NAIRU as an Employment Targeting Regime for Nigeria
Posted: 25 Oct 2014
Date Written: October 1, 2014
One of the major problems confronting the world economy and in particular the Nigerian economy is the rate of unemployment. Nearly all institutions, both domestic and international, have sought solutions to the menace of unemployment. Recent statistics in Nigeria (National Bureau of Statistics, NBS 2010) puts unemployment rate at about 19.7 per cent. Even at this modest official rate the phenomenon is worrisome for a country whose population is currently in the neighbourhood of 168 million. Accordingly, there are both spatial and temporal differences in the components of unemployment across the country. The state of unemployment in Nigeria is even more worrisome when youth unemployment is taken into consideration on its own merit. According to International Labour Organization Report (2010), graduate unemployment which was 26.6 per cent in 2003 rose to about 40.3 per cent in 2009. If such trends continue unabated it portends a grave danger for the socio-political situation of the nation.
Several theories have been suggested in the literature to examine the problems associated with employment/unemployment. Besides Keynesian aggregate demand theory, there is the Phillips Curve proposition relating inflation to unemployment whose implications have been well debated over the years. There are also other views from different macroeconomic schools of thought on employment/unemployment. In particular, the Non-Accelerating Inflation Rate of Unemployment (NAIRU) has been used as an instrument of macroeconomic policy. This approach examines the inverse relation between inflation and growth levels by setting inflation targets as an overriding objective of monetary policy and addressing unemployment by focusing on flexibility issues to clear the labour market so as to establish a non-inflationary long-run equilibrium level of unemployment (Layard et al 1991; Baker et al 2004; Vasiliki, 2011).
The main research questions for this study, therefore, include: what are the time varying estimates of NAIRU for Nigeria over the period 1970-2010? What is the extent of the effect of output gap on the inflation-unemployment relationship? The objective of this paper is thus to introduce a more realistic approach to employment targeting using time varying NAIRU approach. The choice is informed by the fact that although lot of studies on employment/unemployment in Nigeria have used the NAIRU approach but a few have envisaged the TV-NAIRU concept. The paper introduces the demand-supply side and income distribution variables into the standard NAIRU model in order to capture a more realistic basis for economic expansion. This paper contends that it is economic expansion that can lead to sustainable full employment and therefore zero unemployment: supply side concept. The paper will be based on post-Keynesian theoretical framework that will allow us use different specifications for the study.
Data for the study is obtained from domestic sources, in particular, the National Bureau of Statistics, Ministry of Labour and Productivity and Central Bank of Nigeria. Essentially, the data to be used include inflation rate, unemployment rate, NAIRU, output gap, natural rate of output and wages. The period of analysis is between 1970 and 2010. The TV-NAIRU approach adopted in this paper is designed to provide an indication of the path the NAIRU has taken over a particular period by including variables which capture the impact of significant supply-side shocks over the period in question and which could be expected to influence the NAIRU (McMorrow and Roeger, 2000). In applying the TV-NAIRU, which is an unobserved stochastic variable, the paper makes use of the Kalman filter. The paper tests long-run relationship between the variables using the co-integration technique.
The paper provides direction for policy makers in the area of unemployment policy targeting in Nigeria. It is opined that such policy measure is desirable in order to apply appropriate policies when the economy is drifting away from the target.
Keywords: Unemployment, Time Varying NAIRU, Kalman filter, Employment Targeting
JEL Classification: E61, J88
Suggested Citation: Suggested Citation