ON THE DETERMINANTS OF UNEMPLOYMENT IN NIGERIA: WHAT ARE THE ROLES OF TRADE OPENNESS AND CURRENT ACCOUNT BALANCE?

Isiaka Akande Raifu

doi:10.32728/ric.2018.34/1

Abstract

Attention of international trade and macroeconomic experts has focused on the effect of international trade, precisely trade openness, on economic growth and by extension on unemployment rate, albeit with mixed results. However, scanty attention has been drawn towards the effect of current account balance on unemployment rate despite the arguments from different quarters trailing such relationship. By employing Autoregressive Distribution Lag estimation technique, this study specifically focuses on the short-run dynamic and long-run effects of trade openness and current account balance on unemployment rate in Nigeria using the data that span 1981-2014. We found that trade openness worsens unemployment rate both in the short-run and long run. We also discovered that in the short run, current account balance increases unemployment rate but reduces it in the long run. Control variables used in the study such as inflation rate, exchange rate, and FDI followed a priori expectation while real GDP, wages and government consumption expenditure failed to follow a priori expectation. We, therefore, concluded that there is need for sound trade and macroeconomic policies to aid domestic firms’ production to ensure international competitiveness of these firms so as to guarantee employment generation.

Highlights

It has been argued in the literature that when an economy is growing at a certain percentage, unemployment rate is expected to reduce by a certain percentage (Okun, 1962)
More moderate correlations can be observed except on some occasions when independent variables are occasionally highly correlated among themselves. This does not pose a threat to our model and empirical findings because the Variance Inflating Factor (VIF) that shows the degree of interconnection among the variables which results in the inflation of variance and covariance of estimated parameters of model as RX2Y increases does not exceed the tolerable level
On the effect of current account balance on the unemployment rate in Nigeria, our study show that there is no clear cut effect because current account balance could worsen or improve the unemployment situation depending on the time dimension under consideration and the state of the economy

Summary

Introduction

It has been argued in the literature that when an economy is growing at a certain percentage, unemployment rate is expected to reduce by a certain percentage (Okun, 1962). The real experiences of many countries, developing countries, run contrary to these theoretical assertions as many countries in the world face daunting challenges of rising unemployment despite impressive records of economic growth over the years (Rad, 2011). Nigerian economy has experienced a remarkable growth in the past decade, in the current democratic dispensation. Nigeria became the largest economy in Africa after rebasing her GDP. In terms of trade performance measured by net exports, Nigeria has been doing considerably well. Average net exports, over the past decade, stood at N4268.52 billion. Despite the notable growth and trade performance, the country is still battling with many socioeconomic malaises

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Conclusion