Issues of Unemployment in Nigeria: Effect of Real Exchange Rate and Inflation Interaction

Abstract

Article History KeywordsInflation Real exchange rate Unemployment Generalized moment method Marginal effect Interaction of real exchange rate and inflation.Contribution/Originality: This study contributes to the existing studies by distinguishing itself identifying the simultaneous impact of these two fluctuating variables (inflation rate and real exchange rate ) on unemployment, unlike existing literatures which addressed these impacts on unemployment separately and assessing how inflation influences the impact of real exchange rate on unemployment in Nigeria. The study adopts descriptive analysis and generalized method of moment. 1969). Another argument is that trade-off between inflation and unemployment exist in long run because of money supply and productivity growth leads to decrease in unemployment, while supply shock like oil prices leads to increase in unemployment and that increase in productivity growth causes decrease in inflation and also fall in unemployment (Tang and Lean, 2009; Karanassou and Sala, 2010).The relationship between exchange rate and unemployment is controversial, if positive or negative relationship exists between the two variables. Literature establishes that changes in real exchange rates have tendency of impacting the reallocation of resources between sectors of the economy as they reflect changes in relative prices of domestic and foreign goods which influence employment in an economy. Trade theory suggest that a depreciation of real exchange rate increases the competitiveness of the country's exports and hence the demand for labour increases. On the other hand, a depreciation of real exchange rate increases the cost of intermediate inputs which might offset the first effect such affect production level adversely which tends to reduce competitiveness of the country export and hence, demand for labour decreases (Demir, 2010;Feldmann, 2011).In Nigeria, statistics revealed that between 2013 and 2014, the unemployment rate increased from 16.7 to 17.1, despite an increase in annual real GDP from 5.4% to 6.3% with a decrease in the annual inflation from 8.5% to 8% whereby an improvement of real effective exchange rate occurred from 74.20 and 69. 51. Subsequently, unemployment further reveled 17.6 %, 18 % and 18.5% in 2015, 2016 and 2017 respectively. The corresponding real GDP were 2.7%, -1.6% and 0.8% in 2015, 2016 and 2017 respectively. The purchasing power of households further declined as a result of a continuous increase in the annual inflation with 9% in 2015, 15.7% in 2016 and 16.5% in 2017 while the depreciated real effective exchange rates in 2015 was 70.83, when 80.35 and 85.62 were recorded in 2016 and 2017 respectively. This trend contradicted economic postulations that predicted inverse relationship between inflation and unemployment; a depreciated real depreciation was expected to improve and boost real GDP which in turn expected to have a drastically decline in the rate of unemployment via increase in export. Most existing studies have addressed the effect of inflation a...

The determinants of unemployment rate: the case of Thailand

“…According to my knowledge, there was no one conducting the same interaction with my study. However, Olanrewaju (2019) conducted a similar interaction between inflation rate and exchange rate on the unemployment rate in Nigeria and found that the higher the inflation rate and real exchange rate depreciation, the unemployment increased.…”

“…For example, In Bangladesh, Chowdhury and Hossain (2014) utilized a simple single equation linear regression model (SELRM), In China, Chang (2005) applied the autoregressive distributed lag (ARDL) approach and In Bahrain, Alrayes and Abu Wadi (2018) used the ordinary least square (OLS) model. Furthermore, Olanrewaju (2019) examined the effect of real exchange rate and inflation interaction on unemployment in Nigeria by employing the generalized method of moments (GMM) technique in order to control the endogeneity of variables found that the higher the inflation rate and real exchange rate depreciation, the unemployment increased.…”