Relationship Between Inflation and Unemployment: Testing Philips Curve Hypotheses and Investigating the Causes of Inflation and Unemployment in Nigeria

Abstract

The attainment of full employment and price stability are one of the most widely used measures of economic health. Inflation and unemployment are an integral part of an economy; however, there is a need to balance both such that neither inflation nor unemployment is too high. The persistent rise in inflation and unemployment rates has called for the need to investigate the relevance of Philip's postulation of a trade-off between inflation and unemployment in Nigeria. In addition to the interdependency or independence of these variables, there is also a need to access factors that may contribute to the increasing inflation and unemployment rates in Nigeria. These will enable policymakers to formulate policies that affect inflation and unemployment and pay attention to other variables that may directly or indirectly affect inflation and unemployment. Therefore, the study aims to test the validity of Philip's curve hypotheses and examine possible causes of inflation and unemployment in Nigeria. The study used secondary data sourced from the Central Bank of Nigeria and the World Bank. Vector Autoregressive and Error Correction methods were adopted for the analysis. The study revealed that there is no significant relationship between inflation and unemployment in Nigeria. Inefficiencies from the government's side and insufficient domestic investment were observed to be the possible causes of unemployment, whereas; exchange rate depreciation and money supply are blamed for the rising price levels in Nigeria. The study concludes that the problems of inflation and unemployment arise from inefficiencies in both monetary and fiscal policies. Efficient use of fiscal and monetary policies was recommended to raise employment and output in all sectors to meet the steaming local demand and export. Also, the full implementation of economic diversification policies is recommended. Furthermore, the study recommends increasing government spending on social infrastructure and incentives to firms to promote investment in Nigeria. These will have an overall effect of increasing output, reducing unemployment and achieving non-inflationary growth in Nigeria.

COVID-19 Pandemic: Health Challenges and a Critical Study of the Structure of the Nigeria Economy

“…In a similar market, the naira has been more volatile, depreciating above 575/$ in September 2021. A study by [58] revealed that exchange rate depreciation and money supply are the major causes of inflation in Nigeria. In line with his findings, the depreciated naira value of 358.8/$ in 2020 to 410.83/$ in June 2021 corresponds to 13.25% and 17.75% inflation rates in the same periods.…”

Testing the Validity of the Inflation-Unemployment Nexus within the West African Monetary Zone

“…Except for Guinea, all of the group's members are English-speaking. Since the early 2000, unemployment has reached crisis proportions, with millions of non-disabled peo-ple unable to get work while being ready to accept salary rates at or below the market average [16] in the WAMZ. As argued by [39], policymakers in the West African bloc have long recognised unemployment as a significant threat to the region's economic growth.…”

“…West Africa's monetary zone has seen serious inflation problems [19]. In most countries of the WAMZ, rising inflation has become more common than any other macroeconomic concept [16]. Low-income families lament the depreciation of their income since they cannot purchase as much as they formerly did.…”

“…Unemployment and inflation in the West Africa Monetary Zone (WAMZ) have risen to new heights due to the 2019 coronavirus pandemic [16] and the current Russia-Ukraine war that has disrupted global supply chains. As a result, achieving a middle ground between unemployment and inflation is a primary economic objective for all nations in the WAMZ.…”

“…In Ghana, inflation rose from 7.14% in 2019 to 9.97% in 2021, while the unemployment rate rose from 4,32% in 2019 to 4.7% in 2021 [47], invalidating Philip's argument of the existence of a trade-off between inflation and unemployment. According to [16], like other WAMZ nations, the Nigerian economy is dealing with threatening inflation and a sluggish growth rate, with an astronomical unemployment rate. Authors [] concluded that the Nigerian economy is at a crossroads.…”