Unemployment

I. INTRODUCTION

Unemployment is one of the developmental problems that face

every developing economy in the 21st century. Unemployment is

defined as the condition of having no job or being out of work or

proportion of people which are able to work and actively searching

jobs but they are unable to find it. IMF report (1998) defines

‘unemployment is measured annually as percentage of labour force

that can’t find a job’. International Labour Organization (2001)

defines unemployment as situation of being out of work or need a

job and continuously searching for it in the last four week or

unemployed ( age 16 or above) but available to join work in the next

two weeks. People who voluntarily do not want to work, full time

students, retired people and children are not included in

unemployed category.

International statistics portray that industrial and service

workers living in developing regions account for about two-thirds of

the unemployed. (Patterson et al, 2006). The Nigerian economy

since the attainment of political independence in 1960 has

undergone fundamental structural changes. The domestic structural

shifts have however not resulted in any significant and sustainable

economic growth and development.

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Dramatic increase in the level of unemployment is a big

headache in less developed countries in particular and advance

countries in general. A number of social problems are driven by high

growth of unemployment, for example Harvey & Blenna (1998)

studied unemployment and social problems and they concluded that

unemployment gave rise to crimes, suicides and poverty rates.

Unemployment suffers workers, workers’ families and even

countries because lost of job means loss of income both at individual

level and national level. Available data show that the Nigerian

economy grew relatively in the greater parts of the 1970s, with

respect to the oil boom of the 1970s, the outrageous profits from the

oil boom encouraged wasteful expenditures in the public sector

dislocation of the employment factor and also distorted the revenue

bases for policy planning.

This among many other crises resulted in the introduction of

the structural adjustment programme (SAP) in 1986 and the current

economic reforms. The core objective of the economic structural

reform, is a total restructuring of the Nigerian economy in the face

of population explosion (Douglason et al, 2006). However, these

economic and financial structural reforms put in place have not

yielded significant results. In the light of this, this paper seeks to

econometrically examine the determinants of unemployment in

Nigeria.

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We shall consider the key concepts in our study,

unemployment in Nigeria, in previous and recent times, and throw

lights on the factors which exert effects on the level of

unemployment in Nigeria, while we also recommend how these

factors can be manipulated in order to reduce unemployment in

Nigeria, which will invariably result in reduced poverty, improved

standard of living, improved productivity, and an overall

improvement in economic performance among other benefits.

STATEMENT OF PROBLEM

In a context of declining growth and economic restructuring,

the employment situation in Africa has become critical and labour

absorption problematic. In particular, the problem of what is

generally referred to as unemployment has increasingly come to be

recognized as one of the serious socio-economic problems currently

confronting many developing countries, especially those in Africa

(Curtain, 2000; ILO, 1999).

In Nigeria, since the early eighties, unemployment has

assumed alarming and disturbing dimensions with millions of able-

bodied persons who are willing to accept jobs at the prevailing rates

yet unable to find placements (Onah, 2001). According to the Labour

Force Survey conducted by the Federal Office of Statistics in

December 1997, Nigeria had a composite unemployment rate which

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stood at 3.2% compared with 3.4% in the corresponding period of

1996 (F.O.S., 2001). Similarly, the urban and rural unemployment

rates declined from 6.1% and 2.8% in December 1996 to 6.0% and

2.6% in December 1997. The composite registered unemployment

rate for December 1998 stood at 3.2% but declined to 3.1% in 1999,

whereas the urban unemployment rate in December 1998 was 4.9%

but increased to 5.8% in 1999. The rural unemployment rate

declined from 2.8% in December 1996 to 2.5% in 1999 December. In

December 2000, the composite unemployment rate increased to

4.7% and similarly the urban and rural unemployment rates

increased to 7.2% and 3.7% respectively compared with previous

years.

These facts and figures clearly highlights the need for us to

identify the determinants of unemployment in Nigeria, so as to

create an understanding of the prevailing factors affecting the level

of unemployment in Nigeria. It is in line with this that this study will

seek to provide answers to the following research problem:

i. Does population growth affect unemployment level in Nigeria?ii. Does foreign direct investment affect the level of unemployment in

Nigeria?iii. Does inflation affect have any effect on unemployment?OBJECTIVES OF STUDY

This study will seek to fulfil the following:

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i. To evaluate if population growth affects the level of unemployment in Nigeria

ii. To evaluate if foreign direct investment affects the level of unemployment in Nigeria

iii. To evaluate if inflation affects the level of unemployment in NigeriaRESEARCH HYPOTHESIS

H0: Foreign direct investment does not affect the level of unemployment in Nigeria

H1: Foreign direct investment affects the level of unemployment in Nigeria

II. LITERATURE REVIEW

OVERVIEW OF THE NIGERIAN ECONOMY

For all its vaunted wealth of mineral resources and the highly

visible and vocal manufacturing sector, the Nigerian economy is still

basically agricultural, dominated for the most part by peasant small

holder farms. At independence in 1960, the proportion of the Gross

Domestic Product accounted for by agriculture (defined broadly to

include crops, animal husbandry, fishing and forestry) and

petroleum stood at 67.0 per cent and 0.6 per cent respectively; by

1974 the proportions had been reversed to 23.4 and 45.5 per cent

respectively. In 1984, the shares of agriculture and petroleum went

down further to 15.5 per cent and 28.0 Per cent respectively. The

contribution of manufacturing and government has doubled in the

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period 1960 to 1984 although to a still relatively low level of 11.0

per cent arid 7.0 Per cent respectively. As at the end of 1993, the

share of agriculture (at 1984 factor cost) had climbed up once again

to 38.10 Per cent of GDP with petroleum oil going down to 12.66

from the 13.47 Per cent in 1992; the share of manufacturing had

stabilised since 1988 at around 8 to 9 per cent.

Although petroleum continues to dominate the public finances

and foreign exchange resources of Nigeria, the sector is, in reality,

an enclave economy employing less that 100,000 Nigerians directly

in production. Outside of transportation and, perhaps, a small

section of the industrial sector, the petroleum economy has very

little linkage with Nigerian production. It buys little or nothing from

the manufacturing or agricultural sector, transfers little or no

technology to either agriculture or manufacturing.

Agriculture, on the other hand, together with trade provides

the bulk of the employment for Nigerians, provides the bulk of the

needs of the household sector but supplies only a small part of the

needs of manufacturing. In a similar vein, until recently when it

began to make use of locally made fertilizers and pesticides, it

bought very little from manufacturing. Iii effect, the three main

sectors agriculture, manufacturing and mining have no inter-

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linkages in production and each therefore operates almost like an

island unto itself.

The oil boom of the 1970s and early 1980s raised the

consumption levels of both domestic and foreign goods. It led to the

neglect of agriculture and to the increasing import dependence of

the manufacturing sector; with capital goods production accounting

for less than 15 per cent of total manufacturing output, Nigeria has

had to depend on imports not only for equipment and machinery

and for intermediate goods and raw materials but even for food. The

sudden decline in oil prices in the mid 1980 s, which has persisted to

date, the near insatiable demand for imports and the weakening of

the supply base have combined to generate severe internal

pressures and external disequilibria. In addition, time governments,

at both federal and state level, have shown themselves unable to

reduce the size and scope of their expenditures and budget deficit.

The Obasanjo regime (1976 - 1979) had bequeathed to the

incoming Shagari government, in October 1979, an external debt of

$6.8 billion; by the end of the Shagari administration in December

1983, the stock of external debt stood at $18.5 billion. The

succeeding Buhari government pushed it up further to $21.2 billion

by 1985. The debt burden measured by the ratio of debt service to

export proceeds stood at 20.4 per cent in 1978, 15.4 per cent in

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1980, 30 per cent in 1981 and 61.5 per cent in 1982. It was rising to

hit 107 per cent in 1983/84. With the population assumed to be

growing at 2.5 per cent per annum and debt service running at

some 4 per cent of the Gross Domestic Product, it means that just to

maintain the living standards of time people at a stand still, the

economy would be required to grow at a minimum of 6.5 per cent

per annum on a sustainable basis.

The balance on external account showed a small deficit for

most of the period between 1960 and 1970; it then recorded a very

large surplus in 1973 and 1974. Within two years, the government of

General Gowon (1966 - 1975) nearly succeeded in wiping out this

surplus in short order; three years later, by 1978, the account had

turned to a large deficit of $3.696 billion. By deferring the external

obligations through a readily recognisable financial screen, General

Obasanjo left a surplus of $5.870 billion in 1979/80. By 1981, time

Shagari administration had turned the tables into a deficit of $5.3

billion thereby creating time environment for an austerity package

in 1982. But these were shortlived. It took General Buhari s

draconian measures in 1984 to reverse the tide to a modest surplus

in 1984. However, by 1985, it was rapidly becoming clear that the

accumulation of innumerable regulations administered by

innumerable persons had literally brought the economy to a

standstill.

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The Babangida administration that swept itself into office in

August 1985 was quick to recognise this dilemma. After an

extensive, even if illinformed, public debate on IMF supported model

of structural adjustment, the government introduced what it

ostensibly regarded as its own home-grown programme of structural

adjustment. The year 1986, therefore, marked the beginning of

economic deregulation with the objectives of:

a. restructuring and diversifying the economic base of the

economy and reducing the dependence on oil;

b. achieving fiscal balance and reducing the deficit in the balance

of payments in the medium term;

c. Laying the foundation for non inflationary growth in the

medium and long term.

The thrust of the measures for deregulation was to promote

competition and efficiency through greater reliance on market

forces. These encompassed the following:

a. The abolition of import licensing in September, 1986;

b. The partial removal of exchange controls in September 1986,

reduction of government borrowing, and strengthening the use

of Treasury Bills as an effective tool of monetary control;

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c. The removal of restrictions on commercial banks to engage in

equipment leasing and relaxation of restrictions on equity

participation in companies by banks; and

d. The adoption of indirect tools of monetary control (that is, the

use of cash reserve requirements, liquidity ratios, the discount

rate and Open Market Operations) and the establishment of

discount houses.

The reform of the banking system was undertaken in part to

strengthen and enhance the performance of the supervisory and

regulatory framework and in part to improve the reliance of the

banking industry on market forces. Among these reforms were the

granting of autonomy to the Central Bank, the promulgation of the

Central Bank of Nigeria and the Banks and Other Financial

Institutions Decrees in 1991, the establishment of the Nigeria

Deposit Insurance Corporation, and the issuance of prudential

guidelines and regulations by the Centra1 Bank to the banking

institutions.

1986 AND AFTER

The decade before the Babangida regime, that is the

administration of Obasanjo, Shagari and Buhari, was an age of

prohibitions in which the economy was almost being choked to

death by controls. The Babangida era was, on the other hand, an

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age of transition; it dismantled the controls exercised on the

economy by politicians and bureaucrats for over four decades. The

gains were most impressive and noticeable in the first three years of

structural adjustment; thereafter the profligacy of government

spending and the nature of its financing from 1990 to 1993 wiped

out the progress already made. The following achievements of the

first three years of the Structural Adjustment Programme (SAP)

must, however, be recorded:

a. on the External Sector, the Current Account deficit fell to $2.1

billion in 1986, and to only $73 million in 1987 turning into a

surplus of $1.1 billion in 1989, $5.2 billion in 1990 but down to

$1.3 billion in 1991 and $748 million in 1993;

b. External Debt service that stood at 23.4 per cent in 1986,

climbed to 30.2 per cent in 1988 but had to be held down by

public policy to 27.5 per cent in 1989; it jumped to 40 per cent

in 1990, threatened to hit 61 per cent in 1992 and 29.3 per

cent and 30.1 per cent in 1993 and 1994, respectively;

c. Public expenditure remained restrained until 1988; thereafter

it became reckless with budget deficit representing some 8.8,

9.2, and 12.6 per cent respectively of the Gross Domestic

Product in the three years 1989 – 1991 and 10.1 and 12.3 per

cent respectively in 1992 and 1993. Concomitantly, money

supply (Ml) rose by 17.1 per cent in 1987, 24.8 per cent in

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1988 and on the average, by 41.5 per cent between 1988 and

1991; it rose further by 66.4 per cent in 1992 and 54.6 per

cent in 1993. Broad money (M2) grew by an average of 28 per

cent between 1988 ad 1991, and rose by 57 per cent between

1991 and 1992 and by 52.8 per cent between 1992 and 1993;

d. the Consumer Price Index, measuring the movement in the

genera1 price level with 1985 as base, rose to only 181.2 in

1988, but had jumped to 330.9 in 1991, 478.4 in 1992 and

751.9 per cent in 1993 (Table 1.3). The acute inflation

represented by these numbers is compounded by the growing

unemployment which had changed qualitatively since the 70’s:

in the 70’s the bulk of the unemployed had completed only up

to primary school level and took some six weeks for job search,

but by the mid 80 s the bulk of the unemployed had completed

their University education and took some two years or over to

find a job; and

e. By 1988, industrial capacity utilisation stood at only 41.7 per

cent; it fell to 37.6 percent in 1989 and further to 38.2 in 1991;

for 1993 it is put by the Manufacturers Association of Nigeria at

under 30 per cent. In effect, Nigeria is moving from the non-

industrialisation of the colonial and immediate post colonial era

to a period of de-industrialisation.

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The incessant increase in the demand for foreign exchange,

caused by the high level of liquidity in the system as a result of

excess government spending, and the dwindling level of export

earnings caused by fall in oil prices and the stagnation of non-oil

export, resulted in a 16% average annual depreciation in the Naira.

Such persistent and precipitous depreciation, however, failed to

induce any significant increase in non-oil export as was pontificated

when SAP was introduced. Efforts to stem the surging demand for

foreign exchange, through monetary contraction, failed to have a

lasting effect and to prevent the widening of the gap between the

official and parallel market rates. In February 1993 a new rule was

introduced, in which each bank s allocated share of foreign

exchange was made proportional to its holding of Naira deposits at

the Central Bank of Nigeria. That arrangement caused a withdrawal

of virtually all excess liquidity from the financial system for most of

the time. When all efforts to stabilise the foreign exchange rate

failed, the present government, in 1994, fixed the rate at about

N22.00 to $1.00 and re-introduced exchange controls and the direct

allocation of foreign exchange to priority sectors.

The deregulation of interest rates in 1991 engendered very

keen competition in the banking industry, with banks adopting new

strategies to attract deposits and encourage savings. However, the

rapid and significant shifts in interest rates were causes for serious

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concern because such high rates could and did retard productive

investment and growth. The Central Bank was obliged to modify

policy of total deregulation of interest rates, and to request banks to

justify their interest rates by reference to their actual cost of funds.

In 1994, the authorities felt that the prevailing interest rate levels

were out of equilibrium and counterproductive and re introduced

interest rate ceilings of a maximum of 15 per cent for deposit l a

maximum of 21 per cent for lending.

UNEMPLOYMENT

The population of every economy is divided into two

categories, the economically active and the economically inactive.

The economically active population (labour force) or working

population refers to the population that is willing and able to work,

including those actively engaged in the production of goods and

services (employed) and those who are unemployed. Whereas,

unemployed refers to people who are willing and a capable of work

but are unable to find suitable paid employment. The next category,

the economically inactive population refers to people who are

neither working nor looking for jobs. Examples include housewives,

full time students, invalids, those below the legal age for work, old

and retired persons.

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The unemployment rate is expressed as a percentage of the

total number of persons available for employment at any time.

Unemployment is a problem that each society faces, and each

society must find a way to beat it. Unemployment is one of the

developmental problems that face every developing economy in the

21st century. International statistics portray that industrial and

service workers living in developing regions account for about two-

thirds of the unemployed population. Nigeria, since the attainment

of political independence in 1960 has undergone various

fundamental structural changes. These domestic structural shifts

have however not resulted in any significant and sustainable

economic growth and development.

Available data show that the Nigerian economy grew relatively

in the greater parts of the 1970s, with respect to the oil boom of the

1970s; the outrageous profits from the oil boom encouraged

wasteful expenditures in the public sector dislocation of the

employment factor and also distorted the revenue bases for policy

planning. This among many other crises resulted in the introduction

of the structural adjustment programme (SAP) in 1986 and the

current economic reforms. The core objective of the economic

structural reform is a total restructuring of the Nigerian economy in

the face of a massive population explosion. However, these

15

economic and financial structural reforms put in place have not

yielded significant results.

According to Briggs (1973) unemployment is the difference

between the amounts of labour employed at current wage and

working conditions, and the amount of labour not hired at these

levels, however, Gbosi (1997) defined unemployment as a situation

in which people who are willing to work at the prevailing wage rate

are unable to find jobs. “The unemployed is a member of an

economically active population, who are without work but available

for and seeking for work, including people who have lost their jobs

and those who have voluntarily left work (World Bank, 1998). The

natural rate of unemployment is the average rate of unemployment

around which the economy fluctuates. In a recession, the actual

unemployment rate rises above the natural rate, in a boom, the

actual unemployment rate falls below the natural rate

TYPES OF UNEMPLOYMENT

The main types of employment are structural, frictional,

seasonal, cyclical, residual, technological and disguised

unemployment.

Structural Unemployment

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Structural unemployment occurs when there is a change in the

structure of an industry or the economic activities of the country. As

an economy develops over time the type of industries may well

change. This may be because people's tastes have changed or it

may be because technology has moved on and the product or

service is no longer in demand.

The main causes are as follows:

Changes in demand - if there were to be a decrease in the

demand for a produce (due to changes in people’s taste or

cheaper imports available) and if this change were more

permanent, the supply of such a product must be reduced.

Fewer workers would then be required. Retrenched may not be

readily absorbed into other industries and thus become

unemployed.

Changes in supply - the faster the changes taking place in

people's tastes and demand and supply, the more structural

unemployment there may be and an industry has to adapt

more quickly to change due to depletion of raw materials

required.

The regional structure of industry - if industries that are dying

are heavily concentrated in one area, then this may make it

much more difficult for people to find new jobs. Both the

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shipbuilding and mining industries were heavily concentrated

and some areas have taken many years to adapt and reduce

the level of structural unemployment. This type of

unemployment is also known as the chronic unemployment or

the Marxian or long-term unemployment. It is mostly to be

found in the underdeveloped countries of Asia and Africa. This

type of unemployment is due to the deficiency of capital

resources in relation to their demand. The problem in the

underdeveloped countries is to get rid of this age-old chronic

unemployment by accelerating the process of economic

growth. In other words, structural unemployment results from

a mismatch between the demand for labour and the ability of

the workers.

Frictional Unemployment

This type of unemployment is caused by industrial friction,

such as, immobility of labour, ignorance of job opportunities,

shortage of raw materials and breakdown of machinery, etc. Jobs

may exist, yet the workers may be unable to fill them either because

they do not possess the necessary skill, or because they are not

aware of the existence of such jobs. They may remain unemployed

on account of the shortage of raw materials, or mechanical defects

in the working of plants. On average it will take an individual a

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reasonable period of time for him or her to search for the right job.

This creates unemployment while they look and this type of

unemployment is normal and temporary in nature. The more

efficiently the job market is matching people to jobs, the lower this

form of unemployment will be. However, if there is imperfect

information and people don't get to hear of jobs available that may

suit them, then frictional unemployment will be higher. Therefore,

the better the economy is doing, the lower this type of

unemployment is likely to occur. This is because people will usually

be able to find a job that suits them more quickly when the economy

is doing well.

Seasonal Unemployment

This is due to seasonal variations in the activities of particular

industries caused by climatic changes, changes in fashions or by the

inherent nature of such industries. The ice factories are closed down

in winter throwing the workers out of their jobs because there is no

demand for ice during winter. Likewise, the sugar industry is

seasonal in the sense that the crushing of sugar-cane is done only in

a particular season. Such seasonal industries are bound to give rise

to seasonal unemployment.

Cyclical Unemployment

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This type of unemployment (also known as Keynesian

unemployment or the demand deficient unemployment) is due to

the operation of the business cycle. This arises at a time when the

aggregate effective demand of the community becomes deficient in

relation to the productive capacity of the country. In other words,

when the aggregate demand falls below the full employment level, it

is not sufficient to purchase the full employment level of output.

Less production needs to be carried out which ultimately leads to

retrenchment of workers. Cyclical or Keynesian unemployment is

characterized by an economy wide shortage of jobs and last as long

as the cyclical depression lasts.

Disguised Unemployment

This type of unemployment is to be found in the backward and

the underdeveloped countries of Asia and Africa. The term

‘disguised unemployment’ refers to the mass unemployment and

underemployment which prevail in the agricultural sector of an

underdeveloped and overpopulated country. For example, if there

are four persons trying to cultivate an area of land that could be

cultivated as well by three persons, then only three of these persons

are really fully employed and the remaining fourth person

represents disguised unemployment. The people in underdeveloped

countries are outwardly employed but actually they are

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unemployed, the reason being that agricultural production would

suffer no reduction if a certain number of them are actually

withdrawn from agriculture. This can also be seen when the growth

of the labour force exceeds the amount of investment made. The

lack of investment is due to shortages in real factors such as

shortage of skilled labour, managers, right type of entrepreneurs,

etc. As a result, there is over supply of labour available and these

excess labours are ‘employed” (to be exact, underemployed) in jobs

when there are already enough workers. Therefore, the marginal

productivity of such labour is low. This type of disguised

unemployment is caused by the chronic shortage of capital

resources in relation to the rapidly growing population.

KEY CAUSES OF UNEMPLOYMENT

There are many causes for unemployment, and it is vital that

we understand them all to be effective in combating this great social

evil. Only by offering solutions to tackle the causes of

unemployment can we really solve the problem; treating the

symptoms is not enough and will have the same effect as a

painkiller: you numb the pain but the problem doesn’t go away and,

what’s more worrying, painkillers are addictive, and so are solutions

for the symptoms of unemployment as opposed to the causes.

Recessions

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When the economy is not growing, then jobs aren't being

created and unemployment rises. Combating recessions is done

through a prudent fiscal policy that includes incentives to invest and

to spend money, including lower taxation and interest rates.

Recessions are a reason why Conservatives want sustainable growth

with a prudent fiscal policy. Recklessness in public finances means

that a recession strikes harder and does a lot more damage.

Over-Regulation

Over-regulation is an important cause for unemployment. Too

much burden on a business’ shoulders and that business cannot

afford to expand and, with its expansion, to create more jobs.

Because of this, if you are unemployed, it will be almost impossible

for you to find work, and this will be especially critical for students

and for anyone who finds him or herself out of work when they are

middle aged. There is too much paperwork involved to do anything;

there are too many regulations that stifle job creation efforts. This

leads to a two-tier system, usually, with those who are already

employed having a job for life, and those who do not have a job are

unable to find anything, and are forced to live on welfare. There are

too few job offers for the demand, a shortage that leads to poverty

and chronic unemployment. This means that adding burdens to the

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economy will not create new jobs. It will, in fact, make the amount of

new jobs being created decrease.

Skills

To be able to handle a certain job, a person needs a set

number of skills. If the person does not have the skills for a job, then

he or she either gets training or he or she is unable to get that job.

When the types of jobs in a certain area change, then people

without the right skills are either able to move to a different area or

they are unable to find work. In the meantime, these new jobs are

filled up with new people, who do have the skills these require. A

technology shift can lead to this sort of unemployment, which is

structural in nature. The wrong approach to this problem would be

to keep the old jobs going forever, because that situation is

unsustainable. A lot of money will be spent and the people get to

keep their jobs, but they are not given the possibility to improve

their situation. The way to solve this issue is through training.

Lack of Information

A source of unemployment that cannot be overlooked is the

lack of information about available jobs. If people don’t know that

jobs are there, then they will not take them. It is also important that,

when people do know about possible employment opportunities for

them, they are able to take them. Dissemination of information is

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fundamental in any market, and in the job market it is fundamental

as well. The obvious solution for this problem is to be able to bring

information to the people who need it. Job centers do that, and the

more efficient they are, the more effective they are.

EFFECTS OF HIGH RATES OF UNEMPLOYMENT

High and persistent unemployment has presented a major

challenge for the economy in two major areas. One such area, it has

eroded the funding base and secondly, it has increased the

demands on government through the use of welfare programs

because of the consequences for poverty and inequality resulting

from high unemployment. The following is an analysis of the effects

that unemployment has on the economy. One such effect is the

social costs, these include increasing poverty, personal hardships,

depression, decay of unused skills, increase in crime (mostly among

the young) as well as family disputes and broken marriages.

Unemployed individuals become more and more dissatisfied and

resort to riots and demonstrations.

Secondly, the economic costs that are produced from

unemployment. Due to unemployment, the economy’s GNP will be

less than the potential GNP, that is to say; what is possible of full

employment. This difference is known as the GNP gap. The gap is

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positive but can be slightly negative if the actual GNP exceeds

potential GNP and this can be possible only when the employed

labour works overtime or firms run their plants beyond their efficient

level of capacity. Unemployment is an economic problem involving

loss of output and income.

UNEMPLOYMENT IN NIGERIA

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, which caused import dependency of most Nigerian

manufacturing enterprises, which 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, furthermore, the Nigerian Government also placed

an embargo on employment. Specifically, total disengagement from

the Federal Civil Service rose from 2, 724 in 1980 to 6,294 in 1984

(Odusola, 2001). Owing to this, the national unemployment rate

fluctuated around 6.0% until 1987 when it rose to 7.1 percent. It is

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important to state here, that SAP adopted in 1986, had serious

implications on employment in Nigeria, as unemployment rate

declined from 7.1 percent in 1987, to as low as 1.8 percent in 1995,

after which it rose to 3.4 percent in 1996, and hovered between 3.4

and 4.7 percent between 1996 and 2000 (Douglason et al, 2006).

According to a 1974 survey, reported by Aigbokhan (2000)

graduate unemployment accounted for less than 1 percent of the

unemployed, in 1974, by 1984, the proportion rose to 4 percent for

urban areas and 2.2 percent in the rural areas. Graduate

unemployment, (Dabalen et al, 2000) accounted about 32% of the

unemployed labour force between 1992 and 1997. It is impressive to

note here that, in 2003, Nigerian’s unemployment rate declined

substantially to 2.3 percent. This decline was attributed to the

various government efforts aimed at addressing the problem

through poverty alleviation programmes. Recently, the Federal

Government accepted World Bank's figure of 40 million (28.57%)

unemployed people in Nigeria.

Though there were no details of how the Bank arrived at that

figure, the admission by the Minister of Labour, Prince Adetokunbo

Kayode that we do have such an unemployment crisis is enough to

give credence to the report. We recall that two years ago, the

Federal Government disclosed that about 70 percent of Nigeria's

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population lived below the poverty line, but since then no concrete

measures have been taken to address the situation. Suddenly we

are confronted with the statistic that 40 million Nigerians are

unemployed. It is indeed worrisome for a country with a population

figure of 140million (as indicated in the 2006 Census report) to have

40million unemployed. But we wonder why the minister should rely

on World Bank to ascertain the country's unemployment figures

rather than obtain same from the federal office of statistics.

Notwithstanding the reliability or otherwise of the figures, the good

thing is that those at the helm of affairs are beginning to show

concern about the growing rate of unemployment and poverty in

this country and may decide to act now.

While acknowledging efforts made by previous administrations

to tackle the problem of unemployment, we however disagree with

the minister for attributing the present statistics to the current

global economic meltdown. Over the years, hundreds of factories

that hitherto provided employment to multitudes of graduates and

artisans have collapsed. In one year, over 100 textiles factories

closed shop across the country and the trend continues. Why? This

is because energy supply which serves as the main engine of

production has been comatose, thus forcing surviving industries to

depend on power generators while the country becomes a dumping

ground for all imported items. Many artisans such as furniture

27

makers, welders, aluminium window fitters, tailors, etc who cannot

afford power generators are today out of work.

In desperation, a large chunk of Nigerian youths have taken to

riding commercial motorcycles while others went into street hawking

just to keep body and soul together. The country is faced with a

gross abuse and under utilization of human resources with direct

impact on national productivity and competitiveness. Brain drain in

all professional callings has become the order of the day, while the

Manufacturers Association of Nigeria (MAN) which used to play a key

role in policy formulation and implementation has been reduced to a

gathering of complainants. Another disturbing aspect of the whole

phenomena is the state of our educational system which has forced

some employers of labour to reserve spaces for Nigerians with

foreign qualifications. This is because our higher institutions are

steadily producing graduates whose skills are suspect, thus making

it difficult for them to get recruited. This brings to the fore, the need

for Guidance and Counseling tutorials in our schools, in order to

prepare, guide and encourage students to read courses that could

guarantee them employment after graduation.

POLICIES TO MINIMISE UNEMPLOYMENT IN NIGERIA

28

Government policies to reduce unemployment must be based

upon the types and causes of unemployment that are prevalent. It

may be worth glancing back to that section to remind yourself of the

major kinds of unemployment; however, we will go into more detail

in this section. General policies such as cuts in direct taxes so

should be effective across any kind of unemployment, as it increases

the appeal of any job to any potential employee.

Real Wage Unemployment

This is unemployment as a result of a kind of market failure, a

failure of the labour market to respond to changes in demand. If

demand for workers rises, it is logical that they will demand greater

real wages similarly, if demand falls, workers should expect to suffer

lower real wages for the same work. Real wage unemployment is

usually caused by a combination of:

Strong trade unions - giving employees greater power over

deciding wage conditions with the threat of industrial action

(strikes etc.) With strong unions, firms will not be able to

reduce wages when demand is low, leading to bankruptcy

(unemployment) or layoffs of workers (unemployment)

Wage 'stickiness' - Employees on long term contracts will

have a fixed wage over a long period of time. If a downturn in

29

demand occurs, wages cannot fall immediately in response -

they are 'sticky'

Minimum wage - This is a characteristic of most modern

economies, guaranteeing every worker a minimum standard of

living. Whilst this is undoubtedly wonderful, if the minimum

wage is set too high, the labour market is once again

inflexible

Government policies to tackle this form of unemployment are

invariably unpopular for workers, as their wage levels are

threatened to the benefit of firms and businesses. However, it is

largely appreciated that, for example, overly strong trade unions can

utterly paralyze an economy. Policies to combat real wage

unemployment include trade union reform (reducing their powers);

increasing firms' ability to change wages and encouraging shorter

term contracts and ensuring that the minimum wage level does not

adversely impact the economy.

Frictional Unemployment

Remember, this is unemployment generated through

incomplete information of the labour market. This can be solved in

two main ways. Firstly, increasing the knowledge of the local

vacancies through government funded 'job centers’ could reduce

time between jobs. Secondly, increasing the incentive to search for

30

suitable jobs (such as reducing unemployment benefits and lower

taxes on wages) could serve the dual purpose of increasing

incentives to search for work, and making more vacancies

acceptable to the unemployed individuals.

Cyclical Unemployment

It is worth noting that this form of unemployment can also be

known as Keynesian or demand-deficient unemployment. Over the

economic cycle demand changes, and regardless of how flexible

wages are, unemployment will rise of fall. There are clear links

between the rate of economic growth and the level of

unemployment. It is clear that in a depression, unemployment will

rise, as demand for good and services falls. This could result in a

negative multiplier effect, without government intervention. Policies

to reduce the impact of Keynesian unemployment include:

Increased government spending - this includes reductions

in taxes. Increased government expenditure or money supply

will cause an outward shift in AD, and may create a multiplier

effect. Theoretically, government spending to pay workers to

dig huge trenches and fill them in again will help, as it

increases national income. However, targeted policies to

increase the quality of infrastructure or levels of investment

will be more effective. Also, reductions in direct taxes will

31

encourage more people into work, and also increase the level

of disposable income, hopefully leading to a positive multiplier

effect

Reduction of interest rates - remember that a fall in

interest rates can also stimulate AD. A fall in interest rates

encourages consumption and investment. Reflating Aggregate

Demand by using macro-economic policies to increase the

level of aggregate demand. It might also encourage foreign

investment into the economy from foreign multinational

companies. In the diagram below we see an increase in

aggregate demand leading to an expansion of aggregate

supply. Because of the increase in demand for output, the

demand for labour at each wage rate will grow - leading to an

increase in total employment.

32

Not every increase in demand and production has to be met by

using more labour. Each year we expect to see a rise in labour

productivity (more output per worker employed). And, businesses

may decide to increase production by making greater use of capital

inputs (machinery and technology).

Geographical Unemployment

Naturally, policies to reduce geographical unemployment will

seek to decrease geographical immobility of labour. This is the

inability of people to relocate from areas with low demand for

labour, to areas with high demand for labour. Policies to reduce

geographical unemployment include:

Regional Incentives - this is regional policy to increase the

incentives for new businesses to locate in areas of high

unemployment, thus reducing regional variations in

unemployment caused by geographical immobility

Reducing geographical immobility - is the second and

more direct method of combating geographical

unemployment. It aims to reduce geographical immobility by

reducing barriers to free movement of workers (such as no

border controls and cheap housing). This is more difficult

within a country as the barriers are often social in nature, such

as family ties.

33

Structural Unemployment

This is the inability of workers to change the kind of

employment (for example from manufacturing to IT) they are in. Left

without intervention, this could lead to dangerous long term

unemployment, whereby workers find it increasingly difficult to find

jobs as they become less desirable the longer they are unemployed.

Policies to reduce occupational unemployment include:

Retraining - incentives for both companies to retrain and

employees to take part in training to make them more

attractive and useful to firms. Governments may also directly

take part in retraining projects where unemployment levels as

a result of structural unemployment are very high

Reducing geographical immobility - could result in no need

for retraining programs, as worker could simply move to an

area in which their skills are in high demand. This works

providing the costs associated with reducing geographical

immobility are lower than those required for occupational-

orientated projects such as retraining, and that their skills are

in demand somewhere.

National Directorate of Employment (NDE)

One of the steps taken by the Nigerian government to reduce

the problem of unemployment in Nigeria was the establishment of

34

the National Directorate of Employment (NDE), which was

established in November 22, 1986. The objective of NDE was to

promptly and effectively fight unemployment by designing and

implementing innovative programmes, which are directed towards

the provision of training opportunities through the guidance and

management support services to graduate farmers and small scale

entrepreneurs. The objectives of NDE spanned across the following

programmes:

• Agricultural development programme

• Youth employment and vocational skills development programme

• Special public works

• Small scale industries and graduate employment programme

The aim of the agricultural programme is to generate

employment for graduates, non-graduates and school leavers in the

Agricultural sector, with emphasis on self employment in agricultural

production and marketing. The programme is monitored by a team

of Agricultural professionals in the Agricultural department of the

directorate. However, factors which includes inadequate funding and

late release of funds from the federation account among others,

have impaired the effectiveness of the NDE agricultural programmes

(Chinedum, 2006). As stated earlier, this study seeks to recommend

35

the informal sector as a medium of reducing unemployment in

Nigeria, while outlining some of the pointers needed in making the

objectives achievable.

National Economic Employment and Development Strategy

(NEEDS)

The National Economic Employment and Development

Strategy (NEEDS) was introduced in March 2004, in order to confront

the various macroeconomic imbalances, social challenges and

structural problems in the Nigerian Economy. One of the principal

goals is to build a modern Nigerian that maximizes the potential of

every citizen so as to become the largest and strongest African

economy, and a force to be reckoned with in the world. To achieve

this goal NEEDS, as a development strategy anchored on the private

sector is to engineer wealth creation, employment generation and

poverty reduction, however, for NEEDS to achieve its objectives

there’s need to design many integrated programmes that can

generate employment for women and youths to enhance growth and

development (Adebayo, 2006). As it is a medium – termed reform

based development strategy, and action plan for the period 2003-

2007, the impact of NEEDS is yet to be felt, in combating

unemployment problem and this further points to the need to seek

36

help in the informal sector in order to drastically reduce

unemployment.

III. EMPIRICAL LITERATURE

Ozturk L. & Akhtar.I. (2009) took an comprehensive approach

to unemployment by using VAR of “ Variance Decomposition and

Impulse response function analysis”. He was interested in studying

interrelationship among Foreign Direct investment, Export, Gross

Domestic product and unemployment in Turkey for the period of

2000-07. They found only two counteracting vectors in the system,

showing long run relationship. They concluded that foreign direct

investment did not lead to reduce unemployment in Turkey. GDP is

positively affected by variations in exports but is insignificant. So

they did not found any evidence of export led growth in Turkey.

Again, Variations in DGP was no attached with reduction of

unemployment.

Marika Karanassou.et.al (2007) analyzed labour market

dynamically to find relationship between capital stock and

unemployment. They used indirect transmission channels of the

effects of capital stock for estimating single equation unemployment

model. The major variables they used were interest rates and

investment ratios. They introduced different approaches especially

by direct estimation of the model of “Employment theory of Chain

37

response” for the effects of capital stock on labour market. They

concluded that capital stock is the key determinant of

unemployment.

Aleksander.et.al (2009) focused on studying long run

relationships among money supply, interest rate and unemployment.

They concluded that these variables are positively related at low

frequencies. They developed such a framework where money and

unemployment were modelled by using micro details based on

“search and bargaining theory”. They provided a unified theory for

analysis of labours and goods markets. As people hold a sizable

amount in unemployment so the use of monetary theory can be on

basis of search and bargaining or may an alternative ad hoc plan.

Mark C. Foley (1997) used Russian People’s longitudinal survey

for studying determinants of unemployment in early stages of

economic transition in Russia. He used a discrete-time waiting model

along with competing risk and heterogeneity models. He concluded

that married women experience longer unemployment period than

married man. Older worker face higher unemployment period as

compared to younger worker. Persons with lower education were

forced to have longer unemployment spell.

Kupets. O.V (2005) studied determinants of unemployment in

Ukraine between 1997 & 2003. He used Ukrainian Longitudinal

38

Monitoring Survey 2003, to investigate an individual conditional

probability about leaving unemployed to employ. Effects of

unemployment benefits on unemployment were not conformed.

Again, Multivariate Analysis suggested that long term unemployment

reduction policies should focus more on less educated & older

workers and residents of rural areas.

Elameskov. et al (1998) focused on relationship between

unemployment and taxation in OCED countries for the period of

1983-1994. He used Hausman specification test & concluded that

impact of taxation on unemployment is positive and exogenous in

short run where as in long run, relationships are simultaneously

determined. Main conclusion is taxation as a major determinant of

unemployment in long run.

Shu-Chen Chang (2006) applied VAR method of variance

decomposition and impulse response function analysis for studying

relationship among economic growth, trade, foreign direct

investment (FDI) and unemployment in Taiwan. The result showed

that export and economic growth effect FDI inflow positively

however export expansion has negative impact on FDI outflow.

Study confirmed no relationship between FDI and unemployment

where as negative relationship between unemployment and

economic growth was obvious and confirmed.

39

Izraeli and Murphy (2003) studied influence of degree of

industrial diversification on unemployment rates and per capita

income in seventeen states. The result showed that a state with

more diversified base has lower unemployment rate. Evidence on

the relationship between per capita income and industrial

diversification remained inconclusive.

Though a lot of work has been done on relationship between

unemployment and other set of macroeconomic variables but less

attention is paid to determinants of unemployment i.e. what are the

major determinants of unemployment? This paper proceeds to

employ simple econometrics technique of Regression analysis for

analyzing economy.

IV. METHODOLOGY AND MODEL ESTIMATION

a. Data Collection

Basically, data used in this work were obtained from secondary

sources of data collection and theses include textbooks, journals,

articles, statistical bulletins and other publications. The information

obtained from these sources was applied in analysis carried out in

this study, and also found use in the building up of literature.

b. Model Specification

The model specified for this study was used to evaluate the

determinants of unemployment in Nigeria; this would be considered

40

from period 1990 – 2009. From literature, it is possible to identify

some of the possible determinants of unemployment in Nigeria to

include inflation, population growth and foreign direct investment.

The functional form of the model is specified as follows:

UR = F (INR, PG, FDI)

Where UR stand for unemployment rate, PG represent population

growth, FDI is for Foreign Direct Investment and INR denotes

Inflation rate.

In the empirical form, the model is specified as:

UR = 0 + 1 INR + 2 PG + 3 FDI + Ui

Here the UR is used as dependent variable, while INF, PG and

FDI are used as explanatory variables in the models. The 0 is the

intercept, 1 to 3 are the unknown parameter (i.e the slopes) and

the U, is the random term (stochastic variable)

THE APRIORI EXPECTATION

= ≠ 0

1 > 0

2 > 0

3 > 0

41