CHAPTER
I
INTRODUCTION
1.1
BACKGROUND OF THE STUDY:
Undoubtedly, parts of
the macroeconomic goals which the government strives to achieve are the
maintenance of stable domestic price level and full-employment. Macroeconomic
performance is judged by three broad measures- unemployment rate, inflation
rate, and the growth rate of output (Ugwuanyi, 2004).
Unemployment has been categorized as one of the
serious impediments to social progress. Apart from representing an enormous waste of a country‟s
manpower resource terms
of lower output thereby leading to lower income and well-being (Raheem, 1993).
Inflation on the other
hand, has been a major problem in the country over the years. Inflation is a
household word in many market oriented economies. Although several people,
producers, consumers, professionals, non-professionals, trade unionists,
workers and the likes, talk frequently about inflation particularly if the
situation has assumed a chronic character, yet only selected few know or
even bother to know about the mechanics and consequences of inflation.
Prior to the emergence
of what became to be known as the unemployment and inflation trade-off or
Phillips curve in 1958, unemployment and inflation were considered and treated
in economics as distinct subjects. Keynes for instance described inflation as
the excess of expenditure over income at full-employment level. He contended
that the greater the aggregate expenditure, the larger the inflationary gap and
the more rapid the inflation. As for unemployment, the Keynesian economists
hold that an increase in unemployment reduces income, which reduces
consumption, and reduces aggregate output. As a result, employment can be
increased by increasing consumption or investment.
The monetarist on the other hand,
explained inflation in terms of excessive growth of the money supply relative
to real output. Their view on unemployment, however, is framed within the
context of Milton Friedman‟s permanent income
hypothesis Income
Hypothesis (PIH), a
reduction in employment
and current
Each school of thought offered its own
policy solutions. There were however, no major attempts made to examine
inflation and unemployment simultaneously.
It was not until
1958, following the A.W. Phillips, that
traditional economics began to examine unemployment and inflation
simultaneously, thereby postulating a trade-off between inflation and
unemployment- a lower inflation rate must be willing to put-up with a higher
level of unemployment, and vice-versa. However, economists such as Milton
Friedman and Edmund Phelps disapproved
Phillips‟ curve-off th between unemployment and inflation only existed in the
short-run and that in the long-run, the Phillips curve is
vertical. This led to the introduction of the Natural Rate Hypothesis.
Also, empirical analysis carried out by other
economists over the years, have in one way or the other disproved the
authenticity of the trade-off thesis as postulated by Phillips. Both high
inflation rates and high unemployment rates were discovered to co-exist, giving
rise towhat has come to be known as stagflation. These
twin problems are currently crucial elements of most Les crisis.
Unemployment and
inflation are issues that are central to both the social and economic life of
every country. The existing literature refers to unemployment and inflation 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- which brings about the adequate supply of goods and services - is
the surest way to breaking the vicious circle.
The Nigerian experience
of the crisis of unemployment and inflation was delayed until the early - and
mid- 1980s with the collapse of oil prices on which the economy had become
dangerously dependent on. Before the 1980s, previous records showed that the
Nigerian economy was able to provide jobs for its increasing population, and
was able to absorb considerable imported labour in the scientific sectors. The
wage rate compared favourably with international standards, the inflation rate
was moderate, and there was relative industrial peace in most industry
sub-groups.
The oil boom in the
1970s led to the mass migration of youths into the urban area, seeking to get
work. However, following the recession experienced in the 1980s, the available
data revealed that, the problem of unemployment started to manifest, precipitating
the introduction of the Structural Adjustment Programme (SAP), the rapid
depreciation of the naira exchange rate and the inability of most industries to
import the raw materials required to sustain their output levels.
A major consequence of
the rapid depreciation of the naira was the sharp rise in the general price
level (inflation), leading to a significant decline in the real wages. The low
wages in turn fuelled a weakening purchasing power of wage earners and a
decline in the aggregate demand. Consequently, industries started to accumulate
unintended inventories and, as a rational economic agent, the manufacturing
firms started to rationalize their market prices. With the simultaneous rapid
expansion in the educational sector, new entrants into the labour market
increased beyond absorptive capacity of the economy.
Anthony De Mello, in
his famous book “Life is a banquet. And the tragedy is death”. This situation
is prevalent in richly blessed with abundant human and natural resources, but
still finds itself battling with high unemployment and inflation rates, due to
years of neglect of the social infrastructures and general mismanagement of the
economy. Previous governments in their own capacities have been embarking on
various policies to control inflation and reduce the level of unemployment in
the country. However, government efforts have not yielded the desired results
as these problems are known to be skyrocketing rather than plummeting.
The problem of
inflation in Nigeria was brought about by the oil glut in 1981, which resulted
into balance of payment deficits leading to foreign exchange crisis that
necessitated various measures of import restrictions. These restrictions
reduced raw materials for domestic production and spare parts for machinery
operation. The resultant shortage of goods and services for local consumption
spurred the inflation rate to rise from 20% in 1981 to 39.1% in 1984 (Itua,
2000).
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