CHAPTER TWO
2.1 LITERATURE REVIEW
2.2 Conceptual Review
The conceptual review provides a detailed explanation of the major concepts related to this
study. These include unemployment, economic indicators, Gross Domestic Product (GDP),
inflation, interest rate, exchange rate, and their relationships within the Nigerian context. Each of
these variables plays a significant role in determining the performance of the economy and the
level of employment in the labour market.
2.2.1 Concept of Unemployment
Unemployment is a major macroeconomic challenge that reflects the inability of an
economy to provide sufficient job opportunities for its labour force. According to the
International Labour Organization (ILO, 2023), unemployment refers to the share of the labour
force that is without work but available for and seeking employment. Similarly, Mankiw (2020)
defines unemployment as a condition where individuals who are capable and willing to work at
the prevailing wage rate cannot find jobs.
In Nigeria, unemployment has remained persistently high despite various economic reforms and
government programmes. The National Bureau of Statistics (NBS, 2023) reported that the
national unemployment rate stood above 33% as of 2023, reflecting the structural and cyclical
challenges in the economy. Factors contributing to this situation include rapid population growth,
low industrial output, declining agricultural productivity, and an overdependence on crude oil
revenue.
Unemployment is commonly categorized into four major types:
Frictional Unemployment: Short-term unemployment that arises from normal job
search processes and labour mobility (Blanchard & Johnson, 2017).
Structural Unemployment: Occurs when there is a mismatch between the skills of job
seekers and the requirements of available jobs, often due to technological changes or
shifts in economic structure (Todaro & Smith, 2020).
Cyclical Unemployment: Linked to fluctuations in the business cycle. During economic
recessions, aggregate demand falls, leading to job losses (Keynes, 1936).
Seasonal Unemployment: Occurs when employment opportunities fluctuate according
to seasonal activities, such as in agriculture or tourism (ILO, 2021).
In developing countries like Nigeria, unemployment is often both structural and cyclical,
reflecting deep-rooted economic imbalances and policy failures. The consequences of
unemployment include increased poverty, crime rates, social unrest, and low standards of living
(Akinboyo, 2019; NBS, 2023).
2.2.2 Concept of Economic Indicators
Economic indicators are measurable variables used to assess the overall performance and
direction of an economy. According to Samuelson and Nordhaus (2021), economic indicators
provide essential information for evaluating growth, inflation, employment, and other
macroeconomic conditions. They are classified into three categories based on their timing
relative to economic cycles:
Leading indicators: Predict future economic changes (e.g., stock prices, new business
starts).
Lagging indicators: Reflect changes after the economy has already shifted (e.g.,
unemployment rate).
Coincident indicators: Move simultaneously with the overall economy (e.g., GDP,
industrial production).
The key economic indicators relevant to this study are Gross Domestic Product (GDP), inflation
rate, interest rate, and exchange rate, which together influence employment levels and the
stability of the Nigerian economy.
2.2.3 Gross Domestic Product (GDP)
Gross Domestic Product (GDP) represents the total market value of all final goods and
services produced within a country in a given period (World Bank, 2023). It serves as the most
widely used measure of economic growth and national prosperity. When GDP increases, it
indicates an expansion in production and consumption activities, often leading to higher
employment levels. Conversely, a decline in GDP signifies economic contraction and rising
unemployment.
According to Okun (1962), there is an inverse relationship between GDP growth and
unemployment — known as Okun’s Law. A 1% increase in GDP above potential output tends to
reduce unemployment by about 0.5%. However, in Nigeria, this relationship has been weak or
inconsistent due to structural issues such as overreliance on oil exports, poor infrastructure, and
limited industrial diversification.
For example, despite periods of positive GDP growth between 2010 and 2014, Nigeria’s
unemployment rate continued to rise, highlighting the phenomenon of ―jobless growth‖
(Omodero, 2022). This suggests that GDP growth in Nigeria has not translated effectively into
job creation because economic expansion has been concentrated in capital-intensive sectors
rather than labour-intensive ones.
2.2.4 Inflation
Inflation refers to a sustained increase in the general price level of goods and services in an
economy over time, leading to a decline in purchasing power (Friedman, 1963). It is usually
measured by the Consumer Price Index (CPI) and represents a key indicator of economic
stability. Inflation can arise from two main sources:
Demand-pull inflation, caused by excessive aggregate demand; and
Cost-push inflation, driven by rising production costs.
The relationship between inflation and unemployment is captured by the Phillips Curve,
developed by A.W. Phillips (1958), which suggests an inverse relationship between the two in
the short run. However, this relationship tends to disappear in the long run when inflation
expectations adjust (Blanchard & Johnson, 2017).
In Nigeria, inflation has remained high due to structural problems such as poor infrastructure,
exchange rate depreciation, and high import dependency. The Central Bank of Nigeria (CBN,
2023) reported that inflation rates fluctuated between 15% and 28% between 2016 and 2023.
Persistent inflation reduces real incomes, discourages investment, and undermines job creation.
High inflation also increases production costs, leading firms to cut labour demand.
2.2.5 Interest Rate
Interest rate is the cost of borrowing money or the return on savings, expressed as a
percentage of the principal amount. It is a critical tool of monetary policy used by central banks
to control inflation and stabilize the economy. According to Mishkin (2019), interest rates
influence investment, consumption, and employment decisions.
A high interest rate discourages borrowing, reduces investment in productive ventures, and
increases the cost of doing business, thereby reducing employment opportunities. Conversely, a
low interest rate stimulates investment and economic activities, which can enhance job creation.
In Nigeria, interest rates are primarily determined by the Monetary Policy Rate (MPR) set by the
Central Bank. The rates have often been high to control inflation and stabilize the exchange rate,
but this has limited credit availability to the private sector (Adewale, 2021). As a result, small
and medium enterprises (SMEs) — which are major job creators — struggle to access affordable
loans, exacerbating unemployment.
2.2.6 Exchange Rate
Exchange rate represents the price of one country’s currency in terms of another. It
determines the competitiveness of a country’s goods and services in international markets. A
stable exchange rate encourages trade and investment, while excessive volatility discourages
production and employment.
According to Ogunleye and Olaniran (2020), exchange rate instability in Nigeria has a
significant negative impact on employment because it increases production costs, discourages
investment, and fuels inflation. A depreciation of the Naira makes imports more expensive,
leading to rising prices of imported raw materials and intermediate goods. This negatively affects
local industries, especially manufacturing firms that depend on imported inputs.
Between 2015 and 2023, Nigeria experienced persistent exchange rate depreciation due to
declining oil revenues and foreign exchange shortages. This situation led to inflationary
pressures and contributed to rising unemployment, as businesses struggled to sustain operations
amid higher costs (CBN, 2023; NBS, 2023).
2.2.7 Relationship Between Unemployment and Economic Indicators
The relationship between unemployment and economic indicators has been the subject of
extensive research in economics. The interaction among GDP, inflation, interest rate, and
exchange rate determines the direction of employment trends in any economy.
According to Okun’s Law (1962), there is an inverse relationship between GDP and
unemployment as the economy grows, unemployment declines. Similarly, the Phillips Curve
(Phillips, 1958) suggests that inflation and unemployment are inversely related in the short run.
High inflation often accompanies periods of low unemployment because increased demand
stimulates production. However, in the long run, no such trade-off exists.
Interest rate and exchange rate fluctuations also play critical roles in shaping employment
outcomes. Mishkin (2019) and Adewale (2021) emphasize that high interest rates suppress
investment and job creation, while exchange rate depreciation can lead to higher inflation and
increased unemployment.
In the Nigerian context, several structural and policy-related factors complicate these
relationships. Economic growth has not translated into adequate employment due to limited
diversification, infrastructural deficits, and overdependence on oil exports (Omodero, 2022).
Inflationary pressures, exchange rate instability, and restrictive monetary policies have also
contributed to the persistent unemployment problem.
2.3 Theoretical Framework
The theoretical framework provides the foundation upon which this study is built. It
identifies and discusses relevant theories that explain the relationship between unemployment
and major economic indicators. For the purpose of this research, the following theories are
discussed:
2.3.1 The Classical Theory of Employment
The Classical Theory of Employment, developed by early economists such as Adam
Smith (1776), David Ricardo (1817), and later expanded by Pigou (1933), asserts that the
economy is self-regulating and that full employment is the normal situation in the long run.
According to this theory, the labour market operates under the forces of demand and supply, and
unemployment occurs only temporarily due to wage rigidities or market imperfections. The
classical economists believed that unemployment would automatically correct itself through
adjustments in wages. When unemployment occurs, wages fall, leading employers to hire more
workers until full employment is restored. Thus, they argued that unemployment is a voluntary
phenomenon, as anyone willing to work at the prevailing wage rate can find employment
(Jhingan, 2018).
However, in real-world economies especially in developing nations like Nigeria this assumption
rarely holds true. Wages are often rigid downward due to labour laws, minimum wage policies,
and union activities. Moreover, structural and cyclical factors often lead to persistent
unemployment that cannot be corrected by wage adjustments alone (Mankiw, 2020). Hence,
while the classical theory provides a foundation, it fails to explain the high and persistent
unemployment experienced in Nigeria.
2.3.2 Keynesian Theory of Employment
The Keynesian Theory of Employment, proposed by John Maynard Keynes (1936) in his book
The General Theory of Employment, Interest, and Money, challenged the classical assumption of
full employment. Keynes argued that unemployment results from insufficient aggregate demand
in the economy. When total spending (consumption, investment, and government expenditure) is
too low, firms reduce production and lay off workers, leading to involuntary unemployment.
Keynes emphasized that the economy can remain in an equilibrium state with less than full
employment, which was a major departure from classical thought. He proposed that government
intervention through fiscal and monetary policies such as increasing public spending, lowering
interest rates, and stimulating investment can help boost aggregate demand, output, and
employment.
In the Nigerian context, the Keynesian theory is highly relevant because unemployment in the
country is largely demand-deficient. Low investment, poor infrastructure, and declining
consumer spending have constrained aggregate demand, leading to job losses (Adewale, 2021;
Omodero, 2022). Government spending on productive sectors such as agriculture, industry, and
infrastructure can therefore stimulate job creation and economic growth.
2.3.3 Okun’s Law (Theory of Output-Unemployment Relationship)
Okun’s Law, developed by Arthur Okun (1962), establishes a quantitative relationship
between the growth rate of real output (GDP) and changes in the unemployment rate. The theory
posits that when actual output grows faster than potential output, unemployment tends to fall,
and when output growth slows or contracts, unemployment rises. Okun’s Law implies that a 1%
increase in GDP above its potential level typically leads to about a 0.5% reduction in
unemployment (Okun, 1962). The theory underscores the importance of economic growth in
reducing unemployment levels.
In Nigeria, however, this relationship has been weak due to structural imbalances and jobless
growth (Omodero, 2022). GDP growth has often been driven by capital-intensive sectors such as
oil and gas, which do not generate significant employment opportunities. This makes the
Nigerian economy a clear example where economic expansion does not automatically translate
into job creation.
2.3.4 Phillips Curve Theory
The Phillips Curve, introduced by A. W. Phillips (1958), describes an inverse relationship
between the rate of unemployment and the rate of inflation. Phillips analyzed data from the
United Kingdom between 1861 and 1957 and found that periods of low unemployment were
associated with higher inflation, and vice versa. The logic behind the Phillips Curve is that when
unemployment is low, labour becomes scarce, leading to higher wages. As wages rise, firms pass
on the increased costs to consumers in the form of higher prices, resulting in inflation.
Conversely, when unemployment is high, wage growth slows, and inflation declines (Samuelson
& Solow, 1960).
However, in the long run, the expectations-augmented Phillips Curve proposed by Friedman
(1968) and Phelps (1967) suggests that the trade-off between inflation and unemployment
disappears. In the long-term equilibrium, the economy returns to its natural rate of
unemployment, regardless of inflation levels.
In Nigeria, the Phillips Curve relationship is not always clear-cut. High inflation often coexists
with high unemployment a condition known as stagflation (Akinboyo, 2019). This anomaly is
due to structural factors such as supply-side bottlenecks, exchange rate depreciation, and
imported inflation, which cause rising prices even during periods of weak demand.
2.3.5 Monetary Theory of Interest Rate
The Monetary Theory of Interest Rate, advanced by Irving Fisher (1930) and later refined
by Keynes, explains how the equilibrium interest rate is determined by the interaction between
money supply and money demand. The theory asserts that interest rates are influenced by
monetary policy, inflation expectations, and liquidity preferences.
According to Keynes’ Liquidity Preference Theory (1936), interest rates are determined by the
public’s preference for holding cash versus investing in bonds or other assets. When the central
bank increases the money supply, interest rates fall, stimulating investment and employment.
Conversely, when money supply is restricted, interest rates rise, discouraging investment and
slowing economic activity (Mishkin, 2019).
In Nigeria, the Central Bank of Nigeria (CBN) uses the Monetary Policy Rate (MPR) as a key
tool to control inflation and influence credit conditions. However, high interest rates have often
constrained borrowing, particularly for small and medium-sized enterprises (SMEs), leading to
reduced job creation (CBN, 2023). Hence, the monetary theory of interest rate helps to explain
how financial policies influence unemployment through investment channels.
2.3.6 Purchasing Power Parity and Exchange Rate Theory
The Purchasing Power Parity (PPP) Theory, originally developed by Gustav Cassel
(1918), states that in the long run, exchange rates between two countries adjust so that the same
basket of goods has the same price in both countries when measured in a common currency. In
other words, exchange rates reflect differences in price levels between nations.
PPP theory implies that exchange rate depreciation will lead to higher domestic prices (inflation),
as imported goods become more expensive. This can reduce purchasing power and raise
production costs for industries dependent on imported inputs, ultimately leading to reduced
employment opportunities (Ogunleye & Olaniran, 2020).
In the Nigerian context, the persistent depreciation of the Naira against the U.S. dollar has
contributed to inflationary pressures and increased the cost of production. This has negatively
impacted domestic industries and led to layoffs, particularly in the manufacturing sector (CBN,
2023). Thus, PPP theory helps explain how exchange rate volatility influences unemployment
through price instability and reduced competitiveness.
2.3.7 Statistical Theory of Regression and Correlation
Since this study employs statistical analysis to examine the relationship between
unemployment and economic indicators, the statistical theories of regression and correlation
provide an essential framework. According to Gujarati (2015), regression analysis helps estimate
the quantitative relationship between one dependent variable (unemployment rate) and one or
more independent variables (GDP, inflation, interest rate, exchange rate).
The simple correlation coefficient (r) measures the strength and direction of the linear
relationship between two variables. A negative correlation between GDP and unemployment
supports Okun’s Law, while a positive correlation between inflation and unemployment might
indicate stagflation or structural economic challenges.
2.4 Empirical Review
2.4.1 National-level labour statistics and measurement issues
Recent official labour-market publications and commentaries show Nigeria’s
unemployment figures have fluctuated since the 2020 methodological revision by the National
Bureau of Statistics (NBS). The NBS Labour Force Survey reports quarterly unemployment and
underemployment series (for example Q2 and Q3 2023), documenting a rise in unemployment
from Q2 to Q3 2023 and persistent high underemployment and informal employment shares.
Several analysts and international organisations have noted that the revised measurement (which
counts someone as employed if they work at least one hour per week) produces a much lower
headline unemployment rate than earlier series and has prompted debate about whether the
revised figures understate labour-market distress
2.4.2 Okun’s law and the GDP–unemployment link in Nigeria
A body of time-series research has re-examined Okun’s Law for Nigeria with mixed
results. Several recent empirical papers using ARDL, VAR and cointegration techniques find a
negative relationship between output growth and unemployment (consistent with Okun), but
report that the Okun coefficient in Nigeria is smaller (i.e., growth translates weakly into job
creation) and sometimes unstable over time a pattern often described as ―jobless growth.‖ A
2024 modelling paper explicitly investigates Okun’s law in Nigeria and highlights structural
features (sectoral composition of growth, capital intensity, and labour absorption) that weaken
the growth employment channel. These studies commonly recommend policies that favour
labour-intensive sectors (manufacturing, agro-processing, SMEs) to strengthen the linkage.
2.4.3 Inflation unemployment relationship (Phillips curve evidence)
Empirical evidence on the Phillips-curve (inflation vs unemployment) for Nigeria is
mixed. Several studies using distributed-lag and ARDL frameworks find short-run inverse
relationships consistent with the Phillips hypothesis, while others find the trade-off weak or
unstable; in some periods Nigeria experienced rising inflation alongside rising unemployment
(stagflation), driven by supply shocks, exchange-rate depreciation and food-price shocks rather
than demand pressures. Recent re-examinations using extended sample periods and modern time-
series methods suggest that any short-run trade-off is fragile and that expectations and supply-
side factors matter a great deal.
2.4.4 Exchange-rate volatility, inflation and employment
Multiple empirical studies and CBN working papers indicate that exchange-rate volatility
and depreciation have important real effects in Nigeria: they raise production costs (through
higher import prices), feed into inflation, and can reduce employment especially in firms
dependent on imported inputs. ARDL and causality studies of trade and exchange-rate volatility
show negative short-run effects on trade flows and warn that persistent FX instability
undermines industry and investment. The 2015–2021 and more recent episodes of Naira
depreciation (and FX market reforms) have been associated with inflationary episodes and
pressures on employment.
2.4.5 Interest rates, credit conditions and job creation
Empirical work on monetary policy and labour outcomes in Nigeria highlights that high
real interest rates and tight credit conditions constrain private-sector investment, particularly for
SMEs — a major source of jobs. VAR and impulse-response studies show that interest-rate
shocks can reduce investment and employment; conversely, easier monetary conditions (when
coupled with financial sector depth) can stimulate firm expansion and hire more labour. The
CBN’s use of the MPR and recent policy shifts (including rate adjustments in response to
inflation and reforms) are central to understanding credit channels to employment.
