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Author(s): Babatunde O.S., Oni O.V., Adenomon M.O., Abiola O.J., Folorunso G.A..

Volume/Issue: Volume 3 , Issue 4 (2020)

Abstract:

Inflation distorts the working of the price system, creates arbitrary redistribution from debtors to creditors, disrupt productive investment activity, and it is usually costly to eliminate. Also, the inability of job seekers to secure gainful employment tends to create disaffection among people and causes the youth, to resort to social vices (such as robbery, suicide, prostitution, drug addiction, terrorism and political unrest etc. in Nigeria. Thus, this research used the Annual data on Unemployment and Inflation rate which were extracted from Central Bank of Nigeria (CBN) 2019 statistical bulletin to investigate the relationship between unemployment rate and inflation rate in Nigeria. Jarque-Bera normality test was first conducted on the variables which reveal that the variables are normally distributed. Unit root test was also carried out on the macroeconomic variables which the results revealed that all the variables are stationary at first difference. The existence of long run relationship was also investigated using Johansen and Juselius Cointegration Test. The trace test and the maximum eigenvalue test showed there exist long run relationship between unemployment rate and inflation rate in Nigeria. Also, VECM model was implemented; the results revealed that inflation rate and unemployment rate are significantly negatively related in the long run in Nigeria. Error Correction Model (ECM) was developed to study the short run dynamics of our variables, the pairwise Ganger causality test revealed that both variables do not Granger caused each other i.e. there is evidence of short run relationship between unemployment rate and inflation rate in Nigeria. For the short run models, a normality test was conducted using histogram on the residuals and evidence from the Jarque-Bera test revealed that the residuals are normally distributed (p-values>0.05). The CUSUM stability test shows that the parameters of the short run unemployment rate model are not stable over time while for inflation rate model, the parameters of the model are stable over time i.e. an increase in inflation rate leads to decrease in unemployment rate and on the other hand increase in unemployment rate leads to decrease in inflation rate in Nigeria. Thus, inflation rate does not granger cause unemployment rate in Nigeria and also unemployment rate does not granger cause inflation rate in Nigeria.

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