An Empirical Study of Inflation and Unemployment Dynamics in Nigeria Using Time Series Data (1990–2024)
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An Empirical Study of Inflation and Unemployment Dynamics in Nigeria Using Time Series Data (1990–2024)
CHAPTER ONE
INTRODUCTION
- Background to the Study
Inflation is bad, especially when unexpected, because it distorts the working of the price system, creates arbitrary redistribution from debtors to creditors, creates incentives for speculative as opposed to productive investment activity, and it is usually costly to eliminate. Inflation can be defined as a positive rate of growth of the general price level.
Chowdhury and Tanjil (2014) defined unemployment as a state in which people who can work are without jobs and are seeking for pay or profit. Some studies have provided the following as determinants of unemployment. These include: inflation rate, population growth, graduate outputs, Openness of Trade, and Private Domestic Investment and many more (Oniore et al., 2015).
The inability of job seekers to secure gainful employment tends to create disaffection among these people and causes some of them, especially the youth, to resort to social vices such as robbery, suicide, prostitution, drug addiction, terrorism and political unrest.
Indeed, unemployment constitutes underutilization of human resources and the failure to prevent these resources going to waste does not only make them vulnerable to poverty but is also a loss of potential income tax revenue to the nation.
According to economic theory, inflation and unemployment rate are inversely related which can be explained by Phillips Curve, which is the study of the interrelationship between unemployment and inflation. For instance, Umoru & Anyiwe (2013) examined the dynamics of inflation and unemployment rates in Nigeria using the Vector Error Correction Model over a period of twenty- seven (27) years. Their findings revealed evidence of stagflation in the Nigerian economy over the period they studied.
Mohammed et al. (2015) studied the relationship between unemployment, inflation and economic growth in Nigeria. Their findings confirmed that in the long run, interest rate and total public expenditure have significant impact on economic growth in Nigeria, while inflation and unemployment have inverse effects on growth in Nigeria; Orji et al (2015) examined the inflation and unemployment nexus in Nigeria by testing if the original Phillips curve proposition holds for Nigeria. They adopted a distributed lag model on data covering a period from 1970 to 2011. They found out that unemployment is a significant determinant of inflation and there is a positive relationship between inflation and unemployment rate in Nigeria; Ojapinwa & Esan (2013) also examined the existence and the stability of Phillips curve for Nigeria using time series data from 1970 to 2010. They reported that the estimates from the relation between the change in inflation rate and the unemployment rate was theoretically negative in the short run; and that the relationship became non-existence in the long run with positive relationship between inflation and unemployment signifying stagflation.
Aminu & Anono (2013) investigated the relationship between unemployment and inflation in the Nigerian economy between 1977 and 2009. They reported that inflation impacted negatively on unemployment, the causality test reveals that there was no causality between unemployment and inflation in Nigeria and there exist a long run relationship between unemployment and inflation rates in Nigeria; Bula (2014) reported that inflation is negatively correlated with unemployment rates in Nigeria as stipulated by the Phillips curve; Torruam & Abur (2014) investigated the relationship between unemployment, inflation and crime in Nigeria using Vector Error Correction Model (VECM). Their result revealed that there is unidirectional causality running from unemployment and inflation to crime in Nigeria. The study concluded that unemployment in Nigeria Granger causes crime.
Mohaddes & Raissi (2014) examined the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India using cross-sectionally augmented distributed lag (CS-DL) as well as the standard Panel ARDL method. Their findings suggested that on average, there is a negative long-run relationship between inflation and economic growth in India while Al-Zeaud & Al-Hosban (2015) examined the relationship between inflation rate and unemployment rate in order to predict and estimate the existence of Phillips curve trade-off relation within Jordanian economy over the period of 1976 to 2013. Their findings revealed that there was a negative and non-linear relationship between unemployment and inflation rates. Their study further proved a strong empirical existence of Phillips curve on Jordanian economy.
This paper tends to explore the dynamic interrelationship between unemployment and inflation rates in Nigeria, to see if unemployment rate causes inflation rate in Nigeria or whether inflation rate causes unemployment in Nigeria and also to study the dynamic interrelation between unemployment rate and inflation rate in Nigeria using Vector Error Correction Model (VECM) and Granger Causality Test.
Inflation and unemployment are two of the most critical macroeconomic indicators used to assess the health and performance of an economy. Inflation reflects the general rise in prices of goods and services over time, while unemployment measures the proportion of the labor force that is willing and able to work but cannot find employment. The interaction between these two variables has long attracted the attention of economists and policymakers because of its implications for economic stability, growth, and social welfare (Blanchard, 2017).
The theoretical relationship between inflation and unemployment is often explained using the Phillips Curve, which posits an inverse relationship between the two in the short run—lower unemployment is associated with higher inflation and vice versa (Phillips, 1958). However, later developments such as the Natural Rate Hypothesis and Rational Expectations Theory argue that this trade-off may not hold in the long run (Friedman, 1968; Lucas, 1972).
In Nigeria, the relationship between inflation and unemployment has been complex and inconsistent. Since 1990, the Nigerian economy has experienced periods of high inflation alongside rising unemployment, a condition often referred to as stagflation (CBN, 2023). Structural challenges such as weak industrial capacity, insecurity, exchange rate instability, and dependence on oil revenues have contributed to these macroeconomic imbalances (Adebayo & Ogunrinola, 2006).
Understanding how inflation and unemployment interact over time is essential for designing effective fiscal and monetary policies. This study therefore uses time series analysis to empirically examine the relationship between inflation and unemployment in Nigeria from 1990 to 2024.
1.2 Statement of the Problem
Nigeria has struggled with persistent inflationary pressures and high unemployment over the past three decades. Despite various policy interventions by the Central Bank of Nigeria (CBN) and the Federal Government, inflation remains volatile while unemployment continues to rise, especially among youths (NBS, 2024).
The coexistence of rising prices and joblessness contradicts the traditional Phillips Curve framework, raising concerns about the effectiveness of macroeconomic policies in Nigeria. Many Nigerians face declining purchasing power, reduced living standards, and increased poverty levels as a result of these dual challenges (World Bank, 2022).
Although several studies have examined inflation and unemployment separately, limited research has comprehensively analyzed their long-run and short-run relationship in Nigeria using updated data and modern time series techniques. This creates a gap in empirical knowledge that this study seeks to address.
1.3 Objectives of the Study
The main objective of this study is to analyze the relationship between inflation and unemployment in Nigeria using time series data from 1990 to 2024.
The specific objectives are to:
Examine the trend of inflation and unemployment in Nigeria from 1990 to 2024.
Determine the short-run relationship between inflation and unemployment.
Investigate the long-run relationship between inflation and unemployment.
Test the validity of the Phillips Curve hypothesis in the Nigerian context.
Assess the policy implications of the findings for macroeconomic management.
1.4 Research Questions
This study seeks to answer the following questions:
What are the trends of inflation and unemployment in Nigeria between 1990 and 2024?
Is there a significant short-run relationship between inflation and unemployment in Nigeria?
Does a long-run relationship exist between inflation and unemployment in Nigeria?
Does the Phillips Curve apply to Nigeria’s economic experience?
What policy lessons can be drawn from the findings?
1.5 Research Hypotheses
The following hypotheses are formulated for testing:
H₀₁: There is no significant short-run relationship between inflation and unemployment in Nigeria.
H₀₂: There is no significant long-run relationship between inflation and unemployment in Nigeria.
H₀₃: The Phillips Curve does not hold in the Nigerian economy.
1.6 Significance of the Study
This study is significant to policymakers, economists, researchers, and development planners. It provides empirical evidence on how inflation and unemployment interact in Nigeria, which can guide the formulation of effective monetary and fiscal policies (CBN, 2023). Academically, it contributes to the existing literature on macroeconomic dynamics in developing economies and serves as a reference for students and future researchers.
1.7 Scope of the Study
The study covers Nigeria and focuses on annual time series data on inflation and unemployment from 1990 to 2024. It employs econometric techniques such as unit root tests, cointegration analysis, and error correction modeling to analyze both short-run and long-run relationships.
1.8 Operational Definition of Terms
Inflation: A sustained increase in the general price level of goods and services over time.
Unemployment: The percentage of the labor force that is without work but actively seeking employment.
Time Series Analysis: A statistical technique used to analyze data points collected over time.
Phillips Curve: A theory suggesting an inverse relationship between inflation and unemployment in the short run.
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