Macroeconomic Policy, Output and Unemployment Dynamics in Nigeria: Is There Evidence of Jobless Growth?

Abstract

This paper examines the dynamic relationships that exist between output growth and unemployment and assesses the role of macroeconomic policies in shaping these relationships. Using Nigeria’s data for the period 1970-2010, we first estimated the linear Okun-type model using the transitory and permanent components of the output series. Results suggest the short-run link is negative, as expected, but that the long-run relationship is positive. This result therefore provides support for the hypothesis of non-linearity in the dynamic relationship between output and unemployment. We therefore estimated a non-linear variant of the Okun’s type model using the Generalised Method of Moments. The results confirmed that the dynamic relationship is non-linear and hump-shaped. At unemployment rates below the threshold of 5.5%, the relationship is positive, and becomes negative at higher unemployment rates. We therefore argue that unemployment rate is below the 5.5 threshold, the economy experiences jobless growth. Under this condition, supply side policies are better suited for effective employment generation. It was also found that output increases in the service, agricultural and industrial sectors have the greater potential for employment generation. We therefore argued that policies that aim at raising output in these sectors would be more efficient in reducing unemployment in Nigeria.