Relationship Between Unemployment Rate and Shadow Economy in Nigeria: A Tado-Yamamoto Approach

Felicia C Abada,Ngozi Franca Iroegbu,Onyinye J Asogwa,Charles O Manasseh,Johnson I Okoh,Adedoyin I Lawal,Felix C Alio,Ifeoma C Nwakoby

doi:10.5430/ijfr.v12n3p271

Abstract

This study assessed the nature of the relationship between the size of the shadow economy and unemployment rate in Nigeria using the Tado-Yamamoto approach over the period 1980Q1 to 2018Q4. The size of the shadow economy in Nigeria was determined using the parsimonious model of MIMIC (4-1-2) having four multiple causes (tax burden, self-employment, social benefits paid by the government and unemployment rate) and two indicators (index of real Gross Domestic Product and currency ratio (M1/M2)). The estimated relationship of the size of shadow economy as percentage of official GDP recorded 13.78% at the beginning of the first quarter of 1980 before fluctuating to 8.23% in the third quarter of 2009. The existence of a strong and positive association between the unemployment rate and shadow economy is affirmed by the estimated coefficient of determination (0.89) which confirmed the capacity of the shadow economy to absorb the unemployed workers from the official economy in Nigeria. Evidence exists from the Tado and Yamamoto (1995) causality test which revealed a causal relationship emanating from unemployment rate to the size of shadow economy. This was confirmed by the Modified Wald (MWald) test which demonstrated that a strong unidirectional causality running from unemployment rate to the size of shadow economy exists at 1% level of significance.

Highlights

Nigeria as a nation has failed to achieve the required employment and income levels in the formal economy despite the abundant national resources at its discretion
This study is based on the statistical approach of latent variables known to be multiple causes and multiple indicators (MIMIC) which mulled over the causes leading to the survival and proliferation of the shadow economy alongside the multiple effects of shadow economy over time
2002, the base year which sets the bases for other averages to be estimated from this year for Nigerian Shadow economy, is presented in Table 1.To be precise, the index of changes of the Shadow Economy (SE) in Nigeria evaluated as a percentage of Gross Domestic Product (GDP) in the year 2002 is connected to the index of the changes of the real GDP as shown below: Measurement Equation:

Summary

Introduction

Nigeria as a nation has failed to achieve the required employment and income levels in the formal economy despite the abundant national resources at its discretion. These economic anomalies encourage the active labour force to explore other income generating opportunities outside the official economy. People typically operate within the shadow economy as a result of increased tax burden and social security contributions, intricacies with the tax system, tight labour markets regulations, growing unemployment rate, government failure, forced reduction in official working hours, increased rate of inflation, interest rate, early retirement and fast decline in tax confidence.

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Conclusion