Economics and Finance Review Vol. 1(12) pp. 42 61, February, 2012 Available online at http://www.businessjournalz.

org/efr

ISSN: 2047 - 0401

An Empirical Analysis of the Relationship between Unemployment and Inflation in Nigeria from 1977-2009
AMINU UMARU Lecturer, Department of Economics, School of Management and Information Technology, Modibbo Adama University of Technology, YOLA,Adamawa State, Nigeria. E-Mail: aminu_umaru2007@yahoo.com. & ANONO ABDULRAHAMAN ZUBAIRU Lecturer, Department of Management Technology, School of Management and Information Technology, Modibbo Adama University of Technology,YOLA,Adamawa State,Nigeria. E-Mail: abdlrahmananono@yahoo.com ABSTRACTS This paper investigates the relationship between unemployment and inflation in the Nigerian economy between 1977 and 2009 through the application of Augmented Dickey-Fuller techniques to examine the unit root property of the series after which Granger causality test was conducted to determine causation between unemployment and inflation, then cointegration test was conducted through the application of Johansen cointegration technique to examine the long-run relationship between the two phenomenon, lastly ARCH and GARCH technique was conducted to examine the existence of volatility in the series. The results indicate that inflation impacted negatively on unemployment. The causality test reveals that there is no causation between unemployment and inflation in Nigeria during the period of study and a long-run relationship exists between them as confirmed by the cointegration test.ARCH and GARCH results reveals that the time series data for the period under review exhibit a high volatility clustering. The paper recommends the use of inflation/unemployment theory that is drawn from data sourced within the country and also improvement in the existing theories in order to ensure their applicability in the Nigerian context, so as to achieve a desire reduction in unemployment and inflation which in turn boost economic growth and development. Key words: unemployment, inflation and Phillips curve.

1.0 INTRODUCTION Unemployment and inflation are two intricately linked economic concepts. Over the years there have been a number of economists trying to interpret the relationship between the concepts of inflation and unemployment. There are two possible explanations of this relationship one in the short term and another in the long term. In the short term there is an inverse correlation between the two. As per this relation, when the unemployment is on the higher side, inflation is on the lower side and the inverse is true as well. This relationship has presented the regulators with a number of problems. The relationship between unemployment and inflation is also known as the Phillips curve. In the short term the Phillips curve happens to be a declining curve. The Phillips curve in the long term is separate from the Phillips curve in the short term. It has been observed by the economists that the longrun the concepts of unemployment and inflation are not related. As per the classical view of inflation, inflation is caused by the alterations in the supply of money. When the money supply goes up the price level of various commodities goes up as well. The increase in the level of prices is known as inflation. According to the classical economists there is a natural rate of unemployment, which may also be called the equilibrium level of unemployment in a particular economy. This is known as the

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long term Phillips curve. The long term Phillips curve is basically vertical as inflation is not meant to have any relationship with unemployment in the long term. It is therefore assumed that unemployment would stay at a fixed point irrespective of the status of inflation. Generally speaking if the rate of unemployment is lower than natural rate, then the rate of inflation exceeds the limits of expectations and in case the unemployment is higher than what is the permissible limit then the rate of inflation would be lower than the expected levels. The Keynesians have a different point of view compared to the Classics. The Keynesians regard inflation to be an aftermath of money supply that keeps on increasing. They deal primarily with the institutional crises that are encountered by people when they increase their price levels. As per their argument the owners of the companies keep on increasing the salaries of their employees in order to appease them. They make their profit by increasing the prices of the services that are provided by them. This means there has to be an increase in the money supply so that the economy may keep on functioning. In order to meet this demand the government keeps on providing more money so that it can keep up with the rate of inflation. Unemployment and Inflation are issues that are central to the social and economic life of every country. The existing literature refers to inflation and unemployment as constituting a vicious circle that explains the endemic nature of poverty in developing countries. And it has been argued that continuous improvement in productivity is the surest way to breaking this vicious circle. Growth in productivity provides a significant basis for adequate supply of goods and services thereby improving the welfare of the people and enhancing social progress. Unemployment has been categorised as one of the serious impediments to social progress. Apart from representing a colossal waste of a countrys manpower resources, it generates welfare loss in terms of lower output thereby leading to lower income and well-being (Raheem, 1993). Unemployment is a very serious issue in Africa (Bello, 2003) and particularly in Nigeria (Oladeji, 1994 and Umo, 1996). The need to avert the negative effects of unemployment has made the tackling of unemployment problems to feature very prominently in the development objectives of many developing countries. The problem of inflation surely is not a new phenomenon. It has been a major problem in the country over the years. Inflation is defined as a generalised increase in the level of price sustained over a long period in an economy (Adebayo, 1997). Inflation is a household word in many market oriented economics. Although several people, producers, consumers, professionals, non-professionals, trade unionists, workers and the likes, talk frequently about inflation particularly if the malady has assumed a chronic character, yet only selected few knows or even bother to know about the mechanics and consequences of inflation. Undoubtedly, parts of the macroeconomic goals which the government strives to achieve are the maintenance of stable domestic price level and full-employment. These goals are pursued in order to avoid cost of inflation or unemployment and the uncertainty that follows where there is price instability or high rate of unemployment. The effects of inflation and unemployment on economic growth will be examined bearing in mind that a country (Nigeria for instance) will grow faster in real terms if inflation and unemployment are reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatable with growth. The early theories of the relationship between unemployment and inflation are postulated on the basis of data sourced from the developed western world, especially USA and Britain (United Kingdom) whose economies is developed and open. Major economic variables are determined within the country unlike Nigeria and the rest of the developing economies of the world whose major economic variables are determine by forces outside the economy. The Philips postulate of the negative relationship between unemployment and inflation, the Friedmans long-run vertical relationship between the two variables, the Keynesians postulate of change in one variable (unemployment or inflation) as a result of shocks in an economy which may change one without affecting the other for instance around 1973 in USA when Dollars value depreciated, there is an increase in OPEC oil prices and massive demand for Wheat that forces prices of goods and services to increase (inflation)

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without a corresponding decrease in unemployment. There is also a massive flow of teenagers and women in labour force which lead to increase in unemployment without corresponding decrease in inflation. Keynes postulate therefore shift in Philips curve, the recent positive hypotheses which depicted the coexistence of unemployment and inflation in the economy especially in the developing nations which Nigeria happen to be inclusive, was based on data and information from the western world which may have little or no applicability in Nigeria. This therefore provide the basis for the study of the relationship between unemployment and inflation base on data source within the Nigerian economy so as to formulate a theory that can best explain the Nigerian unemployment and inflation situation. The study would address the above problem in Nigerian way with the aim of finding lasting solution to unemployment and inflation in country. 2.0 THEORETICAL REVIEW/FRAMEWORK Here some of the theories of the relationship between unemployment and inflation were reviewed. The Milton Friedman Nobel memorial lecture (1976), the Phillips curve is categorised into four theories namely: the negative, the natural hypotheses, and the positive hypotheses. Keynes is left with the explanation of the Phillips curve and postulated a shift in Phillips curve. 2.1 Negatively sloping Philips curve Professional analysis of the relation between inflation and unemployment has gone through two stages since the end of World War II and is now entering a third. The first stage was the acceptance of a hypothesis associated with the Rate of price change

1 dp P dt

UL

UO

UH

Unemployment

Fig. 1 Simple Philips Curve name of A.W Philips that there is a stable negative relation between the level of unemployment and the rate of change of wages-high levels of unemployment being accompanied by falling wages, low levels of unemployment by rising wages. The wage change in turn was linked to price change by allowing for the secular increase in productivity and treating the excess of price over wage cost as given by a roughly constant mark-up factor. Fig. 1 illustrates this hypothesis where Friedman had followed the standard practice of relating unemployment directly to price change, short-circuiting the intermediate step through wages. This relation was widely interpreted as a causal relation that offered a stable trade-off to policy markers. They could choose a low unemployment target; such as U L. In that case they would have to accept an inflation rate of A. There would remain the problem of choosing the measure (monetary fiscal, perhaps other) that would

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produce the level of aggregate nominal demand required to achieve U L, but if that were done, there need be no concern about maintaining that combination of unemployment and inflation. Alternatively, the policy makers could choose a low inflation rate or even deflation as their target. In that case they would have to reconcile themselves to higher unemployment UO, for zero inflation, UH, for deflation. Economics then busied themselves with trying to extract the relation depicted in Fig. 1 from evidence for different countries and periods, to eliminate the effect of extraneous disturbances, to clarify the relation between wage change and price change, and so on. In addition, they explored social gains and losses from inflation on the other, in order to facilitate the choice of the right trade -off. Unfortunately for this hypothesis, additional evidence failed to conform with it. Empirical estimates of the Philips curve relation were unsatisfactory. More important, the inflation rate that appeared to be consistent with a specified level of unemployment did not remain fixed: in the circumstances of the post-World War II period, when governments everywhere were seeking to promote full employment, it tended in any one country to rise over time and to vary sharply among countries. Looked at the other way, rates of inflation that had earlier been associated with low levels of unemployment were experienced along with high levels of unemployment. The phenomenon of simultaneous high inflation and high unemployment increasingly forced itself on public and professional notice, receiving the unlovely label of stagflation. Some of us were skeptical from the outset about the validity of a stable Philips curve, primarily on theoretical rather than empirical grounds. What mattered for employment, we agreed was not wages in dollars or pounds or kronor but real wages- what the wages would buy in goods and services. Low unemployment would, indeed mean pressure for a higher real wage-but real wages could be higher even if nominal wages were lower, provided that prices were still lower. Similarly, high unemployment would, indeed, mean pressure for a lower real wages could be lower, even if nominal wages were higher, provided prices were still higher. There is no need to assume a stable Philips curve in order to explain the apparent tendency for an acceleration of inflation to reduce unemployment. That can be explained by the impact of unanticipated changes in nominal demand on markers characterized by (implicit or explicit) long-term commitments with respect to both capital and labour. Long-term labor commitments can be explained by the cost of acquiring information by employers about employees and by employees about alternative employment opportunities plus the specific human capital that makes an employees value to a particular employer grow over time and exceed his value to other potential employers. Only surprises matter, if everyone anticipation would be embodied in future say, 20% rate of inflation to be associated with a different level of unemployment than a zero rate. An unanticipated change is very different especially in the presence of long-term commitment themselves partly a result of the imperfect knowledge whose effect they enhance and spread over time. Long-term commitment mean, first that there is not instantaneous market clearing (as in markets for perishable foods) but only a lagged adjustment of both prices and quantity of changes in demand or supply (as in the house rental market); second that commitment entered into depend not only on current observable prices, but also on the prices expected to prevail throughout the term of the commitment. 2.2 THE SHIFTING PHILLIPS CURVE The shifting Phillips curve was postulated by Keynes in his attempt to explain the Phillips curve. To him (Keynes) there is bound to be shocks in an economy whereby one of unemployment or inflation would be affected without necessarily affecting the other. He cited examples with what happen in U.S around 1973 when Dollar value depreciate, there was increase in OPEC oil prices and massive demand for Wheat that forces prices of goods and services to increase (inflation increase) without a corresponding decrease in unemployment. There was also a possibility of having increase in unemployment rate without a corresponding decrease in the rate of inflation. For example, 20 years back there was massive flow of teenagers and women in the labour force which lead to increase in unemployment without a corresponding increase in prices (inflation)

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2.3 NATURAL RATE OF UNEMPLOYMENT HYPOTHESIS Proceeding along these lines, E.S. Phelps and Friedman developed an alternative hypothesis that distinguished between the short-run and long-run effects of unanticipated changes in aggregate nominal demand. Start from some initial stable position and let there be, for example, an anticipated acceleration of aggregate nominal demand. This will come to each producer as an unexpectedly favourable demand for his product. In an environment in which changes are always occurring in the relative demand for different goods, he will not know whether this change is special to him or pervasive. It will be rational for him to interpret it as at least partly special and to react to it, by seeking to produce more to sell at what he now perceives to be a higher than expected market price for future output. He will be willing to pay higher nominal wages than he had been willing to pay before in order to attract additional workers. The real wage that matters to him is the wage in terms of the price of his product, and he perceives that price as higher than before. A higher nominal wage can therefore mean a lower real wage as perceived by him. To workers the situation is different: what matters to them is the purchasing power of wages not over the particular good they produce but over all goods in general. Both they and their employers are likely to adjust more slowly their perception of prices in general-because it is more costly to acquire information about that than their perception of the price of the particular good they produce.

I dp P dt

G A I dp P dt I dp P dt * =A * =B

E B

Fig. 2

UL

UN

Expectations adjusted Philips Curve As a result, rise nominal wages are perceived by workers as a rise in real wages and hence call forth an increased supply, at the same time that it is perceived by employers as a fall in real ages and hence calls forth an increased offer of jobs. Expressed in terms of the average of perceived future prices, real wages are higher.

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But this situation is temporary: let the higher rate of growth of aggregate nominal demand and of prices continue, and perceptions will adjust to reality. When they do, the initial effect will disappear, and then even be reversed for a time as workers and employers find themselves locked into inappropriate contracts. Ultimately, employment will be back at the level that prevailed before the assumed unanticipated acceleration in aggregate nominal demand. This alternative hypothesis is depicted in Fig. 2 each negatively sloping curve is a Philips curve like that in Fig. 1 expect that it is for a particular anticipated or perceived rate of inflation, defined as the perceived average rate of price change, not the average of perceived rates of individual price change (the order of the curves would be reversed for the second concept). Start from point E and let the rate of inflation for whatever reason move from A to B and stay there. Unemployment would initially decline to UL, at point F, moving along the curve defined for an anticipated rate of inflation of A. As anticipations adjusted, the short-run curve would move upward, ultimately to the curve defined for an anticipated inflation rate B. concurrently unemployment would move gradually over from F to G. This analysis is, of course there is a continuing stream of unanticipated changes; it does not deal explicitly with lags, or with overshooting, or with the process or formation of anticipations. But it does highlights the key points: what matters is not inflation per se, but unanticipated inflation; there is no stable trade-off between inflation and unemployment; there is a natural rate of unemployment (U N), which is consistent with the real forces and with accurate perceptions; unemployment can be kept blow that level only by an accelerating inflation; or above it, only by accelerating deflation. The natural rate of unemployment, a term I introduced to parallel Knut Wicksells natural rate of interest is not a numerical constant but depends on real as opposed to monetary factors the effectiveness of the labor market, the extent of competition or monopoly, the barriers or encouragement to working in various occupations and so on. For example, the natural rate has clearly been rising in the United States for two major reasons. First, women, teenagers and part-time workers have constituted a growing fraction of the labor force. These groups are more mobile in employment than other workers, entering and leaving the labor market, shifting more frequently between jobs. As a result, they tend to experience higher average rates of unemployment. Second, unemployment insurance and other forms of assistance to unemployed persons have been made available to more categories of workers, and have become more generous in duration and amount. Workers who lose their jobs are under less pressure to look for other work, will tend to wait longer in the hope, generally fulfilled of being recalled to their former employment, and can be more selective in the alternatives they consider. Further, the availability of unemployment insurance makes it more attractive to enter the labor force in the first place, and so may itself have stimulated the growth that has occurred in the labor force as a percentage of the population and also its changing composition. The determinants of the natural rate of unemployment deserve much fuller analysis for both the United States and other countries. So also do the meaning of the recorded unemployment figures and the relation between the recorded figures and the natural rate. These issues are all of the utmost important for public policy. However, they are side issues for my present limited purpose. The connection between the state of employment and the level of efficiency or productivity of an economy is another topic that is of fundamental importance for public policy but is a issue for my present purpose. There is a tendency to take it for granted that a high level of recorded unemployment is evidence of inefficient use of resources and conversely. This view is seriously in error. A low level of unemployment may be a sign of a forced draft economy that is using its resources inefficiently and is inducing workers to sacrifice leisure for goods that they value less highly than the leisure under the mistaken belief that their real wages will be higher than they prove to be. Or a low natural rate of unemployment may reflect institutional arrangements that inhibit change. A highly static rigid economy may have a fixed place of everyone whereas a dynamic, highly progressive economy, which offers ever-changing opportunities and fosters flexibility, may have a high natural rate of unemployment. To illustrate how the same rate may correspond to very different conditions; both Japan

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and the United Kingdom had low average rates of unemployment from, say 1950 to 1970, but Japan experienced rapid growth, the U.K stagnation. The natural rate or accelerationist or expectations -adjusted Philips curve hypothesis-as it has been variously designated is by now widely accepted by economist, though by no means universally. A few still cling to the original Philips curve, more recognize the difference between short-run and long-run curve but regard even the long-run curve as negatively sloped, though more steeply so than the short-run curves; some substitute a stable relation between the acceleration of inflation and unemployment for a stable relation between inflation and unemployment-aware of but not concerned about the possibility that the same logic that drove them to a second derivative will drive them to ever higher derivatives. Much current economic research is devoted to exploring various aspects of this second stage-the dynamic of the process, the formation of expectations, and the kind of systematic policy, if any that can have a predictable effect on real magnitudes. We can expect rapid progress on these issues, (Special mention should be made of the work on rational expectations, especially the seminal contributions of John Muth, Robert Lucas, a nd Thomas Sargent). [Gordon (9).] 2.4 A POSITIVELY SLOPED PHILIPS CURVE Although the second stage is far from having been fully explored let alone fully absorbed into the economic literature, the course of events is already producing a move to a third stage. In recent years, higher inflation has often been accompanied by higher not lower unemployment, especially for periods of several years in length. A simple statistical Philips curve for such periods seems to be positively sloped, not vertical. The third stage is directed at accommodating this apparent empirical phenomenon. To do so, Friedman suspect that it will have to include in the analysis the interdependence of economic experience and political developments. It will have to treat at least some political phenomena not as independent variables as exogenous variables in econometric jargon-but as themselves determined by economic events as endogenous variables [Gordon (8)]. The second stage was greatly influenced by two major developments in economic theory of the past few decades one the analysis of imperfect information and of the cost of acquiring information, pioneered by George Stigler; the other, the role of human capital in determining the form of labour contracts, pioneered by Gary Becker. The third stage will, he believe, the greatly influenced by a third major development the application of economic analysis to political behaviour, a field in which pioneering work has also been done by Stigler and Becker as well as by Kenneth Arrow, Duncan Black, Anthony Downs. James Buchanan, Gordon Tullock and others. The apparent positive relation between inflation and unemployment has been a source of great concern to government policy makers. Friedman quoted from a recent speech by Prime Minister Callaghan of Great Britain: We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting Government spending. I tell you, in all candour, that that option no longer exists and that insofar as it ever did exist, it only worked by injecting bigger doses of inflation into the economy followed by higher levels, of unemployment as the next step. That is the history of the past 20years (speech to Labour Party Conference, 28 September, 1976). The same view is expressed in a Canadian government white paper: continuing inflation, particularly in North America, has been accompanied by an increase in measured unemployment rates (The Way Ahead: A Framework for Discussion, Government of Canada Working Pa per. October, 1976). These are remarkable statements, running as they do directly counter to the policies adopted by almost every Western government throughout the post-war period.

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2.5 GRAPHICAL PRESENTATION OF UNEMPLOYMENT AND INFLATION IN NIGERIA FROM 1977-2009 FIGURE i. A LINE GRAPH
80 70 60 50 40 30 20 10 0 1980 1985 1990 UNEMPL 1995 2000 INFLA 2005

The graph above reveals that the relationship between unemployment and inflation in Nigeria is neither negative throughout nor positive. The graph shows trade-off in 2000 through to 2009, inflation is more stable while unemployment is volatile. 3.0 EMPIRICAL REVIEW/ FRAMEWORK Here empirical review of other peoples work on the relationship between unemployment and inflation is done. Onwioduokit (2006) investigated the relationship between unemployment and inflation in Nigeria and found that there is negative relationship between unemployment and inflation with the coefficient of -0.412, this validates the Philips hypotheses; however, the results of the causality test indicate no causality between unemployment and inflation in Nigeria. Stock and Watson (1999) used the conventional Phillips curve (unemployment rate) to investigate forecasts of U.S. inflation at the 12-month horizon. The authors focused on three questions. First, has the U.S. Phillips curve been stable? If not, what are the implications of the instability for forecasting future inflation? Second, would an alternative Phillips curve provide better forecasts of inflation than unemployment rate Phillips curve? Third, how do inflation forecasts from Phillips curve stack up against time series forecasts made using interest rate, money, and other series? They found that inflation forecasts produced by Phillips curve generally had been more accurate than forecasts based on other macroeconomic variables, including interest rates, money and commodity prices but relying on it to the exclusion of other forecasts was a mistake. Forecasting relations based on other measures of aggregate activity could perform as well or better than those based on unemployment, and combining these forecasts would produce optimal forecasts. Williams and Adedeji (2004) examined price dynamics in the Dominican Republic by exploring the joint effects of distortions in the money and traded-goods markets on inflation, holding other potential influences constant. The study captured the remarkable macroeconomic stability and growth for period 1991 to 2002. Using a parsimonious and empirically stable error-correction model, the paper found that the major determinants of inflation were changes in monetary aggregates, real output, foreign inflation, and the exchange rate. However, there was an incomplete pass-through of depreciation from the exchange rate to inflation. The authors established a long-run relationship in the money and traded-goods markets, observing that inflation was influenced only by disequilibrium in the money market. In recent years, many emerging-market countries have experienced dramatic decline in inflation as a result of a combination of relatively benign external factors and the adoption of sound domestic policies (Bailliu, et al

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2002). Applying existing inflation models that have worked well in industrialized countries to Mexico, the performance of these models was compared to a mark-up model that had been used extensively for the analysis of inflation in Mexico. Each model was estimated using quarterly data, over the period 1983 to 2001. The estimation and forecasting results suggest that the evolution of the exchange rate remained a very important factor for explaining inflation. Indeed, the best performing model, the mark-up model, was the one in which the exchange rate played the most significant role. The Phillips curve preformed better when using actual values than forecasted values as explanatory variables. Omoke and Ugwuanyi (2010) tested the relationship between money, inflation and output by employing cointegration and Granger-causality test analysis. The findings revealed no existence of a cointegrating vector in the series used. Money supply was seen to Granger cause both output and inflation. The result suggest that monetary stability can contribute towards price stability in Nigerian economy since the variation in price level is mainly caused by money supply and also conclude that inflation in Nigeria is to much extent a monetary phenomenon. They find empirical support in context of the money-priceoutput hypothesis for Nigerian economy. M2 appears to have a strong causal effect on the real output as well as prices.Using Okuns law each percentage point of cyclical unemployment is associated with a loss equal to 2% of full-employment output; if full-employment output is $10 trillion, each percentage point of unemployment sustained for one year costs $200 billion. Tejvan (2011) collected data from US and UK and analysed the relationship between inflation and unemployment. The result revealed some trade-off between inflation and unemployment in both US and UK as indicated in two graphs below. The data collected for US was from 1978 to 2011 while that of UK was from 1981 to 2011. Empirical Evidence Behind Trade Off This graph shows unemployment and inflation rate for the US economy.

There are occasions when you can see a trade off. For example, between 1979 and 1983, he sees inflation (CPI) fall from 15% to 2.5%. During this period, he sees a rise in unemployment from 5% to 11%. In 2008, he sees inflation fall from 5% to -2%. During this time, he sees a sharp rise in unemployment from 5% to over 10%. This therefore, suggests there can be a trade off between unemployment and inflation.

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UK Evidence Unemployment v Inflation

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% annual change in inflation and unemployment. The graph above reveals that the trade-off in UK is very high compare to US, the trade-off is almost all year round only in some few cases where the graph shows positive relationship, especially in 2009. 3.0 DATA METHOD OF ANALYSIS The research work will make use of the econometric procedure in estimating the relationship between the variables. The ordinary Least Square (OLS) technique will be employed in obtaining the numerical estimates of the coefficients of the equation, Argumented Dicky-Fuller test of stationarity would be adopted after which Granger causality test can also be used to determine the causation between inflation and unemployment or shortrun relationship between the variables, after which Johansen cointegration test would be employed to test the existence of long-run relationship between inflation and unemployment in Nigeria then ARCH and GARCH technique can be employed to test the volatility of the data because is a time series data. The OLS method is chosen because it possesses some optimal properties; its computational procedure is fairly simple and it is also an essential component of most other estimation techniques. In demonstrating the application of ordinary least square method, the simple linear regression analysis will be used with the inflation rate and unemployment rate, as the relevant variables. The independent variable is unemployment rate while the inflation rate will be the dependent variable. Justification for the selection of these methods is that the data is a time series data and all time series data exhibit a random walk. MODELS SPECIFICATION MODEL I(OLS) UNEMP = a0 + a1 INFL + e INFL Inflation rate UNEMPL Unemployment rate a0, and a1 Parameters e Error term (white noise)

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MODEL II (ARCH and GARCH) UNEMPt = a0 + a1 UNEMPt-1 + e -------------------------(1) 2 2 = + B t 1 1t-1 + B2 t-1 --------------------------------------------(2) INFLt = a2 + a3 INFLt-1 + e --------------------------------(3) 2 = 2 + B3t-1 + B4 t-12 --------------------------------------------(4) t Where INFL Inflation rate UNEMP Unemployment rate 1 and 2 Constant B1, B2, B3 and B4 - ARCH and GARCH coefficients B1t-1 - ARCH term B2 t-12 - GARCH term e Error term (white noise) A PRIORI EXPECTATION ECONOMIC A PRIORI CRITERIA This refers to the sign and size of the parameters in economic relationships. MODEL I It is expected that a0 > 0, a1 < 0 and a2 < 0 MODEL II

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It is expected that B1 +B2<1 and B3+B4 <1 However, if the estimates of the parameter turn up with signs or size not conforming to economic theory, they should be rejected, unless there is a good reason to believe that in the particular instance, the principles of economic theory do not hold. 4.0 RESULTS AND FINDINGS TABLE 2: REGRESSION RESULTS Dependent Variable: UNEMPL Method: Least Squares Date: 03/02/12 Time: 20:18 Sample: 1977 2009 Included observations: 33 Variable C INFLA R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient 32.71779 -1.512065 0.169292 0.142495 17.29598 9273.675 -139.8590 1.138311 Std. Error 5.425731 0.601582 t-Statistic 6.030117 -2.513480 Prob. 0.0000 0.0174 21.37273 18.67785 8.597517 8.688214 6.317584 0.017364

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

Table 2 contains bivariate regression results for the relationship between unemployment and inflation. The results indicate that the coefficient of inflation and the constant are statistically significant. Precisely, the coefficient of inflation is found to be statistically significant at 5 percent level as indicated by its probability value 0.0174 and rightly signed (negative). This therefore, implies that 1 percent increase in inflation would reduce unemployment by 151.2 percent. The F-statistics value 6.32, which is the measure of the joint significance of the parameters, is found to be statistically significant at 5 percent level as indicated by the corresponding probability value 0.0174. The R2 value 0.1693 (16.93%) implies that 16.93 percent total variation in unemployment is explained by the regression equation. Coincidentally, the goodness of fit of the regression remained low after adjusting for degree of freedom as indicated by the

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adjusted R2 (R2 = 0.1425 or 14.25%). Durbin Watson statistic 1.14 in table 2 is found to be greater than R2 value 0.1693 indicating that the model is not spurious. TABLE 3: UNIT ROOT TEST Null Hypothesis: D(UNEMPL) has a unit root Exogenous: Constant Lag Length: 1 (Automatic based on SIC, MAXLAG=2) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level *MacKinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D(UNEMPL,2) Method: Least Squares Date: 03/02/12 Time: 20:13 Sample(adjusted): 1980 2009 Included observations: 30 after adjusting endpoints Variable D(UNEMPL(-1)) D(UNEMPL(-1),2) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Coefficient -1.422372 0.403134 -0.190772 0.587316 0.556747 17.80830 8562.657 -127.3777 2.169205 Std. Error 0.250494 0.175886 3.252724 t-Statistic -5.678275 2.292013 -0.058650 Prob. 0.0000 0.0299 0.9537 0.083333 26.74832 8.691845 8.831965 19.21268 0.000006 -5.678275 -3.670170 -2.963972 -2.621007 Prob.* 0.0001

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

The results of unit root are contained in table 3. The results revealed that all the variables of the model are found to be stationary at both 1 percent, 5 percent, and 10 percent level with first difference (d(1)), which is indicated by ADF results at all levels less than the critical values in negative direction. The null hypotheses are rejected at 1 percent significance level. TABLE 4 : CAUSALITY TEST Pairwise Granger Causality Tests Date: 02/08/12 Time: 14:52 Sample: 1977 2009 Lags: 2 Null Hypothesis: INFLA does not Granger Cause UNEMPL UNEMPL does not Granger Cause INFLA Obs 31 F-Statistic 1.27311 1.32802 Probability 0.29684 0.28239

The results of Granger causality are contained in table 4. The results revealed that there is no causation between unemployment and inflation in Nigeria. The F-statistics values are all less than 2 which indicate acceptance of the two hypotheses of no causation between the variables. The probability values also confirmed that given their high values.

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The Johansen cointegration test results contain in table 5 below confirm the existence of long-run relationship between unemployment and inflation as indicated by the TRACE- Statistic. The TRACE-Statistic results revealed that there is 1 cointegrating equation at 5 percent level and also the Max-eigenvalue revealed that there is 1 cointegrating equation at 5 percent level. TABLE 5 :COINTEGRATION TEST Date: 02/08/12 Time: 14:46 Sample(adjusted): 1979 2009 Included observations: 31 after adjusting endpoints Trend assumption: Linear deterministic trend Series: UNEMPL INFLA Lags interval (in first differences): 1 to 1 Unrestricted Cointegration Rank Test Hypothesized No. of CE(s) None * At most 1 Eigenvalue 0.439746 0.008131 Trace Statistic 18.21338 0.253087 5 Percent Critical Value 15.41 3.76 1 Percent Critical Value 20.04 6.65

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*(**) denotes rejection of the hypothesis at the 5%(1%) level Trace test indicates 1 cointegrating equation(s) at the 5% level Trace test indicates no cointegration at the 1% level Hypothesized No. of CE(s) None * At most 1 Max-Eigen Statistic 17.96029 0.253087 5 Percent Critical Value 14.07 3.76 1 Percent Critical Value 18.63 6.65

Eigenvalue 0.439746 0.008131

*(**) denotes rejection of the hypothesis at the 5%(1%) level Max-eigenvalue test indicates 1 cointegrating equation(s) at the 5% level Max-eigenvalue test indicates no cointegration at the 1% level Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I): UNEMPL 0.070431 -0.000469 INFLA 0.131053 0.234523

Unrestricted Adjustment Coefficients (alpha): D(UNEMPL) D(INFLA) -10.33268 -0.907885 0.790288 -0.240750 Log likelihood -202.4224

1 Cointegrating Equation(s):

Normalized cointegrating coefficients (std.err. in parentheses) UNEMPL INFLA 1.000000 1.860740 (0.72600) Adjustment coefficients (std.err. in parentheses)

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D(UNEMPL) D(INFLA) -0.727738 (0.19774) -0.063943 (0.03876)

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TABLE 6: ARCH and GARCH RESULTS Dependent Variable: UNEMPL Method: ML - ARCH (Marquardt) Date: 03/02/12 Time: 21:14 Sample: 1977 2009 Included observations: 33 Convergence achieved after 129 iterations Variance backcast: ON Coefficient C INFLA C ARCH(1) GARCH(1) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat 24.52172 -0.825710 4.979235 0.903699 0.367203 0.106978 -0.020596 18.86921 9969.322 -132.6230 1.029681 Std. Error 4.069828 0.370758 27.16191 0.789814 0.317549 z-Statistic 6.025247 -2.227083 0.183317 1.144193 1.156367 Prob. 0.0000 0.0259 0.8545 0.2525 0.2475 21.37273 18.67785 8.340791 8.567534 0.838557 0.512397

Variance Equation

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

The ARCH and GARCH results contain in table 6 reveals that the time series data under consideration is volatile. This is indicated by the sum of the ARCH and GARCH coefficient (0.9037 + 0.3672 = 1.2709). This result shows that there is high volatility clustering in the data. 5.0 CONCLUDING REMARKS This paper investigates the impact of government expenditure on education and health on economic growth and development in Nigeria through the application of Augmented Dickey-Fuller technique in testing the unit root property of the series, the Granger causality test for causation was conducted, Johansen cointegration test of the existence of long-run relationship of variables in the model and ARCH and GARCH techniques was conducted to test the presence of volatility in the series. The results of unit root suggest that all the variables in the model are stationary, the results of causality suggest no causation between unemployment and inflation in Nigeria, the results of cointegration technique suggest that there is long-run relationship between unemployment and inflation and ARCH and GARCH results suggest that the data is volatile. The results also revealed that when inflation is increased by 1 percent unemployment will reduce by 152 percent in inflation. Despite the negative relationship revealed by the regression results, the applicability of various theories of unemployment and inflation in Nigeria is minimal. This paper therefore, recommend the use of theories drawn from data sourced within the country. A major policy implication of this result is that concerted effort should be made by policy makers to increase the level of usage of unemployment/inflation theory that is base on Nigerian data and situation (they should stop copying theories from the western world) for they are detrimental to the growth and development of the Nigerian economy.

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REFERENCES Adamson Y. K. (2000) Structural Disequilibrium and Inflation in Nigeria: A Theoretical and Empirical Analysis. Centre for Economic Research on Africa. October, pp. 1-17. Adebayo A. (1997) Economics: A simplified approach, Volume II . Lagos: Harmony International Publisher Limited. Adebayo A. (1999) Youth unemployment and National Directorate of Employment self-employment programmes. Nigerian Journal of Economics and Social Studies. 41(1), pp. 81-102. Agenor, P. R. (1989) Money, Exchange rates, and inflation in Africa: A Vector Autoregression Analysis. International Monetary Fund. Unpublished. November. Aghevli B. B., Kahn M. S. and Montiel P. J. (1991) Exchange Rate Policy in Developing Countries: Some Analytical Issues. IMF Occasional Paper. No. 78. Ajao W. (2004) Neglect of technical, vocational education increases youth unemployment. The Vanguard. 23 December, pp. 23. Akintoye I. R. (2008) Reducing Unemployment Through the Informal Sector: A Case Study of Nigeria. European Journal of Economics, Finance and Administrative Sciences. Issue 11. Akomolafe C. O. and Adegun O. A. (2009) Strategies of managing higher education for youth labour market in Nigeria. International NGO Journal. 4(10), pp. 456-460. Akpomi M. E. (2008) Entrepreneurship Among Graduates-to-be of Business/Management Faculties and Economic Development in Nigeria. European Journal of Economics, Finance and Administrative Sciences. Issue 14. Alesina A. and Summers L. H. (1 993) Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence. Journal of Money, Credit and Banking. 25(2), May. Arong F. E. and Ogbadu M. A. (2010) Major Causes of Declining Quality of Education in Nigeria from Administrative Perspective: A Case Study of Dekina Local Government Area. Canadian Social Science. 6(3), pp. 61-76. Asogu J. O. (1991) An Econometric Analysis of the Nature and Causes of Inflation in Nigeria. C'BN Economic and Financial Review. 29(3), September. Balami, D.H (2006). Macroeconomic Theory and Practice.Salawe prints, Off Leventies, Wulari, Maiduguri. Batini N. (2004) Achieving and Maintaining Price Stability in Nigeria. International Monetary Fund Working Paper. No. WP/04/97, pp. 1-39. Bello T. (2003) Attacking unemployment hurdles in the fragile economies of the Sub Saharan Africa: The experience of Nigeria. Being a paper presented at the Economics for the Future conference; on the occasion of the celebration of 100 years of Cambridge Economics; Cambridge, United Kingdom. September. Buhari, A.L. (1987). Straight to the Point, ICAN Economics.Unilorin Press,University of Ilorin, Nigeri Cagan P. (1956) The Monetary Dynamics of Hyperinflation in Milton Friedman. Calvo, G. A., Reinhart, C. M. and Vgh, C. A. (1994). Targeting the Real Exchange Rate: Theory and Evidence. IMF Working Paper, No. 94/22. Central Bank of Nigeria (2008) Annual Report and Financial Statement for the Year Ended 31 st December. Abuja: Central Bank of Nigeria. Chhibber, A., Cottani, J., Firuzabadi, R. and Walton, M. (1989) Inflation, Price Controls, and Fiscal Adjustment: The Case of Zimbabwe. The World Bank Working Paper. No. WPS 192, April. Cukierman, A., Webb, S. B. and Neyapti, B. (1992) Measuring the Independence of Central Banks and its Effect on Policy Outcomes. The World Bank Economic Review. 6(3). Cukierman A. (1992) Central Bank Strategy, Credibility and Independence: Theory and Evidence . Cambridge, Mass: MIT Press. Dabalen A., Oni B. and Adekola O. A. (2000) Labour Market Prospects of University Graduates in Nigeria. Background study conducted to inform the design of the Nigeria University System Innovation Project. Damachi N. A. (2001). Evaluation of Past Policy Measures for Solving Unemployment Problems, in Unemployment in Nigeria; CBN Bullion Vol. 25, No 4; Oct/Dec. Dantwala M. (1971) The Definition and Measurement of Unemployment in Developing Countries. Dauda R. O. S. (2010) Investment in Education and Economic Growth in Nigeria: An Empirical Evidence. International Research Journal of Finance and Economics. Issue 55. Englama, A. (2001). Unemployment: Concepts and Issues. Bullion Publication of the Central Bank of Nigeria vol.25 (4), pp.1-6. Emunemu B. O. (2008) Private Sector Participation in Education and Skills Development in Nigeria. European Journal of Social Sciences. 6(4), pp. 165-170. Fadayomi, T. O. (1992) Migration Development and Urbanization Policies in Sub-Saharan Africa. Ibadan: CODESRIA Books Series. Falae S. O. (1971) Unemployment in Nigeria. Nigerian Journal of Economics and Social Studies. 13(1), pp. 65.

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Fadiya B. B. (2010) Determinants of Educational Outcomes in Nigeria (1975 2008). European Journal of Social Sciences. 15(4). Fakiyesi O. M. (1996) Further Empirical Analysis of Inflation in Nigeria. CBN Economic and Financial Review. 34(1), March. Friedman M. (1956) The Quantity Theory of Money - A Restatement. Chicago IL: The University of Chicago Press. Friedman, M. (1976) Inflation and Unemployment- Nobel Memorial Lecture. The University of Chicago, Illinois, USA. Garba A. S. (2010) Refocusing Education System towards Entrepreneurship Development in Nigeria: a Tool for Poverty Eradication. European Journal of Social Sciences. 15(1), pp. 140-150. Harberger A. (1963) The Dynamics of Inflation in Chile. In: Carl F. Christ et al, Measurement in Economics: Studies in Mathematical Economics and Econometrics. Stanford, CA: Stanford University Press. International Labour Organization (ILO, 2001), Labour Statistics Yearbook, Geneva.
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Rosenberg S. and Weisskopf T. E. (198I) A Conflict Theory Approach to Inflation in the Post-war US Economy. American Economic Review. 71, pp. 42 -47. Rowthorn R. E. (1977) Conflict, Inflation and Money. Cambridge Journal of Economics. 1, pp. 215-239. Tegene A. (1989) The Monetarist Explanation of Inflation: The Experience of Six African Countries. Journal of Economic Studies. 16, pp. 5-18. Todaro, M. (1992) Economics for a Developing World 2nd Ed . England: Longman Group, U.K. Limited. Umo J. U. (1996) Introductory Overview in J. U. Umoh (ed.) Towards Full Employment Strategy in Nigeria, National Manpower Board, Lagos. Usoro, U. (1977) Observed Disparity in Nigeria Rural Poverty. University of Ibadan. Appendix TABLE 1: Unemployment rate and inflation rate from 1977-2009 years 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 unemployment rate 21.5 13.3 11.6 10.0 21.4 7.2 23.2 40.7 4.7 5.4 10.2 56.0 50.5 7.5 12.7 44.8 57.2 57.0 72.8 29.3 10.7 7.9 6.6 6.9 18.9 12.9 14.0 15.0 17.8 8.2 5.4 11.6 inflation rate 4.3 4.3 4.3 6.4 6.4 6.4 6.4 6.2 6.1 5.3 7 5.3 4.5 3.5 3.1 3.4 2.7 2 1.8 3.4 3.2 3.2 3 18.1 13.7 12.2 14.8 11.8 11.9 13.7 14.6 14.9 19.7

2009 12.4 Source: CBN Statistical Bulletin, 2009.

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Most systematic evidence for the past two decades is given in Table 1 and figure 3 and 4, which show the rates of inflation and unemployment in seven industrialized countries over the past two decades. According to the five year averages in Table 1, the rate of inflation and the level of unemployment moved in opposite directions the expected simple Philips curve outcome in five out of seven countries between the first two quinquennia (1956 60, 1961 65); in only four out of seven countries between the second and third quinquennia (1961-65 and 1966-70); and in only one out of seven countries between the final two quinquennia (1966-70 and 1970-75). And even the one exception-Italy is not a real exception. True, unemployment averaged a shade lower from 1971 to 1975 than in the prior five years, despite a more than tripling of the rate of inflation. However, since 1973, both inflation and unemployment have risen sharply. UNIT ROOT TEST Null Hypothesis: D(UNEMPL) has a unit root Exogenous: Constant Lag Length: 1 (Automatic based on SIC, MAXLAG=9) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level *MacKinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D(UNEMPL,2) Method: Least Squares Date: 02/08/12 Time: 15:26 Sample(adjusted): 1980 2009 Included observations: 30 after adjusting endpoints Variable D(UNEMPL(-1)) D(UNEMPL(-1),2) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat CAUSALITY TEST Pairwise Granger Causality Tests Date: 02/08/12 Time: 14:52 Sample: 1977 2009 Lags: 2 Null Hypothesis: INFLA does not Granger Cause UNEMPL UNEMPL does not Granger Cause INFLA Obs 31 F-Statistic 1.27311 1.32802 Probability 0.29684 0.28239 Coefficient -1.422372 0.403134 -0.190772 0.587316 0.556747 17.80830 8562.657 -127.3777 2.169205 Std. Error 0.250494 0.175886 3.252724 t-Statistic -5.678275 2.292013 -0.058650 -5.678275 -3.670170 -2.963972 -2.621007

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Prob.* 0.0001

Prob. 0.0000 0.0299 0.9537 0.083333 26.74832 8.691845 8.831965 19.21268 0.000006

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

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CAUSALITY TEST Date: 02/08/12 Time: 14:52 Sample(adjusted): 1979 2009 Included observations: 31 after adjusting endpoints Trend assumption: Linear deterministic trend Series: UNEMPL INFLA Lags interval (in first differences): 1 to 1

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Unrestricted Cointegration Rank Test Hypothesized No. of CE(s) None * At most 1 Eigenvalue 0.439746 0.008131 Trace Statistic 18.21338 0.253087 5 Percent Critical Value 15.41 3.76 1 Percent Critical Value 20.04 6.65

*(**) denotes rejection of the hypothesis at the 5%(1%) level Trace test indicates 1 cointegrating equation(s) at the 5% level Trace test indicates no cointegration at the 1% level

Hypothesized No. of CE(s) None * At most 1 Eigenvalue 0.439746 0.008131

Max-Eigen Statistic 17.96029 0.253087

5 Percent Critical Value 14.07 3.76

1 Percent Critical Value 18.63 6.65

*(**) denotes rejection of the hypothesis at the 5%(1%) level Max-eigenvalue test indicates 1 cointegrating equation(s) at the 5% level Max-eigenvalue test indicates no cointegration at the 1% level

Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I): UNEMPL 0.070431 -0.000469 INFLA 0.131053 0.234523

Unrestricted Adjustment Coefficients (alpha): D(UNEMPL) -10.33268 0.790288

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D(INFLA) -0.907885 -0.240750

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1 Cointegrating Equation(s):

Log likelihood

-202.4224

Normalized cointegrating coefficients (std.err. in parentheses) UNEMPL 1.000000 INFLA 1.860740 (0.72600)

Adjustment coefficients (std.err. in parentheses) D(UNEMPL) -0.727738 (0.19774) D(INFLA) -0.063943 (0.03876)

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