individuals in the economy, lack of proper job adverts placements.

2.2 Okun’s law

The Okun’s law is a law propounded by a Yale Economist/Historian Arthur Okun in 1962. Arthur Okun proposed the relationship between unemployment and economic growth. The Okun’s law establishes a statistical relationship between economic growth and unemployment. The law states that when an economy (i.e. GNP) is growing at the rate of 3% the unemployment rate is supposed to be decreasing by 1%. But after it was checked will datas in reality it was seen that it didn’t really represent real life situation. Then the law was reframed and then the GDP was used, where it now stated that at 2% increase in economic growth the unemployment rate is supposed to decrease by 1%. This assertion was confirmed by Abel and Bernanke (2005), when they tested data and found that the economic growth rate (GDP) was at 2% while the rate of unemployment was decreasing at 1%. Thus, the law establishes a negative relationship between unemployment and economic growth.

According to Bernanke (2005), the chairman of the St. Louis Federal Reserve Bank, Okun’s Law is a rule of thumb used to explain the relationship between jobs and growth.

He summarized his idea by saying that the rule of thumb describes the observed relationship between changes in the unemployment rate and the growth rate. He then asserted that to achieve a percentage point fall in the unemployment rate in a particular period, real GDP must grow approximately by 2% faster than the rate of growth of potential GDP.

This law was referred to as a rule of thumb because it is primarily an empirical observation rather than a result derived from theory.

The law can be stated mathematically below:

Using two versions, the first version is when output is below full employment (that is, the economy is operating inside the production possibility frontier) the unemployment will exceed the natural rate.

This has an equation:

100 (Y*-Y)/Y*=2(u-un)

Where u is measured in percentage points, i.e. u=5.5%.

un is the natural rate of unemployment

u is the unemployment rate

Y* is the full employment level of real GDP

Y is the real GDP

The lefthand side above is also called the output gap.

The second idea is that when output grows more slowly than the full employment output, unemployment will rise. This version is useful for forecasting

%Y=3-2 u

For every 2% that the growth of real GDP exceeds the rate of growth of full employment GDP over the course of a year, the rate of unemployment will fall by 1%.

2.3 THEORETICAL LITERATURE

2.2.1 The Endogenous Growth Model

One major goal of an economic growth theory is to explain the persistent rise in standard of living observed in various parts of the world.

The neoclassical model (Solow model) shows that if there is to be persistent growth in the economy it must come from technological progress which was assumed to be determined exogenously.

The endogenous growth model looks at the major factors that affect economic Growth from within the model. Majorly the endogenous Model considers basically such factor as to affect growth within the model. Such factors are investment in human capital, innovation, and knowledge which are significant contributors to economic growth.

However the endogenous model rejected the assumptions of exogenous determination of technological change. The production function in the endogenous model does not exhibit diminishing returns of capital. One extra unit produces one extra unit of output regardless of how much capital was imputed (Mankiw, 2010). The absence of the diminishing returns of capital is the major distinguishing factor that differentiates the endogenous model form the exogenous model.

In this endogenous model, the savings and investment lead to persistent long run growth. But on the contrary in the Solow model, savings leads to growth temporarily, but diminishing returns to capital forces the economy to approach the steady state in which growth depends on exogenous technology progress. Using knowledge as an example, since knowledge is not subject to diminishing returns of capital, increasing technological and scientific innovations has led economist to argue that the knowledge is subject to increasing returns. If knowledge is then accepted as capital, the endogenous model with its assumptions of constant returns to capital becomes plausible description of long run growth.

The Solow model has major short coming which is the assumption of the rate of technology been determined outside the model. This assumption makes it difficult to incorporate the technological change because the standard competitive assumptions cannot be maintained. The model also assumes that the long run growth level depends on the population growth rate which is also exogenously determined. The Solow model did not properly explain the long run growth in terms of technological change. But the endogenous models produced the missing explanation of the long run growth.

The model focuses on positive externalities and spillover effects of a knowledge based economy which will lead to economic development. The Robelo’s model, Romer’s model, the AK model, the Lucas model e.t.c is examples of exogenous models. But for this work the exogenous model will be used, which is therefore stated briefly below.

But the field of the endogenous model is too large and complex.

2.2.2 Solow Swan Model of Economic

The Solow swan model is the model that will be used for this particular work.

The concept of capital in the Solow model is broadened from physical capital to human capital which includes factors such as education, experience and health. In the words of Barro (1996), "a country that starts with a high ratio of human to physical capital tends to grow rapidly because physical capital is more amenable than human capital to rapid expansion".

The Solow swan model came up with extensions and advancements to the Harrod Domar model by including labor as a factor of production and also said that the ratio between the capital to labor ratio is not fixed. This advancement in their model allows for intensity to be distinguished from technological progress. The Solow Sawn model considers both the supply and the demand side of the economy but they are more concerned about the supply side. It must also be of note that the production function can be used to explain part of the Solow Swan model

The Solow Swan model can be given mathematically below

The solow takes as a whole, the only commodity, in the economy.

K=sY --------------- (1)

Since output is produced with capital and labour, technological possibilities are represented by the production.

Y=F (K, L) --------------- (2)

That shows constant returns to scale.

Inserting equation (2) in (1), we have

K=sF (K, L) --------------- (3)

In equation (3), L represents total employment.

Since population is growing exogenously, the labour force increases at a constant relative rate n. Thus

L (t)=Locnt --------------- (4)

Where is n referred to by Solow as Harrod’s natural rate of growth in absence of technological change; and L (t) as the available supply of labour at time (t). The right hand side of equation (4) shows the compound rate of the growth of labour force from period o to period t. Alternatively, equation (4) can be regarded as a supply curve of labour. This says that the exponential growing labour force is offered for employment completely inelastically. The labour supply curve is vertical line, which shifts to the right in time as the labour force grows according to (4). Then the real wage adjusts so that all available labour is employed, and the marginal productivity equation determines the wage rate which will actually rule.

By putting equation (4) into (3) Solow gives this equation

K=sF (K, Locnt) ---------------- (5)

This referred to as determining the time path of capital accumulation

2.2.3 EMPIRICAL LITERATURE

There have been many discussions on the topic been researched on. Some of the thought and discussions and scholarlic insight into the subject matter will be examined in this section.

Every nation wants to grow and also develop so as to bring about economic independence. There have been various policies recommendations from various writers to combat unemployment in various aspects and facet of the economy.

The various schools of thought had their fair share in discussing the relationship that exists between unemployment and economic growth. The classical, the neo – classical, the Keynesian and the new Keynesians have had various discussions on the nexus between economic growth and employment creation and generation which will also be examined briefly in this section.

Schumpeter who was an Austro-Hungarian economist but he never did follow the Austrian school of thought, also made an extensive discussion on economic growth and development. He said that only daring entrepreneurs could change the technical and financial innovations in the face of increasing market competitiveness and falling profits which in turn will yield economic growth and development. This he stated in his book "the theory of economic development" published in 1912. He then gave three categories in order to explain and understand his theory of economic development. The first one he gave was the process of production which he said that production is a combination of productive forces and physical material of production which consists of land, labour and capital and there is the non physical material which consists of technical facts and social organization. He then said that the rate of production of the economy depends on the rate of change of productive forces, the rate of change of technology and the rate of change of social setup. The second one which he called the dynamic evaluation of the economy; here he stated that capital, labour and land are the growth components. In the third one which he called the trend of growth, he explained that the economy was characterized by periods of booms and depressions (cyclical fluctuations). The entrepreneurs who use productive factors to produce products, produces a new products which when it is introduced to the market it gives them high or heavy profits. But in no time other firms start producing the same type of commodity which will in turn increase the production of the products and this will boost income and employment in the economy.

The classical school of thought also gave their explanation of the relationship between employment and growth where they advocated flexible wages, flexible prices, flexible rate of interest and free market economy. They said that in the long run that equilibrium in the economy will be at full employment of resources. And that economy will only have frictional or search unemployment.

They said that the flexible prices will equate the level of savings and investment. Those firms want to invest in new plants and equipment by requiring for finance to procure the new innovations and inventions. Their ability to borrow more will depend on the rate of interest, if the rate of interest is high they borrow less and if interest is high they borrow more. This will then lead to the ability of the firm to increase production and also diversify thereby demanding for more labour, this leads to increase in the level of employment given that the wage rates are also flexible to allow for the increase in the amount of people employed at the going rate of wages. This was also supported by the Say’s law which states that "supply creates its own demand".

The classical schools perception of the linkage between employment and growth had its own shortcomings which were stated in the Keynesian’s perception of the linkage. The Keynesian school stated that at the going wage rate and prices the market would not clear and that it is not supply that create demand but demand determines the level of goods that will be sold in the market. Therefore prices and wages are sticky. His analysis is based on the demand side and also the short run because he said that in the long run we will all be dead. He said that it is increase in aggregate demand that brings about increase in the level of employment and high rate of growth in the economy. During recession because of low demand for goods firms cut down production and then workers are let go because the production of products only leads to increase in stocks.

As observed by Gbosi (2005), unemployment in Nigeria is caused by so many factors; bad educational planning which Eze (1983) said that it is not only the Keynesian instability of effective demand that is the cause unemployment in Nigeria, but rather it is mainly due to lack of fundamental disequilibrium, that the problem of unemployment is because of lack of proper skill expansion in the educational institutions, faulty curricular and orientation. The Nigeria government is to blame for their poor salary structure in the public sector that has no special incentives for those who possess the skills need.

Another cause of unemployment in Nigeria is the bad economic planning. The programme SAP in July 1986 was introduced during the Babangida regime to salvage the economic and financial crisis facing the Nigerian economy. This policy had a major effect on labour – management relations. The objective of the Structural Adjustment Programme (SAP) was to restructure and diversify the productive base of the economy. Some the instruments used in achieving the goals of SAP were trade liberalization, commercialization and privatization of public enterprises and then the devaluation of the naira. Because of this programme many industries ceased operation because of the inability to import raw materials need for the production of their commodities. The situation became rather worse for marginal firms who were left with no other option than to cut down their work force and those who could not do so had to close down. What this programme succeeded in doing was increasing the frequency at which workers are been retrenched in both the public and private sectors. The situation was even more profound in the public sector (Fashoyin, 1987).

He went head and mentioned yet another factor which is the imperfect flow of information. In the assumptions of the neo classical school, the labour market is not perfectly competitive. In Nigeria labour market information are either absent or mostly misleading and unreliable. This in turn hampers the movement of labour to where they are needed.

He went further by giving another factor which is the rapid growth in population from basic statistics gathered it shows that the Nigerian population over the years since the 1997 which was estimated to be about 102.5 has increased to about 160 million people in 2012. There has also been high increase in rural urban migration which has contributed to the high levels of unemployment in urban cities (Gbosi, 2004)

However, the various upcoming programs have all also contributed to the boosting of employment and also having a multiplier effect on the economy. This was stated in a work by Ogunrinola (1991), who examined the issue of employment and incomes of the urban informal sector of Ibadan. He found out that the urban informal sector of Ibadan has contributed significantly to employment creation, skill development and entrepreneurial development. In the same vain also Onwuioduokit (2006), looked at the major nexus between unemployment and several macroeconomic variables in Nigeria and then concluded that the consistent shift in the employment variables since 2000 has made it inadequate to quantify the real state of the country’s unemployed.

And in different countries also so many studies have been done using both the comparative and empirically analysis. Some of their thoughts are; in the Euro zone the relationship between unemployment was also examined by Walterskirchen (1999) who made an indepth research into the link between economic growth and the labour market. His findings were that changes in employment and unemployment rates were affected by economic factors and also demographic influences and labour market policies. His findings established a strong positive correlation between economic growth change in level of employment after he used time series analysis and panel data. Many studies both in Nigeria and beyond have used times series data to explain trends and establish the relationship between the two variables. The research that will be done will also follow suit in the same line of action.

SECTION THREE

3.0 METHODOLOGY

The Data that will be used in this project will be from secondary sources such as the National Bureau of Statistics (NBS), the Central Bank of Nigeria’s (CBN) statistical bulletin, National Population Commission (NPC) and newspaper.

According to Ogunrinola and Shodipe (2011), the model used which was based on Fofana’s modeling of the relationship between economic growth and unemployment in Ivory Coast is more appropriate in describing the nexus between the two variables. The model will be stated below with little modifications:

Two factors only will be consider as to be held responsible for the change in employment levels they are; the real GDP and Public expenditure.

E=f(RGDP, PE) ---------------- (1)

RGDP= f(K, L) ---------------- (2)

Where E= Total employment

RGDP= Real Gross Domestic Product

PE= Public Expenditures

L=Labour or the labour force

K= Capital Accumulation

Assuming that a linear relationship among the two independent or explanatory variables, the explicit form of equation (1) becomes

E=βo + β1RGDP + β2PE + Є ---------------- (3)

E=βo + β1L + β2K + β3PE + Є ---------------- (4)

Adopting a log-linear specification, taking the natural logarithm of both sides of the equation and assuming linearity among the variables gives:

LogE= βo + β1LogL + β2 LogK + β3 LogPE + Є

Note that Log A = β0

Є here represents the error term which includes all other externality that contributes to the growth in employment.

E=Ø0 + Ø1RGDPGR + Ø2PE + Є ---------------- (3)

This equation represents the real growth rate Of GDP

We can then similarly estimates the non-linear form of equation (1) which now become

e= αo + α1rgdp + α2pe + µ ---------------- (4) and

e= bo + b1rgdpgr + b2pe + e ---------------- (5)

Then when we want to carry out this analysis we will recognize that there is a need to assess the stationary of the data. To avoid spurious regression we do not regress non stationary of one data over another non-stationary data. And this also helps us to reduce the level of bias and inconsistency in our outcome. Then a time series analysis is then carried out and the Augmented Dickey Fuller test will then be used to test the null hypothesis using the statistical package for social sciences (SPSS) or the E views (Economic views). All in all, what was done is econometric in nature.