CHAPTER ONE

INTRODUCTION

1.1 Problem Statement

Unemployment which is a major economic problem confronting both developed and

developing countries of the world has been seen to take an increasing turn in form of graduate

unemployment.

An examination of the unemployment profile in Africa shows that unemployment rates are

alarming for some African countries, part of which are Botswana 22% (1995), Algeria 24%

(1995), Tanzania 22% (1999), South Africa 25% (1999) and Nigeria 17% (1995), 19.7%

(2009) (Umo, 2007).

The acquisition of a University degree was once considered as a sure guarantee for securing a

paid employment either in the public or the private sector (Idowu, 1987). The reverse has

been the case in Nigeria. For several decades, the issue of graduate unemployment has

remained intractable.

The issue of graduate unemployment in Nigeria has become a national concern as the

unemployed youths tend to be more anxious, depressed and unhappy with their attendant

sleeplessness than those with jobs. This situation has not only posed a great challenge to the

economy but has also led to the retarded state of the country’s economic growth.

Yet individual investment expenditure on tertiary education continues to increase despite the

inadequate demand for it, thereby adding to the looming unemployment rate already in

existence in the country. This problem can be seen to have emanated as a result of a mismatch

between supply of labour (graduates) and demand for labour (graduates) following the

1
assumption of the renowned sail’s law which says “supply equals demand”; meaning that the

supply of labour should equal the demand for labour so equilibrium can exist in the labour

market.

This has prompted various research works and studies to investigate the economic killer

disease, “Graduate unemployment” and to create policy frameworks that will help minimize

or totally eliminate the problem of graduate unemployment.

Evident is the fact that government policies have failed to adequately curb the problem of

graduate unemployment. A worrisome situation is the increasing trend of graduate turnout

each year and the declining labour absorption capacity of the country. This worrisome

situation can be said to have evolved after oil boom of 1970’s and mid 1980’s during the

world economic blow “global recession” and still remains till date. Prior to the 1970’s,

Nigeria was basically an agrarian society with the agricultural sector absorbing the largest

proportion of the work force; 70% of the working population engaged in agricultural

activities. But due to the poor linkage structure of the country, the demand by the sector’s

product has reduced drastically, therefore leaving it to the peasants, small and medium scale

operators in the sector. All these issues give rise to questions to which unambiguous answers

must be sought out:

1. What is the relationship between graduate unemployment and economic growth?

2. What are the causes of graduate unemployment and the psycho-social effects of

unemployment?
3. What relevant policy framework can be drawn from (1) above?

1.2 Objectives

2
The prime objective of this study is to empirically analyse the causes and cure of graduate

unemployment in Nigeria and its effect on the country’s economic growth. Specifically this

study will:
1. Examine the relationship between graduate unemployment and economic growth.
2. Examine the causes of graduate unemployment and the psycho-social effects of

unemployment.
3. Provide a relevant policy framework on the basis of (1) above.

1.3 Justification Of Study

This study seeks to broaden the research criterions on which previous research policy

framework have being based upon. Most research works in the area of graduate

unemployment were not comprehensive leaving out detailed factors such as trade union effect

through the agitation for adjustment in minimum wage, global recession through inflation,

government policy such as; indigenization, import substitution, nationalization, lending

interest rate (%) through the central bank, existing domestic investment and labour force.

Also it has been seen that previous study on unemployment of youths especially on graduate

unemployment in developing countries ( Falae , 1971,Bhalla 1973;Diejomaoh,1979; Bear and

Herve 1966;Bhagwati 1973; Diejomaoh and Orimolade 1971) tend to ignore the special case

of the university graduates that are first time job seekers. This study attempt at constructing a

more comprehensive policy framework and an all inclusive economic model that takes into

consideration additional influencing factors of graduate unemployment in relation to

economic growth and how the negative ones can be minimized and positive ones, sustained.

This is aimed at achieving a sustained economic growth.

1.4 Scope Of Study

This study focuses on graduate proportion of the total unemployment in Nigeria, taking into

consideration those unemployed, who own B.A/ B.SC/ B.ED/ HND certificates. This study

provides a robust empirical review and theoretical argument on the causes and cure of

graduate unemployment. In specifics, it analyses the relationship between graduate

3
unemployment and economic growth through the factors of graduate unemployment;

government policy, trade union activities, inflation, existing domestic investment and labour

force in Nigeria. This study covers the period from 1980 to 2009.
.

1.5 Statement of Hypothesis

Hypothesis testing

H0: There is no relationship between graduate unemployment and economic growth.

H1: There is a relationship between graduate unemployment and economic growth

1.6 Organisation of study

The rest of the study is as follows. Chapter 2 provides a general idea and overview of the

unemployment problem in Nigeria, precisely by providing an historical perspective that

examines the trend in graduate unemployment and its independent variables (that is factors

that affect graduate unemployment) over the years. It also examines recent policy, programs

and institutions that as been set up over the years to tackle the existing problem of graduate

unemployment in Nigeria. Chapter 3 gives the literature review on studies and research works

relating to this study, by presenting the different opposing views on unemployment; in form

of graduate unemployment and its relationship with economic growth and is presented in a

structured manner, which result’s to a deducted conclusion concerning the cure and causes of

graduate unemployment and its effect on graduate unemployment. Chapter 4 discusses the

methodology employed in empirical analysis and a detailed description of data used. Chapter

5 documents the empirical findings of the study, while Chapter 6 concludes and draws

deductive policy recommendations based on the empirical findings of the study

4
 CHAPTER TWO
BACKGROUND OF STUDY
2.1 Background of the Study
2.1.1 An overview of unemployment
Unemployment is a situation where those who are able and available for work don’t get jobs.

The intensity of unemployment is often measured by “Unemployment rate” (U). This is the

ratio of the number of unemployed people to the total labour force, made up of those who are

either employed (E) or unemployed (U) e.g. U^= U/ET +UT

Unemployment results to a lower standard of living, anxiety about the future and reduced self

esteem.
Unemployment is one of the development problems that face every developing economy in

the 21st century. International statistics portray that industrial and service workers living in

developing regions account for about two-thirds of the unemployed (Patterson et al, 2006).
Concern about graduate unemployment is growing daily and at an accelerated rate in Nigeria, yet

the strength of student enrolment and graduate output of the institutions of higher learning are

growing rapidly. There is serious suspicion that the cause of high crime wave in Nigeria is due to

high youth unemployment especially among the educated youths (Anyanwu, 2000).

However, the existing economic and financial structural reforms that have being put in place

have not yielded significant results.

Cyclical unemployment is the type of unemployment associated with the downturn of the

business cycle. The basic cause of cyclical unemployment is a fall in aggregate demand or

5
reduced level of total spending in the economy. Consequently many workers are laid off

while new entrants into the labour market find it extremely difficult to get jobs. (Umo, 2007)

Such unemployment was noticeable in Nigeria after the era of the first oil boom (1974-1976).

A fall in oil earnings, with a consequent squeeze in the budget, meant that many government

contracts had to be terminated and new ones were not awarded. This created a recessionary

condition causing cyclical unemployment.

Structural unemployment is loss of jobs brought about by changes in the structure of the

economy. Such a structural change may be traced to a decrease in demand for a particular

item which can also be traced to technological change.

Frictional unemployment is due to lack of information, changes in the supply of labour when

wage rates are flexible, etc. This type includes the unemployment of persons who temporarily

lose jobs or decide to change jobs, as well as new entrants into labour market like those

finishing formal school. The period of unemployment occurs because of the time it takes to

find jobs. In Nigeria, this type of unemployment can also be attributed to the existence of

“spatial friction”. This refers to the fact that distance can pose a problem to labour mobility.

Over several decades, most members of the Nation Youth Service Corps (NYSC) have been

reluctant to work in rural areas because of the underdevelopment existing in such places.

Although the conceptual distinction between frictional and structural employment is tenuous,

the main distinguishing characteristic is that, while frictional unemployment involves people

with marketable skills such as educational qualifications and experience, structural

unemployment involves people whose existing skill are no longer marketable (Umo, 2007).

6
One of the main issues in this field of study is that creating urban jobs may increase rather

than decrease urban unemployment because of the induced negative effect on rural migration,

which may outweigh the positive effect of creating jobs (Todaro, 1976). This is referred to as

the Todaro paradox.

Unemployment according to Lipsey (1963) brings about economic waste and causes human

suffering. The contribution and attitude of this economic waste were emphasized by the fact

that the factor services are the least durable economic commodity.

Unemployment is as a result of the inability to develop and utilize the nation’s manpower

resources effectively especially in the rural sector (Fadayomi, 1992; Osinubi, 2006).The

negative consequences include poverty, psychological problems of frustration, depression,

hostility, suspiciousness of people, food insecurity, all manner of criminal behaviour and

general insecurity of life and property (Adebayo, 1999; Egbuna, 2001; Alanana, 2003;

Okonkwo, 2005). Although Nigeria is known to be rich in manpower; however, all these

problems are not left out in the country.

Unemployment is measured among people in the labour force. Labour force of a country as

defined by Feyisetan (1991) is a set of people or citizens of a country who are willing and are

able to make available at any given point in time their efforts for gainful employment. The

unemployed are the individuals with no work but are looking for work at the time of survey.

It has been established that the greater the provision of schooling, the greater the stock of

human capital in the society, and consequently, the increase in national productivity and

economic growth. Thus, investment in human capital is a function of the potency of the

labour force to contribute meaningfully to the growth of Gross National product (Samuel,

1990).

7
2.2 Historical background of graduate unemployment in Nigeria

The Nigerian economy during the first two decades of independence exhibited

unemployment rate similar or less than those of the industrialised economies, but in the

1960’s the country suffered a large increase in unemployment rate. Despite all the

fundamental and domestic structural changes since independence in 1960, the country has

failed at achieving any significant and sustainable economic growth or development. With the

wasteful expenditure in the public sector that accompanied the oil boom of 1970 dislocating

the employment factor and also distorting the revenue bases for policy planning. This led to

the introduction of the structural adjustment programme (SAP) in 1986 and other current

economic reforms; all of which were aimed at restructuring the Nigerian economy in the face

of the existing population explosion.

However, these economic and financial structural reforms put in place have not yielded

significant results. In the light of this, Akintoye (2006) examined how a major

macroeconomic variable, unemployment could be reduced through the informal sector by

empowering people towards being self productive and independent.

After the 1967-1970 civil war in Nigeria, the incidence of graduate unemployment was

suspected, rumoured and feared (Fajana, 2000). Graduate unemployment between 1965 and

1972 was not as serious as dreaded. The level of graduate unemployment within the period

was attributed to slow bureaucratic machinery for the processing of application for jobs and

the influence system which left some graduates temporarily unemployed for the first few

months after graduation. The trend of graduate unemployment rate in Nigeria is shown table

1 below.

Table 1: Graduate Unemployment Rate in Nigeria (2003-2009)

Years Urban(%) Rural(%) Total(%)

2003 17.3 8.3 25.6

8
 2004 25.2 12.8 38

2005 19.0 13.3 32.3

2006 18.8 13.4 32.2

2007 18.7 13.4 32.1

2008 15.8 21.7 37.5

2009 13.9 26.4 40.3

Source: International labour organization, (2010)

2.2.1 Trend in enrolment in Nigerian universities

Despite poor funding problems, enrolment at all levels of education has been on the increase

(Moja, 2000). Currently the number of universities has increased and their curricular have

expanded. The motivation for the establishment of private universities was in part a response

to unprecedented demand by Nigerians for higher education with large expansion in

education.

Table 2: Number of Nigerian Universities and Annual Total Enrolment (1960-2010)

Year No of universities Total enrolment Year No of universities Total enrolment

1960/1961 2 1396 1983 27 116822

1961 1476 1984 126265

1962 3646 1985 135783

1963 5106 1986 151967

1964 5707 1987 160767

1965 7709 1988 160174

1966 8888 1989/1990 31 180871

1967 7058 1990/91 230420

1968 8588 1991/92 302580

1969 9695 1992/93 408859

9
1970 14468 1994/95 452653

1971 17093 1995/96 453784

1972 6 20889 1996/97 481280

1973 23228 1997/98 490933

1974 26448 1998/99 574723

1975 13 38286 1999/00 547867

1976 40552 2000/01 587996

1977 47499 2001/02 586323

1978 52755 2002/03 572509

1979 59294 2003/04 620852

1980 77791 2004/05 810220

1981 90751 2006 89 765522

1982 101774 2007 95 1401888

2008 95 661493

2009 104 577029

2010 104 605068

Source; National Universities Commission, (2006)

Table 2 above shows the enrolment trend in Nigerian universities. It can be seen that between

1960 and 1961, there were only two universities in Nigeria with total enrolment of

undergraduates in Nigeria at 1,396. By 1975 it raised to 38,286 students with 13 universities;

116,822 in 27 universities in 1983; and 180,871 in 31 universities by 1990. Total enrolment

rose to 490,933 in 1998, this implies a growth rate of 15 percent each year during the period.
According to the Executive Secretary of the National Universities Commission, Prof. Julius

Okogie, as at 2006/2007 session there were 1,096,312 students in Nigerian universities out of

this number 87 percent were undergraduates (953,792) while 6% were non-degree students

(65,778). The remaining number consists of post graduate students.

Presently the total number of registered universities in Nigeria is 104 with total enrolment at

605,068 students.

2.2.2 Trend in unemployment in Nigeria

10
Despite this increase experienced by the number of tertiary institutions; enrolment rate; and

increased graduate turnout, the issue of graduate unemployment has posed a great challenge

to the country.

Table 3: Composition of Unemployment in Nigeria for the Year 2009

Educational level Composite

Never attended 0.5

Primary 11.0

JSS 3.3

Vocational/Commercial 0.0

SSS 55.6

NCE/OND/Nursing 10.2

B.A/B.SC/B.ED/HND 18.8

MSC/M.A/M.ADM 0.5

Doctorate 0.0

Others 0.2

Source; International Labour Organisation, March (2009)

Table 3 above shows the distribution of unemployed persons by educational level. It will be

seen that following the largest percentage (55.6%) belonging to those in senior secondary

schools are those with B.A/B.SC/B.ED/HND with 18.8%.

Hence the gap between registered unemployment and vacancies declared has been

consistently high both for lower grade workers and the professionals and executives. The

peak was recorded for lower grade workers in 1981. Apart from 1980 and 1981, the vacancies

declared for lower grade workers were consistently lower than 20,000 while unemployment

11
was largely greater than 100,000. The situation with professionals and executives was not as

worse as lower grade workers. Up to 1991, unemployed professionals and executives was not

more than 20,000. A sharp increase was recorded in 1993 when the figure rose to 108,153

largely because of mass retrenchment.

Since then unemployed professionals and executives have been greater than 20,000 every

year. Nevertheless vacancies declared were largely below 10,000. For both professional

workers, more than 50% of unemployed citizens had no vacancy for which they could be

considered every year and the inflation rate coupled with lack of adequate fund to start

business hinder the growth of self employment as an option. (Ajetomobi & Ayanwale)
In Nigeria, national unemployment rate as experienced increases from 13.1% in 2000 to

14.8% in 2003; similarly to 14.9% in 2008 and then 19.7% in 2009; a situation seen as a

generalised waste of human resources.

Graduate unemployment has been assumed to be a result of Global recession that affected not

only the country but the world of employers of labour (that is the business cycle), increasing

the number of unemployed due to downsizing by firms in order for them to cover their

production cost. Also the ever increasing demand for tertiary education has led to excess

labour force compared to the job vacancies available; increasing supply of tertiary education

due to establishment of more universities which in turn is producing low quality graduates;

the limited credit facility due to the lending rates of credit institutions, therefore reducing the

entrepreneurial possibilities which would have reduced graduate unemployment.

Table 4: Overall unemployment rates (1970-2008)

Year Total registered Unemployment rate Year Total Unemployment

unemployment (%) registered rate(%)

unemployment

1970 12250 4.3 1989 110336 4.5

1971 12685 4.2 1990 99934 3.5

1972 13573 N/A 1991 123137 3.1

1973 15497 4.6 1992 97349 3.5

12
1974 20918 N/A 1993 183540 3.4

1975 23418 4.7 1994 100400 3.2

1976 21026 4.3 1995 114672 1.9

1977 14834 5.5 1996 152693 2.8

1978 18796 N/A 1997 152293 3.4

1979 N/A 4.9 1998 184103 3.5

1980 256623 6.4 1999 149693 17.5

1981 188438 N/A 2000 190328 18.1

1982 106496 N/A 2001 170287 13.7

1983 112588 N/A 2002 180311 12.2

1984 123459 6.2 2003 N/A 14.8

1985 100745 6.1 2004 N/A 11.8

1986 91281 5.3 2005 N/A 11.9

1987 160184 7 2006 N/A 12.3

1988 132455 5.1 2007 N/A 12.7

2008 N/A 14.9

Source: National Bureau of Statistics (2010)

From table 4 above, it can be seen that the unemployment rate was lowest in 1995 with 1.9%

and was highest in 1999 with 17.5%. It can also be observed that unemployment rate was

single figure from 1970-1998 and jumped to a double figure in 1999. It hasn’t being too

stable ever since the

2.2.3 Trend in inflation in Nigeria

Inflation has been widely acknowledged to pose one of the persistent macro economic

challenges facing Nigeria. It is a sustained increase in the general price level of goods and

services in a country over a long period of time. Nigeria, with a population of about 100

million, remains highly dependent upon agricultural sector, with approximately 70 percent of

13
her population still living in rural areas and deriving their livelihood from the land. Nigeria’s

contribution to GDP has been decreasing for over two decades and the position of the country

has shifted from self sufficiency in agricultural production in the early 1960s to now being a

major importer of food and raw materials for domestic industries. Ideally, inflation in Nigeria

remains a debated economic issue.

The average inflation was relatively low at 5.01% during the period of early 1960s up to the

year 1972. But when the economy was assessed on an annual basis, however, rising prices

became a cause for concern for the then military government when in 1969 the inflation rate

hit double digits at 10.36 percent. Nigeria government’s concern seems to have been justified

by the fact that Nigeria was experiencing double-digit inflation for the first time, in the face

of a raging civil war whose end was not then in sight. In reaction, government imposed a

general wage freeze for a period of one year, apparently aware of possible opposition by

labour unions. Price control measures were introduced with the official promulgation of the

Price Control Decree in Nigeria from the early years of 1970 to 1975.

For instance, oil in Nigerian economy has been factored as hindrance to its economic

progress as it created booming mode of economic management. The oil boom of 1970s,

concomitant of soaring international oil prices, resulted in substantial resources by way of

government revenue and foreign exchange earnings along with expansion of public sector

expenditure to hastily develop productive capacity of economy and improve living standards

of people (1993). In early 1980s there was near total collapse of international oil market. The

dips in international oil prices aggravated the problems of the Nigerian economy such as

foreign exchange earnings declined and credit were dishonoured (1993).

Inflation had its bitter toll on the Nigerian economy and monetary and fiscal policies among

others have been deployed to arrest it. Central Bank of Nigeria has statutory responsibility of

formulating and implementing monetary policy with emphasis on price stability. Inflationary
14
trend has been cyclical since mid 1970s peaking at various times like during 1975, 1990,

1996 and 2006 as the major factor has been responsible for inflation in Nigeria is poor fiscal

management by the government. However, inflation since 2006 has reduced to single digit of

8.4 percent on the average unlike the double digits experience since the 1980s. In addition,

during the year 1970 broad money supply have stood at N 949.9 million and have risen to

N23, 818.6 million during the year 1985. Then, at near end of 2006, money supply stood at

N3 190.9 billion. There have been astronomic growth rate as there is no doubt of Nigeria

presence of inflationary factors most ideally if output growth is not proportional to the

economic status.

There are factors responsible for certain growth in the monetary aggregates is the

monetization of foreign reserves, inadequate financial policy framework, and poor

institutions among others. Aside, prior to the end of 2006 and early 2007, Nigeria have

become one of highest indebted nations, owing huge sums of money to various international

creditors. The exit from certain class of countries was secured in 2006 and sealed in 2007

after the debt cancellations and subsequent pay off of outstanding debts to the Paris Club

among other creditors. The 2006 Nigerian Core Welfare Indication survey by the National

Bureau of Statistics showed that the dependency ratio defined as total number of household

members aged 0 to 14 years and 65 years and above to the number of household members

aged 15 to 64 years, was 0.8 as implied reflection of the high population growth rate of

Nigeria.

However, during 2006 exchange rate has been stable with convergence of rates among the

various segments of the foreign exchange markets as it assumes the official market and or

Interbank Foreign Exchange Market, Bureau de Change and Parallel Markets in Nigeria.

Presently, in the year 2008, the Nigeria’s naira exchanges for an average of N117/US $1 as

15
against N281.7/US $1 in the parallel market in 1995 and implied that the naira has been

appreciating over the United States dollar as other currency witnessed depreciation against

the naira.

Table 5: Trend in Inflation Rates in Nigeria

Inflation, consumer
Inflation, consumer price index (%
Years price index (% change) Year change)
13.76 7.36
1970 1990
16.00 13.01
1971 1991
3.46 44.59
1972 1992
5.40 57.17
1973 1993
12.67 57.03
1974 1994
33.96 72.84
1975 1995
24.30 29.27
1976 1996
15.09 8.53
1977 1997
21.71 10.00
1978 1998
11.71 6.62
1979 1999
9.97 6.93
1980 2000
20.81 18.87
1981 2001
7.70 12.88
1982 2002
23.21 14.03
1983 2003
17.82 15.00
1984 2004
7.44 17.86
1985 2005
5.72 8.24
1986 2006
11.29 5.38
1987 2007
54.51 11.58
1988 2008
50.47
1989 2009 11.5
Source; World Development Indicator 2008(WDI)

16
Table 5 above shows the trend in inflation in the country using the inflation rate to measure

how the volatility in inflation as being as far back as 1970. We would see that Nigeria

experienced its highest share of inflation between 1975-1983 and 1992-1996; during this

periods inflation rate on the average was 18.72 and 52.18% respectively.

2.2.4 Trend in minimum wage in Nigeria

This is the lowest hourly, daily, monthly or annually remunerations that employers may

legally pay to workers. It is the lowest wage at which workers may sell their labour. Although

it has its benefits and drawbacks but we are more concerned about its drawbacks which is that

it increases graduate unemployment due to already increased cost of labour incurred by firms

both in the public and private sector, thereby reducing their labour absorption capacity.
ILO has over the year adopted several instruments in setting standards on the principle and

methods of minimum wage regulation. The first of such standard was the minimum wage-

fixing machinery convention [No.26] of 1928 {which laid down certain principles and rules

for the application of minimum wage fixing machinery in those trades including

manufacturing and commerce, in which no such mechanism was available and wages were

exceptionally low}. Several other conventions on minimum wage were later adopted such as

the wages, hours of work and manning (sea) conventions [No.76], prescribing the actual

amount of an international minimum wage for seamen and making provision for adjustment

of their basic wage and the social policy (non- metropolitan territories) convention (No.82),

adopted in 1947 which set forth the principles and methods that should be observed in fixing

minimum wages in dependent territories. There is also the Minimum Wage Fixing Machinery

(agriculture) convention [No.99] which was adopted in 1951 to address the special problems

of wage policy in agriculture. Later in 1970, the ILO convention 131 on minimum wage

fixing, which is the principal ILO convention on Minimum Wage Fixing, was adopted. In

Nigeria, a new wage is not enforceable until Nigerian national assembly amends the national

minimum wage act. It is therefore important that the executive arm of government fast track

17
the submission and passage of an amendment to the former existing minimum wage act to

give effect to the consensus reached.

Between 1945 when workers staged the famous 45 days general strike for a Cost of Living

Allowance and 2007, when the demand won by workers for a 25% general wage through the

Ernest Shonekan Wage Consolidation Committee was arbitrarily cut down to 15% by

Obasanjo, workers have struggled at 15 times to have wages improved and a national

minimum wage legislated upon. But the struggles produced notable victories for workers and

the NLC, it was usually the case that:

1. The National Minimum Wage was always set below the minimum wage needed by

workers to survive. Because of the inadequacy of the wage, some state governments

elected on their own to pay more. Even then, there were also some

2. State governments that pay less than the stipulated national minimum wage. The

result was that workers always could not cope.

3. The wage reviews were largely unstructured; sometimes negotiated wages were

changed by government through circulars; at other times, government effected

unilateral wage increases.

4. Agreements reached with government were sometimes distorted at implementation or

not implemented at all by government. For example, the 2000 Wage Review

Agreement provided for a further 25 per cent wage increase for workers with effect

from May 1, 2001, and 15 per cent wage increase with effect from May 1, 2002. This

was not implemented. Following industrial dispute over this a 12 and 1/2 percent

increase rather than the 35 per cent agreement in 2000, was signed in 2003. But in the

end, only an increase of between 4 and 12 and 1/2 per cent was implemented by the

Federal Government. Although the Shonekan Committee was set up against this

background and recommended a 25% increase in salaries, Obasanjo unilaterally

18
 implemented a 15% increase in 2007. Government also failed to abide by the

timeframes set out for subsequent negotiations with workers.

5. Workers always had to fight to get government to agree to collective bargaining even

when the procedure was agreed in previous negotiations. Today, workers find that

they have to fight yet again to get government to agree to negotiate a new National

Minimum Wage and a general upward review of wages.

Table 6: Trend in Minimum Wage in Nigeria

YEAR AMOUNT (N = NAIRA) SOURCE

1981 125 National minimum wage Act 1981

1990 250

1998-1999 3000 Under the military dictatorship of General

Abdulsalami Abubakar

2000 5,500 Act cited in National Minimum Wage

(amendment) act 2000. Signed into law on the

7th June 2000 by Chief Olusegun Obasanjo

GCFR, President of the Federal Republic of

Nigeria.

2000 7,500 Act cited in National Minimum Wage

(amendment) act 2000.

2O11 18,000 Act cited in national minimum wage

(amendment) act. Signed into law by Dr

Goodluck Ebele Jonathan GCFR, President of

the Federal Republic of Nigeria.

Table 6 above shows a brief summary of the amendments that have occurred in the National

Minimum Wage in Nigeria.

19
2.2.5 Trend in Lending Interest Rate in Nigeria
Figure 1: Trend in lending interest rate in Nigeria (1970-2008)

Source; World Development Indicator 2008 (WDI)

Figure 1 above shows that the 1970s saw different interest rates for different sectors through

to mid 1980s. The preferential interest rates were based on the assumption that the market

rate, if universally applied, would exclude some of the priority sectors. Interest rates were,

therefore, adjusted periodically to promote increase in the level of investment in the different

sectors of the economy. For example agriculture and manufacturing sectors were accorded

priority, and the commercial banks were directed (by the central bank) to charge a preferential

interest rates (vary from year to year) on all loans and advances to small-scale industries.

Currently, the government of Nigeria is pursuing a market-determined interest rate regime,

which does not permit a direct state intervention in the general direct of the economy. The

market demand and supply is the driving force of resource allocation. Thus current formal

lending policy does not give special interest rate concession to the manufacturing sub-sector.

The interest on loans is based on the risk factor of the subsector that the loan is meant for.

20
Average nominal lending rate rose from 8% in 1973-1979 to 25.3 per cent in 2002 and the

corresponding inflation rates were 16.8 % and 9.3% respectively. Real lending rates were

negatives in most of the years except 2002, which is a reflection of high inflation rates. This

shows that high inflation rate is a contributing factor to high lending rates in Nigeria

(Adebiyi, 2001).

Similarly, bank credit to the private sector (expressed as a percentage of GDP) declined from

15.2 % to 2.6% between the periods 1973-79 and 1994-98 respectively and later rose to 11

per cent in 2002. Similar trends were also revealed using other indicators such as

manufacturing capacity utilization, share of manufacturing in GDP, growth rate of

manufacturing (in Percentage). It can be said that manufacturing performance in Nigeria

during the deregulation era was not encouraging. The rather high lending rate, coupled with

the general perception of manufacturing enterprise lack of the traditional bank collateral

requirement, meant that the manufacturing sector access to formal bank loans is limited. This

explains the reason for the creation of special financial schemes for the growth and

development of the manufacturing sub-sector in Nigeria. The evaluation of these institutions

revealed that most of them were faced with problems arising from weak institutional

arrangement and corrupt practices (Adebiyi, 2004).

Commercial Banks in Nigeria are highly liquid but they perceive that lending to the

manufacturing sub-sector is very risky and increasing credit to the sector is not justified in

terms of risk and cost. The high risk arises from difficulties in obtaining information on a

firm’s true financial condition and performance coupled with weak and inefficient institutions

makes it difficult for banks to enforce contracts. Also, the business environment in Nigeria is

very risky and uncertain coupled with poor infrastructural facilities necessary to bring about

substantial reduction in the risk associated with financing an extremely traumatized economy.

21
Consequently, banks charge high interest rates, demand high levels of collateral and make

few loans of more than a year in term (World Bank, 2002).

2.2.6 Trend in the Gross Domestic Product of Nigeria

The Nigerian economy has had a truncated history. In the period 1960-70, the Gross

Domestic Product (GDP) recorded 3.1 per cent growth annually. During the oil boom era,

roughly 1970-78, QDP grew positively by 6.2 per cent annually - a remarkable growth.

However, in the 1980s, GDP had negative growth rates. In the period 1988-1997 which

constitutes the period of structural adjustment and economic liberalisation, the QDP

responded to economic adjustment policies and grew at a positive rate of 4.0. In the years

after independence, industry and manufacturing sectors had positive growth rates except for

the period 1980-1988 where industry and manufacturing grew negatively by - 3.2 per cent

and - 2.9 per cent respectively. The growth of agriculture for the periods 1960-70 and 1970-

78 was unsatisfactory. In the early 1960s, the agricultural sector suffered from low

commodity prices while the oil boom contributed to the negative growth of agriculture in the

1970s. The boom in the oil sector lured labour away from the rural sector to urban centres.

The contribution of agriculture to GDP, which was 63 percent in 1960 declined to 34 percent

in 1988, not because the industrial sector increased its share but due to neglect of the

agricultural sector. It was therefore not surprising that by 1975, the economy had become a

net importer of basic food items. The apparent increase in industry and manufacturing from

1978-1988, was due to activities in the mining sub-sector, especially petroleum. Capital

formation in the economy has not been satisfactory. Gross domestic investment as a

percentage of GDP, which was 16.3 per cent and 22.8 per cent in the periods 1965-73 and

1973-80 respectively, decreased to almost 14 per cent in 1980-88 and increased to 18.2 per

22
cent in 1991 -98. Gross National Saving has been low and consists mostly of public savings

especially during the period 1973-80. The current account balances before official transfers

are negative for 1965-73, 1980-88 and 1991-98.

2.3 Efforts to Reduce Unemployment in the Past and Present

The previous efforts of the government in tackling unemployment which are referred to as

Poverty and Unemployment Eradication Programmes include the following: National

Directorate of Employment (NDE), encouragement of small scale industries, creating

employment opportunities in schools/ministries. Operation Feed the Nation (OFN) and Better

Life for Rural Area, and so on. Upon reviewing of Nigeria’s import substitution development

strategy and its implementation. Egwaikhde (1997) found that the strategy depleted and

aggravated Nigeria’s problem of balance of payments. This is because the strategy demanded

increased foreign inputs, technology and expertise for production.

Also Onimode (1982) found out that the employment generating ability of the import

substitution industrialization strategy is rather too negligible.

Finally, one can concludethat Nigeria has been wasting time and other resources pursuing

ITT for many years since her independence. It is a fact that ITT cannot promote

industrialization in Nigeria or any less developed country for that matter and also it cannot

generate learning and employment opportunities because it is a passive, corruption and

poverty promoting process (Aiyelari and Oyefemi , 2009).

CHAPTER THREE

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

3.1 Literature Review

23
The literature review phase of this study would involve examining and reviewing existing

literatures which deal with the determinant factors of graduate unemployment. Under this

chapter, we shall consider and investigate existing theories and their empirical findings. This

is needed in order to fully understand the preceding findings of authors, worldwide, who have

carried out researches of a similar nature.

3.1.1 Conceptual Issues and Definition

The word unemployment is nothing new anywhere in the world. Unemployment in one form

of the other has always existed; one of which is Graduate Unemployment. The National

Bureau of Statistics (NBS) defines unemployment as the proportion of labour force that is

available for work but did not work for at least 39 hours in the week proceeding the survey

period (Central Bank of Nigeria Annual Report, 2008). The CBN report went further to say

that those individuals who do not fall into either of these groups, such as retired people and

discouraged workers, are not include in the circulation of the labour force. Aboidun (2010)

regards unemployment as the proportion of labour force, expressed, therefore, refers to the

unemployment among people who have graduated from tertiary institutions and who are

qualified to work but do not work at any given point in time. In Nigeria context, graduate

unemployment refers to a situation where tertiary institution graduates, after finishing their

National youth Service Corps (NYSC), and is willing and able to work but fail to secure jobs.

According to Elegbede, Unemployment can be conceived as the number of people who are

unemployed in an area, often given as a percentage of the total labour force. Economists are

unable to agree on the causes or cure for unemployment. The essence of the Keynesian

explanation is that firms demand too little labour because individuals demand too few goods.

The Classical view was that unemployment was voluntary and could be cleared by natural
24
market forces. Neo-Classical theory is that there is a natural rate of unemployment, which

reflects a given rate of technology, individual’s preferences and endowments. With flexible

wages in a competitive labour market, wages adjust to clear the market \and any

unemployment that remains is voluntary. The latter view was that held by Milton Friedman

and strongly influenced government policy in the early 1980’s, but without success. There is,

of course, no simple explanation of unemployment and no simple solution.

According to Aiyelari and Oyefemi (2009), unemployment refers to a situation when factors

of production especially labour are not engaged at all or not fully engaged in economic

activities. People are classified as unemployed, if they all of the following criteria: They had

no employment during the reference period of time; they were available for work at that time;

and they made specific efforts to find employment sometimes during the reference period of

time. Persons laid off from a job and expecting recall are counted as unemployed.

According to Marglin (1991), the technologically advanced nations (TANs) had been

enjoying economic boom from the eighteenth century. The 1950s and 1960s were specifically

described as the “Golden Age” of capitalism. The Golden Age was characterized by full

employment, high productivity and low inflation. It has been observed that the third world

war nations (TWNs) have never enjoyed any economic boom. Nigeria as a country has never

enjoyed any economic boom characterized by full employment, high productivity and low

inflation. Rather, Nigeria has been facing the co-existent problems of Mass Unemployment,

low productivity and high inflation for more than forty year ago. In recent years, Nigeria has

also been facing the problems of high crime rate, mass poverty (abject poverty for that

matter), high indebtedness and high debt accumulation tendency, brain drain, decaying

infrastructure and above all political instability, among others (Ogbimi, 1999).

25
According to Standing (1983) and Fajana (2000) unemployment can be described as the state

of worklessness experienced by persons who are members of the labour force who perceived

themselves and are perceived by others as capable of work. Unemployed people can be

categorised into those who have lost their jobs thereby seeking re-entry into labour market.

Under the ILO approach all people aged 16 and over are classified into one of three states: in

employment, ILO unemployed, or economically inactive. ILO unemployed are those who

either

 Are out of work, want a job, have actively sought work in the last four weeks an are

available to start work in the next two weeks or

 Are out of work, have found a job, and are waiting to start it in the next two weeks.

Anyone who carries out at least one hours paid work in a week, is on a government supported

training scheme, does unpaid work for a family business, or is away temporarily from a job is

counted as being in employment. Those who are out of work but do not meet the criteria for

ILO unemployment, are defined as economically inactive. The unemployment percentage

expresses numbers of ILO unemployed as a percentage of the total number of economically

active.

The recorded figures for unemployment may significantly understate or overstate the

numbers who are actually willling to work at the exisiting set wage rates. Overstatement

arises because measured unemployment includes people who are not interested in work but

who say they in order to collect unemployment unemployment benefits. Understatement

arises because of voluntary withdrawal from the labour force of people who would like to

work but have ceased to believe that there are any suitable jobs available; although these

people may not be measured in the unemployment figures, they are unemployed in the sense

26
that they would accept a job if one were available at the going wage rate.people in this

category are referred to as “discouraged workers”. They have voluntarily withdrawn from

labour force, not because they do not want to work, but because they believe that they cannot

find a job given current labour market conditions (Lipsey & Chrystal, 2007).

On the face of it, the cause of employment seems clear: too many workers are chasing too

few jobs. Yet this simple phenomenon has presented a tremendous puzzle to economists for a

long period of time.

3.1.2 Review of Theoretical Arguments

Classical Theory of employment

The classical economists always believed in the existence of full employment. Their view is

characterized by perfect competition and economic efficiency with very many “atomistic”

producers and consumers, none of whom is large enough to influence prices or wages

(Todaro, 1980). The level of employment and the “wage rate” are determined simultaneously

with all other prices and factor users in the by the forces of demand and supply.

According to this view, unemployment will occur if there is rigidity in the wage structure and

interference in the workings of the free market system in the form of trade union legislation

and minimum wage legislation.

The limitation of this model is that it offers little insight into the realities of wage and

employment determination of the 3rd world countries. Wage rates are typically not flexible

downward, since they are largely determined by institutional forces including trade union

pressures, legislated government salary scales and Multinational Corporations hiring

practices.
27
There are many more labourers seeking unemployment at the going wage than there are jobs

available such as involuntary unemployment (Jhingan, 1975).

The New Classical Approach

Major characteristics under this, is that an agent continues to optimize and markets continue

to clear; that is, there can’t be no level involuntary unemployment. New classists seek to

explain unemployment as the outcome of voluntary decisions made by rational people who

are choosing to do what they do, including spending time out of work in contradiction to the

traditional Keynesian who assume that unemployment is a sign of market failure; associated

with non-market clearing prices/wages and that a high proportion of unemployment is

involuntary.

New classical explanation in employment assumes that they are caused by fluctuations in the

willingness of people to supply their labour as shown in figure 2 below.

Figure 2: {New Classical Approach} - Showing fluctuations in the willingness of people

to supply their labour

S2

S0

S1
Wage Rate

28
 W2

W0

W1

D0

Q2 Q0 Q1

Quantity of labour (employment)

If the supply curve of labour fluctuates cyclically, this will lead to cyclical variations in

employment.

This explanation has two problems.

1. It implies that wages will tend to rise in slumps and fall in booms, which isn’t what

we observe.

2. It predicts that there will still be no systematic cyclical involuntary unemployment,

since labour market always clear, leaving everyone who wishes to work actually

work.

Another line of the new classical explanation lies in errors on the part of workers and

employers in predicting the course of the price level over the business cycle.

Now suppose government relaxes monetary policy to permit money supply to increase in

such a way inflation expectations are unaffected. Increased money supply leads to an increase

in desired expenditure on all commodities. Demand and prices rise; since they are assumed to

be competitively determined.

29
Individual decision makers seeing their selling price go up mistakenly interpret the increase

as a rise in their own relative price (expecting the over all inflation rate to be zero). Firms will

produce more and workers will work more because both groups think they are getting an

increase in relative price for what they sell.

Thus total output and employment rise (This assumes that producers and consumers are not

aware of the changes in the prices of what they buy).

When both groups eventually realise that their own relative prices are in fact unchanged,

output and employment fall back to their initial levels. The extra output and employment

occur only while people are being fooled.

All new classical explanations assume that labour markets clear and then look for reasons

why employment fluctuates. They all imply, therefore, that people who are not working have

voluntarily withdrawn from the labour market either because this is their optimal decision or

because they have misinterpreted market signals (Lipsey and Chrystal, 2007).

The New Keynesian Agenda

They believe that people read market signals more or less correctly but react in ways that

don’t cause market to be in equilibrium at all times. So they believed that the unemployed are

involuntarily unemployed.

The new Keynesian agenda came as a result of those who are unhappy to assume no

involuntary unemployment therefore seek to explain why there could be a labour market

equilibrium in which there is an excess supply of labour at the going wage.

30
Most attempts to explain involuntary unemployment examine the forces that determine wage-

setting and living decisions in what are thought to be more realistic labour market

institutions. They look for reasons (consistent with optimizing behaviour by participants) why

wages do not respond quickly to shifts in supply and demand in the labour markets.

So quantity supplied and quantity demanded may not be equated for extended periods of time

even though people are behaving rationally. Labour markets will then display unemployment

during recessions and excess demand during booms; which can be seen in figure 3 and 4

below.

Figure 3: {New Keynesian Agenda} – Showing when wage is responding quickly to shifts

in demand and supply in the labour market

SO
Wage Rates

W2

W0

W1 D2

31
 D0

D1

Q1 Q0 Q2

Quantity of labour (employment)

Figure 4: {New Keynesian Agenda} –Showing when Wage is not responding quickly to

shifts in demand and supply in the labour market

SO

W2 ’
Wage Rates
Rates

W0
Wage

W1’ D2

D0

D1

Q1 Q1’Q0 Q2 Q2’ Quantity of labour (employment)

These theories start with the everyday observation that wage rates do not change every time

demand or supply shifts. When unemployed workers who are looking for jobs, they do not

knock on employers doors and offer to work at lower wages than are being paid to current

workers. Instead, they answer job advertisement and hope to get the jobs offered and often

are disappointed. Similarly employers seeing an excess of applicants for few jobs that are

available, do not reduce wages of their current workers until potential applicants for a job

have all lost interest (Lipsey and Chrystal, 2007).

Two Disturbing Paradoxes

32
 According to (Oladeji, 1987) the classical economic theory would predict eventual

elimination of graduate unemployment through the workings of the market system. Wages

under this framework are considered generally flexible and in the absence of any institutional

factors such as union wage policy or minimum wage legislation, all forms of unemployment

are temporary, frictional or voluntary.

Applying this prediction in the education market suggests that the problem is a transient

problem, for instance, the argument that supply creates its own demand. In other words, that

the demand for education would adjust itself automatically to needs of the economy.

Four conditions under which this could hold are:

1. The life time salary differential for graduates would need to reflect exactly the

marginal productivity of higher education.

2. The cost of higher education would need to be borne exclusively by the student.
3. Potential students, in deciding whether to stay on at school and enter higher

education, would need to act on an assessment of life time salary prospect in relation

to costs.
4. This assessment would need to be correct.

But it can be evidently said that the present education market nor the labour market in Nigeria

can be characterised thus cause it’s being seen to be competitive. It is characterized by rigid

public pay structure, poor information flow and restricted labour mobility. For these

imperfections among others, the unemployment problem might not automatically take care of

itself without any special efforts on the part of government to reduce it. The process of

tackling graduate unemployment in LDC’s is usually bedevilled with some intriguing

paradoxical situations. They appear disturbing as automatic adjustment to equilibrium (or

eventual elimination of the surplus skilled manpower) is made virtually impossible. These

two paradoxical situations are;

33
 1. Persistence of high demands for higher education (and consequently increased supply

of educated manpower) despite graduate unemployment, this is referred to as the

Demand-Unemployment Paradoxes.
2. There is the rapid expansion of educational facilities by governments to meet the

growing demand for education despite the unemployment problem or when such

higher education policy is tantamount to over investment in university education. This

is referred to as the Supply-Unemployment paradox.

These two paradoxical situations are considered in greater details.

Demand-Unemployment Paradox

The demand as expressed by potential students and their families (private demand for

education) is emphasized in this paradox. Economic rationality requires that as the wage rates

or expected earnings decline the demand for education should fall. Some explanation is

therefore required, if despite graduate unemployment, there exists a persistent high demand

for education.

One possible interpretation of this situation is the argument that the demand for education is

not for the sake of employment but that it is a kind of consumption good, and this demand

would persist as long as the psychic satisfaction or no-pecuniary benefits payoff the cost. This

view is rather unsustainable given the level of development or living standards of the LDC’s.

According to Edwards and Todaro (1973), a country like Nigeria cannot afford the luxury of

treating education as consumption good. An average parent looks at education as an

investment from which some returns are expected.

There are other interpretations which appear more plausible as they acknowledge the

investment aspect of education as of utmost importance and at the same time see education a

facilitating access to the modern or wage employment sector. Edwards and Todaro (1973), for

34
instance explain the demand-unemployment paradox by means of the cost-benefit

framework.

The demand for education is assumed to be jointly and severally influenced by the urban-

rural wage differential, the probability of obtaining modern sector employment, the direct

private costs and the opportunity cost of education. A scenario, supposedly describing labour

market situation in the LDC’s, is also advanced by Edward and Todaro. The hypothetical

economy is characterized by:

1. A large wage differential; salary of a primary school leaver doubles that of a non-

primary graduate in the rural or traditional sector economy.

2. Selection for job is by level of education: at the going wage rate. Secondary school

leavers are preferred to primary school graduates even if the former are over-qualified

for the job.

3. Wages are institutionally determined with the trade union actively pushing up the

going wage level of education attainment of job holders.

4. Schools are virtually free and the government bears the bulk of the students cost at

each level of education.

What emerges out of this is what they refer to as the educational displacement phenomenon.

It is a process in which, by means of education, access to the modern sector for employment

is secured and to safeguard being displaced by the educated ones, the next level of education

is demanded as a terminal point or as an intermediate stage.

Thus, it would therefore seem that the demand for higher education will, in most cases, be

prompted by unemployment at lower levels of education. Although the analyses relates to the

primary and secondary school graduates, the displacement process, as argued by authors, will

invariably make unemployment more visible among the highly educated persons.

35
Granted that the process culminates in university graduate unemployment, the paradox will

be said to have been established if the situation still engenders a strong demand for university

education. And for this to hold in the context of the displacement hypothesis, first degree

university education would probably cease to be terminal but rather an intermediate stage for

post-graduate education. The rush for Masters Degree in India provides a case point. The

underlying motivating force for this trend may be consequence of job upgrading by

employers and (or) the desire to safeguard being displaced out of the “graduate labour

market” by the more educated ones and finally poor employment prospect for university

graduates ( first degree holders).

Another interpretation of the demand-unemployment paradox relates to the private rate of

returns to university education. A number of reasons could be adduced for the attractive rates

of returns to university education after discounting for the unemployment problem, namely

unemployment at lower levels of education (and hence low opportunity cost of university

education), heavy subsidy of university education, attractive earnings of university graduates,

etc. So, on economic grounds one may find that for quite some time the pressure of demand

for university education may continue to mount despite the unemployment problem.

According to Fields (1974) theoretical exposition of the strong demand for education in the

LDC’s provides yet another economic interpretation of the demand-unemployment paradox.

The author considers two groups of workers: the “educated”- those with a given level of

education, and the “uneducated”- workers with less education.

Furthermore, the analysis assumes that two types of jobs exist in the modern sector of the

economy: skilled jobs which are meant for the educated ones and the unskilled jobs which are

meant for the uneducated. However, if they also desire, the educated workers may take up an

unskilled job whereas the uneducated can only choose between urban unskilled jobs and jobs

36
in agriculture. And unlike in the Edward and Todaro analysis, wage received depends on the

job rather than qualifications of job holder.

The demand for education in this instance serves as a means of obtaining skilled jobs and

whether education received enhances the ability to displace the uneducated workers or not

depends on the labour market situation. Three market situations are conceivable, namely:

1. Bumping Situation: Here educated workers maximize their expected income by

either taking up skilled jobs if vacancies exist or in the absence of any, they may enter

the unskilled job market to displace the uneducated workers. It is assumed in this

market situation that employers have preference for educated person. However an

educated person entering the unskilled job market will have to accept a lower pay than

his normal salary in the skilled job market.

2. Labour Market Stratification: The stratification in this type of market makes

displacement a rare event. It restricts job choice of educated workers to the skilled

jobs. Such stratification may result from the high expectations of the educated

persons. And so, by their own volition exclude themselves from the unskilled jobs. On

the other hand, it would be in form of refusal by employers to hire the educated

person for unskilled jobs. Employers may fear that employing educated workers in the

unskilled jobs could lead to low morale, greater absenteeism and consequently low

productivity.
3. Pooling Situation: This is when the educated can enter the unskilled job market, but

for which their educational attainment does not give them an edge over the

uneducated in terms of getting the unskilled jobs. As compared to the bumping

situation, the fate of educated workers in this type of market is less secure; the

educated and uneducated persons have to compete for the unskilled jobs.

37
Within the cost-benefit paradigm, the demand for education (D) is assumed to be functionally

related to the present value (PV) or alternatively, the rate of return to education. This is,

D = f (PV)

And that dD/d (PV) >0

Assuming the size of the educated labour force in the country to be (L1) and the demand for

the labour force remaining the same; an increased supply of the educated labour force will

cause a decline in the expected earnings of an educated worker and consequently the PV.

Thus PV = g (L1)

D (PV)/dL1<0

It will then follow that:

D = h (L1)

And that dD/dL1<0

However, by means of mathematical manipulation, Field arrives at the paradoxical situation

in which it is claimed that over a certain range ( herein referred to as “Fields”-“demand

trap”), an increased supply of educated labour force, even though adding to the educated

unemployment problem, would not reduce the demand for education. The paradoxical

situation can be explained within the bumping and pooling market situations since

analytically the two are the same. In terms of a researchable proposition the postulate can be

seen as asking for the responsiveness of demand (or present value) education to increased

supply of educated labour force. An empirical investigation into this proposition assists in

formulating the appropriate policies towards solving educated unemployment problem. An

38
important implication of confirming the Field-demand trap is that merely altering parameters

which enter into individual’s computation of private costs and benefits neither may nor

necessarily influence the demand for education and consequently the educated unemployment

problem cannot b solved by such means.

Supply-Unemployment Paradox

Economic reasoning requires that policy makers should allocate expenditure in such a form

that it takes cognisance of the needs of the economy. And as a public investment proposition

such allocation should be such that:

1. Social rate of returns and private rate of returns to education are equalized;
2. Social rates of returns for all tiers of an educational system are also equalized. The

observation is that in the LDC’s, the private rate of return and there appears to be

overinvestment in higher education. For instance the social returns to education in

Africa have been reported to be 29 percent, 17 percent and 12 percent respectively for

primary, secondary and higher education.

Contrary to expectations there continues to be rapid expansion of higher institution in

these countries in a bid to meet the growing demands for higher education even at risk

of graduate unemployment.
The explanation here may not be far-fetched given the politics of educational

investment in LDC’s.
It must be remarked, however that the implied economic rationality in the above

propositions can only be sustained under the dictum of say’s law, namely: that supply

creates its own demand. In other words, that educated manpower has capacity to

create demand for its own services. Again, this philosophical stance would take us

back to the classical argument wherein unemployment is analysed as a passing

phenomenon.

39
 Furthermore, if the content of education in LDC’s is anything to go by, it is suspicious

if the education received is as “developmental” to the extent of making graduates

more of job-creators rather than job-seekers.

3.1.3 Theoretical Framework

The Natural Rate of Unemployment

Assumption:

Nominal wage depends on the actual price level “p” rather than on expected price level “pe”.

Under this assumption wage-setting and price-setting determines the equilibrium rate of

unemployment (Blanchard, 2009).

The Wage-Setting Relation

From the above assumption, which characterise wage determination as:-

W= P f (u, z)

We can divide both sides by price level;

W/P= f (u, z)

(-, +)

Wage determination implies a negative relation between the real wage, W/P, and the

unemployment rate, U: Wage chosen by wage setters. The intuition is clear: The higher the

unemployment rate, the weaker the position of the workers in bargaining and lower the real

wage will be.

This relation between the real wage and the rate of unemployment can be called Wage-Setting

relation (Blanchard, 2009).

40
The Price-Setting Relation

This examines the implication of price determination on the rate of unemployment.

P= (1+U) W ---------------------- equation 1

Where U is the mark-up of the price over the cost (π). If goods market were perfectly

competitive, U would be equal to zero and the price, P, would simply equal the cost, W. In

the instance that they are not competitive and firms have market power, U is positive and

price, P, will exceed the cost, W, by the factor to (1+U).

If we divide both sides of the price determination equation, by nominal wage, we get

P/W= 1+U ---------------------- equation 2

The ratio of the price level to the wage implied by the Price-Setting behaviour of firms equal

1 plus the mark-up price. Now lower both sides of this equation to get the implied real wage.

W/P= 1/1+U

Note what this equation says: price-determination decisions determine the real wage paid by

firms. An increase in the mark-up leads firms to increase their prices, given the wage they

have to pay equivalent, it lead to increase in the real wage.

Example: Suppose the firm you work for increases its mark-up and therefore increases the

price of its product your real wage does not change very much: You are still paid the same

nominal wage and the product produced by the firm is at most a small part of your

consumption basket. Now suppose same happens with all firms in the economy, all prices go

up due to increased mark-up set by firms, the lower your real wage will be.

Natural rate of unemployment is the unemployment rate such that the real wage chosen in

wage –setting is equal to the real wage implied by price-setting (Blanchard, 2009).

41
 Figure 5: Showing wage–setting relation and price-setting relation
Real Wage W/P

PS

1/1+u A Price-Setting Relation

WS

Wage-Setting Relation

UN
Unemployment Rate, U

Figure 5 above shows the equilibrium real wages and unemployment which is given as point

A, with equilibrium unemployment rate given as UN, which is also known as “Natural Rate of

Unemployment

The Phillips Curve

42
In the 1950s Professor A.W. Phillips (1914-75) was doing research on stabilization policy at

the London School of Economics. He was interested in the question of the speed with which

input prices responded to excess demand and excess supply. To study this question, he looked

at the rate of change of money wage rates in the United Kingdom over a period of 100 years.

By relating these wage changes to level of unemployment, he discovered a remarkable

relationship that became known as the “Phillips Curve”.

“When the demand for a commodity or service is high relatively to the supply of it, we expect

the price to rise, the rate of rise being greater the greater the excess demand. Conversely

when the demand is low relative to the supply, we expect the price to fall and the rate of fall

being greater the greater the deficiency of demand. It seems plausible that this principle

should operate as one of the factors determining the rate of change of money wage rates,

which are the price of labour services.

When the demand for labour is high and there are very few unemployed we should expect

employers to bid wage rates up quite rapidly, each firm and each industry being continually

tempted to offer a little above the prevailing rates to attract the most suitable labour from

other firms and industries. On the other hand it appears that workers are reluctant to offer

their services at less than the prevailing rates when the demand for labour is low and

unemployment is high such that wage rates fall only very slowly. The relation between

unemployment and the rate of change of wage rates is therefore likely to be highly non-

linear” (Phillips, 1958).

This shows that a relationship exist between unemployment, supply and demand of labour.as

put by Phillips, there is an inverse relationship between unemployment rate and wage rates.

Also there is a positive relationship between demand for labour services and wage rates

which in turn means demand for labour has an inverse relationship with unemployment.

43
Therefore it can be assumed based on this theory that if demand for labour is kept on an

increasing pace with its supply, unemployment (graduate unemployment) would be kept at

minimal.

“Thus in a year of rising business activity, with the demand for labour increasing and the

percentage unemployment decreasing, employers will be bidding more vigorously for the

services of labour than they would be in a year during which the average percentage

unemployment was the same but the demand for labour was not increasing. Conversely in a

year of falling business activity, with the demand for labour decreasing and the percentage

unemployment increasing, employers will be less inclined to grant wage increases, and

workers will be in a weaker position to press for them, than they would be in a year during

which the average percentage unemployment was the same but the demand for labour was

not decreasing” (Phillips, 1958).

Phillip in his second statement says that there is a relationship between level of business

activities, demand for labour, supply of labour and unemployment rate. Thus showing that

there is a positive relationship between level of business activities and demand for labour,

therefore reducing unemployment rate. If negative volatility in business activities is kept at

minimum and business activities are stabilized and rising, then demand for labour services

would increase, therefore reducing unemployment rate (graduate unemployment).

Fluctuations in business cycle are caused by inflation rate and interest rate (lending interest

rate and deposit interest rate).

According to Lipsey and Chrystal (2007) Phillip curve relates the amount of unemployment

to the rate of change of money wages. Letting ∆W stand for the change in money wage rate

from one year to the next and W for the level of wage rates in the first year, the equation of

Phillips curve is
44
 (∆W/W)= f (U)

Figure 6: Phillip curve

Annual rate of change of money wages (%)

20

15

10

Phillips Curve

0
2 4 6 8 10 12 14 16
Unemployment %

An increase in unemployment by four percentage points, from 8 to 12%, will lower wage

inflation from 3 to 2%, while a reduction in unemployment by 4%, from 8 to 4%, will raise

wage inflation from 3 to 14%.

According to Blanchard (2009) phillip curve shows the relation between inflation, expected

inflation and unemployment.

Πt= Πte-α (Ut-Un)

Inflation depends on expected inflation and on the deviation of unemployment from the

natural rate of unemployment. It can be further simplified as seen below.

45
Πt- Πte= -α (Ut-Un)

Unemployment below the natural rate leads to an increase in inflation; Unemployment above

the national rate leads to a decrease in inflation. The parameter α gives the effect of

unemployment on the change in inflation. The value of α means that an unemployment rate

of 1% above the national rate for one year leads to a decrease in the inflation rate of about α.

The shape of the Phillips Curve

Negative Slope

This shows that the lower the level of unemployment, the higher the rate of change of money

wages. This should not surprise us. Low rates of unemployment associated with boom

conditions when excess demand for labour cause money wages to rise rapidly. While high

rate of unemployment is associated with slump conditions, when the slack demand for labour

leads to low increases or possibly even deceases in money wages.

A flattening slope

 The steepness of the curve is the range of low unemployment shows that wage

inflation is very responsive to changes in unemployment in that range.

 The flatness of the Phillips curve in the range of high unemployment shows that the

rate of wage inflation is relatively unresponsive to changes in unemployment over that

range

46
Okun’s Law

In 1961, Aurther Okun established a relationship between real GNP and changes in the

employment rate. This relationship has come to be known as Okun’s Law. This law states that

every three percentage points growth in real GNP, unemployment rate declines by one

percentage point every year. This is illustrated below, with the economy growing at 3% with

an unemployment rate of 4%. During the year 1970, when the real GNP increases by 4.5%

(from 3% to 7.5%), the unemployment rate falls by 1.5% (from 4% to 2.5%). In the next year

1971, the growth rate of the economy fell to zero and the unemployment rate rises to 5%. In

the subsequent year 1972, the real growth rate increases to 3% per year and the

unemployment rate declines to 4%.

Figure 7:

Some of the reasons why 1% change in output growth might not exactly lead to a 1%

decrease in unemployment rate where sighted by Blanchard (2009). These are:

47
 1. Firms adjust employment less than one for one in response to deviations of output

growth from normal. One reason is that some workers are needed, no matter what the

level of output.

2. An increase in the employment rate does not lead to a one for one decrease in the

unemployment rate. The reason is that labour participation increases. When

employment increases not all the new jobs are filled by the unemployed.

Theory of Derived Demand

This is a type of demand where by a good or service demanded as a result of the demand for

another intermediate/final good or service. This occurs as the former is a part of production of

the second. For example, demand for coal leads to derived demand for mining, as coal must

be mined for coal to be consumed. So also is the demand for labour a derived demand

because the demand for labour is as a result of the demand for its output. So as demand for

output of an industry increases, so does the its price. The increase in price leads to a higher

demand for the resources (e.g. labour) involved in the production process. Therefore

MRPL= MPPL*P

Where MRP is the marginal revenue product of labour, MPP is the marginal physical product

of labour, and P is the price of the physical product of labour.

When the supply for a particular good or service increases, so does the derived demand for

factors of production needed in producing this good or service also increases. Therefore this

drives up the price for the factors of production and a firm’s average cost curve increases as it

has incurred a variable cost e.g. increase in wages. When supply for a good or service

48
decreases, so does the derived demand for its inputs. This causes the price of factors of

production to decrease, decreasing a firms average cost curve.

Growth Theory of Development

The growth theory has evolved over the years as a major feature of development economics.

One of the earliest attempts to model economic growth is popularly referred to as the

‘Harrod-Domar’ Model associated with the English economist, Sir Roy Harrod and American

Economist, Evsey Domar. The model is an early attempt to show that growth is directly

related to savings and indirectly related to the capital/output ratio.

According to the model, growth (G) can be written symbolically as:

G = s/k (1)

where k - incremental capital-output ratio and;

s - the average propensity to save.

The model indicated that saving affect growth directly, while the incremental capital/output

ratio affects growth indirectly or inversely.

But Solow’s model of economic growth is based on the premise that output in an economy is

produced by a combination of labour (L) and capital (K), under constant returns, such that

doubling input results in doubling output. Contemporary versions distinguish between

physical and human capital. Thus, the quantity of output (Y) is also determined by the

efficiency (A) with which capital and labour is used. Mathematically:

Y = A f (L, K). (2)

Solow assumed that this production function exhibits constant returns to scale, that is, if all

inputs are increased by a certain multiple, output will increase by exactly the same multiple.

The Solow neoclassical growth model uses a standard aggregate production function in which

Yt = At Ktα Lt1 - α, 0 < α <. (3)

49
In this case, Y is gross domestic product, K is stock of capital, L is labour and A represents

the productivity of labour, assumed to grow at exogenous rates n and g.

Lt = L0ent (3.4)

At = A0egt. (4)

The number of effective units of labour, At Lt grows at rate n + g.

For developed countries, these rates have been estimated at about 2 % per year. For

developing countries, it may be smaller or larger depending on whether they are stagnating or

catching up with the developed countries. In the equation (3) above, α represents the

elasticity of output with respect to capital (the percentage increases in GDP as a result of a 1

% increase in human and physical capital). It is usually measured statistically as the share of

capital in a country’s national income accounts.

The model assumes that a constant fraction of output, s, is invested. Defining k as the stock of

capital per effective unit of labour, k = K/AL and y as the level of output per effective unit of

labour, y = Y/AL, the evolution of k is governed by:

Kt = syt – (n + g +δ) kt (5)

= sktn – (n + g +δ) kt .

Where δ is the “rate of depreciation”, equation (6) above implies that k converges to a steady-

state value k* defined by sk*α = (n + g +δ) k*, or

k* = [s/(n + g + δ)]1/(1-α) . (6)

The steady-state capital-labor ratio is related positively to the rate of saving and negatively to

the rate of population growth. The central predictions of the Solow model concern the impact

of saving and population growth on real income. Substituting (5) into the production function

and taking logs, we find that steady-state income per capita is:

In [ Yt/Lt ]=InA0+gt–α/1-α In (s) – α / 1-α In (n + g+ δ). (7)

50
Based on the fact that the model assumes that factors are paid their marginal products, it

predicts the magnitudes alongside the signs of the coefficients on savings and population

growth.

In the case of competitive markets being assumed, the growth rate of the economy can be

seen as a weighted sum of growth rates of efficiency parameter gA (sometimes referred to as

technical progress, of the labor force gL, and of the capital stock gK. The weights on labour

and capital are the shares of payment to labour and capital in Gross Domestic Product (GDP).

gY = gA + algL + akgK . (8)

The Solow Growth model assumes that the marginal product of capital decreases with the

amount of capital in the economy. In the long run, as the economy accumulates more and

more capital, gK, approaches zero and the growth rate is determined by technical progress

and growth in the labour force. However, in the short run, an economy that accumulates

capital faster will enjoy a higher level of output. The above argument relates to the entire

economy, but can also be extended to subsectors of the economy such as education.

For the purpose of this study we will focus on equation (2) of this model, introducing the

factors of graduate unemployment (which have been identified by various studies cited in the

empirical review of this study) through the efficiency parameter (A).

Graduate unemployment= f (inflation rate, minimum wage, lending interest rate and

unemployment rate)

(9)

The identified factors are then incorporated in the Solow growth model through the efficiency

parameter or factor productivity “A”

A= f (inflation rate; consumer price index (% change), minimum wage, lending interest rate

and unemployment rate)

51
 (10)

Substitute equation (2) into equation (1)

(11)

3.1.4 What Are the Causes of Graduate Unemployment?

Unemployment is the greatest challenge to underdeveloped and developing countries. The

phenomenon of graduate unemployment as it is being experienced in the developing

countries constitutes a peculiar problem to labour market and the general economy of these

countries. From the context analysis perceptions of job seekers on the issue of graduate

unemployment in a study conducted by Fajana (2000), the following factors were identified

as the major causes of unemployment in Nigeria:

-The long period of initial unemployment among university graduates in Nigeria.

- Faulty manpower planning and expansion of educational facilities that have unduly raised

the expectations of Nigerian youths.

-The economic recession, continued proportionality of expatriates in employment.

-The institution of NYSC.

-The collective bargaining process, graduate attitude to some type of jobs, jobs in certain

location as well as search behaviour of employers and job seekers.

-Use of capital intensive technology.

-Wide rural-urban migration.

52
-Formal-informal sectors differentials.

The identified developmental problem by the Nigerian developmental plans of 1962-85

includes shortages of skilled manpower, uneven distribution of available manpower among

regions and between urban and rural areas, unemployment in the informal sector as well as

widespread under-employment particularly in the informal sector, inadequate or

underdeveloped organizations and institutions for mobilizing human effort, lack of incentives

for people to engage in particular activities which are important for national development,

and a rapidly growing population.

The year book of labour statistics (1984, 1985, 1986) reports that unemployment rate has

generally risen during the world wide recession of the 1980s and 90s. The rational steps taken

by most management to cope with the recession includes ban on recruitment. Since graduate

are mostly first job seekers, this practice of natural wastage, which involves the refusal to fill

vacancies imply that graduates directly hit. The annual reports of civil service commission

(1981, 1982) show that overseas recruitment were carried out ostensibly because of the

absence of qualified Nigerians to fill some technological and professional jobs. This may

have contributed to the problem of unemployment in Nigeria. Contrary to this, Fajana (2000)

argued that the presence of expatriates in jobs may not cause graduate unemployment.

Nevertheless, this factor became very important when solutions to the problem of

unemployment are being sought.

One of the measures adopted by governments in developing countries as part of their policy

package to solve manpower problems is the establishment of national youth service

programmes (Godfrey, 1970). The National Youth Service Corps (NYSC) in Nigeria came

into being in 1973 in response to the particular urgent needs of fostering national unity, a

means of recouping government investments in graduates. Unfortunately, the NYSC scheme

53
has encouraged employers (private and public) to shy away from employing graduates. It can

be said that it has contributed to graduate unemployment in Nigeria.

The labour decree (1974, section 19) protects older workers from being laid off in a situation

of redundancy. As labour and management makes an attempt in trying to cope with the

recession, they adopt the policy of last-in-first out, coupled with the ban on recruitment

during recession. These seemed to have combined to exert a great impact on the employment

situation for graduates trying to seek first jobs. Industrialization in Nigeria has been pursued

haphazardly with little or no attention paid to manpower development implications of the

adopted strategies. For instance, after independence, a battery of incentives was offered to

industrialists to lure foreign investment into Nigeria. But, the industrialists that came were

capital intensive in their operation and could not absolve proportional size of the growing

Labour force in gainful employment (Yesufu, 1971).

According to Aiyelari and Oyefemi (2009) the following factors are responsible for the high

rate of unemployment in Nigeria:

1) The Backward State of the Nigerian Economy: To say the least, the Nigerian

economy is still primitive one. It is an artisan economy in which the fundamental

production tools remain hoe, cutlass, axe, etc. and production depends on the energy

stored in small and its ability to absorb highly educated people has traditionally been

low. But as an artisan economy is transformed into an industrialized one, the

production base expands and the manpower absorptive power increases as well as the

total employment. In general, pre-industrial societies experienced mass

unemployment and low productivity but industrialization solves these problems. This

simply means that rapid industrialization must be stimulated to solve the mass

unemployment and low productivity problems confronting Nigeria. One realistic and

54
 pragmatic way of achieving rapid industrialization in Nigeria is for both the

government and the organized private sector (OPS) to invest heavily on education of

citizens and with special emphasis on science, engineering and technology at all

levels of our education.

2) Dependence on White Collar Jobs by Graduates: In the period after political

independence and up to early eighties majority of Nigerians graduates tend to seek

employment with the government. This idea is however changing due to the acute

level of retrenchment in the public sector.

3) Perception Of The Relationship Between Employment And The Health Of

Economy: Since Nigeria attained independence and up till the present moment, top

government functionaries and policy makers who have been and are still in charge of

the country’s governance used to believe that retrenchment of employees (labour

force) is the best method to correct bad economy (economic recession). But in actual

fact, unemployment is a social problem which governments should be able to solve.

According to (Keynes, 1936), persistent (mass) unemployment is caused by sufficient

demand for goods. Therefore, governments, even through deficit financing should

stimulate demand and the use of underutilized resources and reduce unemployment.
4) Faulty Planning Theory And Framework: Okigbo (1989) analysed the Nigerian

planning process from 1900-1992 and noted that the theory that guided the Nigerian

First National Plan 1962-1968, was the (Harrod, 1939)- (Domer, 1946) model and it is

very clear that the model remains the Nigeria’s planning theory even till today. This

model in its simplest form states that the growth in income achievable by a nation

depends on the rate of savings and capital invested. That is, the more the capital

invested, the higher would be the growth of output in a society. In short HDM

assumes that labour is not needed in the production process or that there is only one

important input in the production process, which is capital (Glahe, 1977). The

important point here is that those who have been planning for Nigeria since 1960 to
55
 date do not believe that manpower development, but capital, is essential to achieving

sustainable economic growth and industrialization and this is the reason why

government at various time emphasize and encourage foreign investments. This is the

major and principal reason why the country is facing mass unemployment and low

productivity problems.

3.1.5 Empirical Studies on Graduate Unemployment, Unemployment and Economic

Growth

Elegbede in his paper “causes, consequences and implication of graduate unemployment in

Nigeria” tried to provide useful suggestions and recommendations on how to curb graduate

unemployment in Nigeria. The paper adopted an empirical analysis to examine the causes of

unemployment in Nigeria. The study made use of both primary and secondary data. However,

for primary data the questionnaire was used to solicit responses from the respondents. In

conclusion economic recession, governmental policy, employment of expatriates and trade

union wage demand increase the rate of unemployment. The study emphasised that planning

of human resource use in Nigeria has been on guesswork and must be re-evaluated.

Oladeji (1987) in his paper “Graduate Unemployment paradoxes in the less developed

countries: implication for research in Nigeria” tried to open up some researchable

prepositions on the country’s graduate unemployment problem by examining the two

disturbing paradoxes; Demand paradox and Supply paradox. He argued that global recession

may not explain the entire phenomenon. Perhaps to appreciate the basic causes, there may be

need to isolate’ the effect of economic recession. This is not to discount the impact of the

economic recession, in fact its consideration vis-à-vis the phenomenon under study would

help bring into focus the weakness of the country’s development strategy.

56
Sodipe et al (2011) in their paper “Employment and Economic Growth Nexus in Nigeria”

examined the employment and economic growth relationships in the Nigerian economy. A

sample model of employment was formulated and estimated using ordinary least square

technique, before and after the time series data used for the study were corrected for non-

stationary using Hodrick-Prescott Filter. The result of our econometric analysis shows that a

positive and statistically significant relationship exists between employment level and

economic growth in Nigeria while a negative relationship was observed between employment

growth rate and the GDP growth rate in the economy. The paper advocated for increased

labour-promoting investment strategies that will help to reduce the high current open

unemployment in Nigeria.

Akinyemi et al (2009) in analysing the extent of the mismatch between graduate turnout vis-

à-vis their skills and graduate employment in Nigeria found that graduate turnout outpaced

the graduate employment rate over the years in Nigeria. The increase in graduate

unemployment rate was largely attributed to the mismatch between graduate employee skills

and those skills required for performance in the modern workplace. The study also found that

inadequate technical knowledge, deficient English proficiency and lack of critical thinking on

the part of graduate employees coupled with high technological drive of most organizations

in response to tougher competition in the competitive markets are factors responsible for

graduate unemployment. The study recommended that the issue of mismatch between

graduate turnout vis-à-vis their skills and graduate employment should be seriously addressed

by taking a three-dimensional approach that involves the tertiary institutions, the government

and the labour market. Their study was based on a survey that covered all the 36 states of the

federation and the federal capital territory, Abuja. All universities, colleges of education and

polytechnics as at 2007 were involved in the study. The study also included all the registered

57
employers of labour who belong to the organized public and private sectors using purposive

sampling technique. The study utilized a checklist questionnaire

Keynes also in his book “The General Theory of Employment, Interest and Money” when

restating the general theory of employment identified the ultimate independent variables as

(1) the three fundamental psychological factors, namely, the psychological propensity to

consume, the psychological expectation of future yield from capital-assets,(2) the wage-unit

as determined by the bargains reached between employers and employed, and (3) the quantity

of money as determined by action of central bank; these variables specified above determine

the national income and the quantity of employment.

Douglason and Augustus (2006) in their paper “ The dynamics of productivity and

unemployment nexus: implication for employment generation in Nigeria” explored the

relationship between productivity and unemployment in nigeria. they carried out a

stationarity test together with a granger causality test. The result indicates a level stationarity

I(0) for the series. Level stationarity suggested the use of autoregressive distributed lag

(ARDL) analysis. The granger causality test indicate that productivity growth and

unemployment rate neither granger causes the other. Some implacable issues of the paper

pointed to the fact that employment generation policies should be complemented with

political will and physical infrastructure development, including stable power supply.

Akpan (2006) in his paper “ Economic Incentives for employment generation” indentified

economic incentives that can foster economic expansion for job creation and employment

generation. The choice of policies should be based on the understanding of structures and

relationship between the various variables within the economy. Preference should be given to

policies that enhance higher linkages in the economy. Integrated rural-urban development of

infrastructures, a build-up of moral capital, enhancement of skill acquisition and

58
entrepreneurial development are measures that would lead to employment generation, even

as the traditional fiscal and monetary policies would, provided adequate precautions are taken

concerning the expected policy interractions with economic variables.

Inang and Ebong (2006) in their study “Rememdying Rural Unemployment and

Underemployment Problems in Nigeria: Issues and Options” analysed the problems of

unemployment and underemployment as conventionally defined in Nigeria. It noted that the

problems have remained intractable and that measures introduced over the years by various

government to curb the problems have made only modest impacts. Where as data from

government surveys report figures that portray the country as having no such problems, the

problems of unemployment and underemployment exist, even at levels that are high and

growing. The paper fingers both supply and demand factors in explaninig the problem. It

reviewed past efforts at addressing them and suggesting ways of sustaining existing

programmes, drawing attention to the need to revive those that have gone muriband.

Iwayemi (2006) in his paper “Modelling the Nigerian Economic Growth and Employment”

proposed a model which he used to reflect some of the key features of the Nigerian economy

such as the importance of the informal sector, unemployment, structural rigidities in both

labour and product markets and also the important role of government investment in the

economy. His findings show very clearly that increase in domestic investment in the economy

either through government or foreign capital has strong positive impact on growth and

employment. Based on this findings he suggested that the government should not cut down

its investent spending, as we cavassed by some. Inteernational organisation in the past. Rather

it should increase its investment expenditure and possibly retarget it towards the development

of infrastructure and human capital. Given the urgency of these needs, government should

embark on job creation programmes.

59
Adewuyi (2006) investigated the imapct of macro economic policy reform on wage and

employment in nigeria’s manufacturing sectorss. His results suggested that there is a trade-off

between capital and labour in the manufacturing process. The results also showed that higher

general price level hinders employment in the sector.

Oni (2006) in his paper “ Towards Promoting Employment Generation in Nigeria” examined

the theoretical and empirical perspectives of employment generation. The general conclusion

from both perspectives are that the solution to the problem of unemployment and poverty

cannot be found within one single epistemological approach. The reality is that objectives of

macroeconomic stability, although necessary in achieving economic growth, is not sufficient

for the effective management of the labour market in the context of the lack of access to

credit, lack of competiveness weak infrastructures and other constraints. Evidence in his

research is the fact that macroeconomic stability alone cannot reduce poverty; hence it should

be accompanied with job creation and other anti- poor strategies. He suggested that this

called for repackaging of employment-oriented economic policies that focus on the creation

of job opportunities.

Aiyelari and Oyefemi (2009) in their study “A Critical Analysis of the Causes of Mass

Unemployment in Nigeria” critically examined the causes of unemployment in Nigeria and

proffering solutions to it. Amongst the causes of unemployment in Nigeria is the backward

state of the Nigerian economy, dependence on white collar by jobs graduates, inappropriate

economic philosophy and developmental strategies. Mass unemployment can be reduced, if

less emphasis is laid on certificate acquisition and youths are encouraged to develop their

God-given talents. Entrepreneurships development should be encouraged.

Onwioduokit (2006) in his paper “Character of Unemployment in Nigeria and its Link with

the Macro-economy” adopted a simple empirical verification adopted to highlight the

60
important role of good macroeconomic management to achieving robust economic growth

that can reduce unemployment by expanding level of economic activity and thereby, creating

employment. The facts remains that creation of sustainable employment lies especially with

the private sector, especially the small and medium enterprises. He identified the need to re-

examine the educational curriculum of various institutions to ensure that there is an effective

nexus between what is produced and what is demanded in the labour market, so therefore

government needs to refocus on skill acquisition that can integrate the beneficiaries into the

production process.

Adeolu (2006) showed in his paper “ Institutional Foundation of unemployment in Nigeria”

that the attainment and sustainance of full employment in the mordern economy is dependent

on the quantity of political leaders, their choice of discount rate and institutional restrictions

that place a limit on predation of public resources or its coversion to private use. In the

absence of institutional inhibitions, political leaders can decide to build either a

developmental or predatory state. High quality political leadership can ensure zero or near

zero predation and in addition build institutions to accelerate growth and development and

ensure full or near full employment. Poor quality and predatory political leadership can lead

to a reverse case, causing economic stagnation and mass unemployment. Furthermore, this

paper tried to establish that the macroeconomic problem of unemployment is a system of

deeper institutional problem. The deployment of monetary or fiscal policy instrument without

taking into consideration the institutional enviroment and preferences of the political leaders

will lead to policy failure. Institutional changes that will provide full employment must

therefore be a package that aligns political leadership’s preferences with the macroeconomic

objectives of full employment.

61
Ajetomobi and Ayanwale in their paper “Education Allocation, Unemployment and Economic

Growth in Nigeria: 1970-2004” examined education expenditure trend, higher education

student enrolment and linkages with unemployment and economic growth in Nigeria. Data

for the study came from several issues of central bank of Nigeria annual reports and

statement of account, Federal Ministry of Education and National University Commission.

The result of their study showed that government funding is unstable and unpredictable,

capital and recurrent funding since 1970 are only a very small fraction of the nation’s budget,

total enrolment contrasts sharply with level of employment because government could not

limit enrolment to a level which fund made available could adequately cater for and the

proportion of GDP that goes to education is still slow.

Prof. Durosaro in his paper on “Resource Allocation and Utilisation for Universities in

Nigeria: Trends and Issues” discovered that the 60/40 quota of students enrolment in

science/humanities was not met. Also, the lecturer/student ratios prescribed in the facilities

were not achieved. The academic/non academic quota in some cases was not met. These

gaps, no doubt, have implications on the use-efficiency of our university resources. He said

that the persisting economic downturn seems to have compounded the problem particularly

with the serious depreciation of the rain and the lower absorptive capacity of the economy for

university capacity of the economy for university graduate. All of these together with the fear

of increasing problem of graduate unemployment in Nigeria call for a rethinking of the goals

of our university system.

Eko (2010) in his article “Bridging the Gap between the World of Work and the World of

Learning in Nigeria: A dialectical Analysis” aimed at an appraisal of the gap existing between

the world of work and the world of learning in Nigeria economy. Findings show that there

exists a disconnection between the learning world and the needs of the labour market. The

62
study contends that this mismatch/gap is as a result of the declining quality of education. The

problem of educator- especially higher education- relating to inadequate funding, insufficient

and irrelevant learning materials, poorly remunerated and trained staff and irrelevant

curriculum were also examined. The study also reveals that there is inadequate information in

the labour market concerning job vacancies. A 4-point recommendation was proffered by the

paper in bridging the existing gap.

3.1.6 PSYCHO-SOCIAL EFFECT OF UNEMPLOYMENT

Graduate initial unemployment and idleness have adverse psychological, social, occupational

and financial effects on them (Fashoyin, 1987) and (Fajana, 2000).Unemployment as serious

effects both on their present conditions their outlook in the future and on the society in which

they are supposed to be part.

Graduate unemployment is like a terminal disease to graduates because it literally destroys

them morally and raptures the ties and relationship they form. People who have no jobs feel

insignificant and inferior. And always having the feeling that they are ostracized from the rest

of the society, and most often they are regarded as parasites by other people.

In most societies conventional work ethic suggests that unemployment is unwelcome because

of the special role and meaning work has. In particular, young people in this situation feel

that they must find work, no matter what. At the beginning of the search period, they look for

jobs suited to their qualifications, training or trade but later on they look for any kind of work

( Hayes and Nutman, 1981) and any kind of pay (Kasper, 1987).

Unemployment and under- employment may cause people to flee the rural areas move about

or migrate. The later effects will tend to explain some of the current wave of brain drain to

63
the advanced countries from less developed world. The unemployed produce an unsettled

labour force, and in urban areas they may lead to overcrowding and crimes.

Research findings by Hayes and Nutman (1980) indicated that in a period characterised by a

permanent stable high unemployment situation, there will be considerable increase in deaths

due to cardiovascular diseases and cirrhosis of the liver and murder too. According to Banks

and Ullah (1988) there will also be increase in admission into psychiatric hospitals (for

mental illness) and also imprisonment arising from the criminal tendencies of idle hands.

In summary, Fajana (2000) opined that unemployment can lead to the following: loss of

status, loss of prestige and economic strength or power as a result of the loss of wages and

benefits of jobs, inflictions of psychological injury of the breakdown in social contacts and

isolation from the world of work, loss of responsibility, identity and respect which the

position at work ensures, loss of purchasing power, loss of union check off dues, loss of

production and stunting of gross national product, reduction in the pay-roll tax revenues of

the state.

CHAPTER FOUR
RESEARCH METHODOLGY
4.1 Methodology
4.1.1 Methodological Procedure

In elucidating the relationship between Graduate unemployment and economic growth,

taking into consideration the determining factors of graduate unemployment (inflation rate,

64
minimum wage, lending interest rate and the level of gross domestic investment (GDI),We

adopt a four step procedure.

 Descriptive analysis
 Test for Stationarity
 Cointegration analysis and
 Regression analysis.

Unit Root Test

Economic variables occasionally experience an abrupt shift in their levels over time. This

could result from a number of reasons which could include domestic or international unrest,

depressions, booms and etcetera. This phenomenon could result in the non stationarity of our

variables, thereby affecting the results of the study. It is imperative therefore, that in order to

properly carry out our study, we ought to investigate the characteristics of the time series

variables before proceeding to carry out tests for Cointegration.

We employ the Augmented Dickey Fuller (ADF) method of unit root testing, in this study.

The unit root test is of significant importance as it facilitates the testing of the stationarity of a

time series. A non-stationary regressor leads to unreliable empirical conclusions and could

even result in spurious correlation. According to Perron (1989), it is appropriate to employ

the unit root test because tests that do not account for structural breaks may falsely fail to

reject the unit root null hypothesis against the trend stationary alternative when the data

generating process is trend stationary with a one-time break.

Cointegration Analysis

Since its development by Engle and Granger (1987), it has become a common measure to use

Cointegration analysis and error correction models (ECM). Cointegration aids us to resolve

65
the issue of the existence (or non existence) of a long run relationship between the variables

employed. It could be applied when dealing with time series variables. Two or more time

series are said to be cointegrated if they share a certain type of behaviour in terms of their

long term fluctuations. This does not necessarily mean that they move together. Therefore, we

may classify them to be otherwise unrelated. In the event that two or more series are

individually integrated, but some linear combination of the above series has lower order

integration, then the series are said to be cointegrated.

Prior to the 1980’s, several economists used linear regressions on non stationary time series

data which Granger et al (1987) showed to be an unreliable approach, which could result in

spurious correlation. The customary method for testing hypotheses which relate to the

relationship between non stationary variables was to run the ordinary least squares regression

method, (OLS) on data which had initially been differenced. Although this approach is

correct in large samples, Cointegration provides more powerful tools when the data sets are

of limited lengths, as most economic time series essentially are.

Generally, there are three main methods for testing Cointegration. They are the Engle-granger

two-step method, the Johansen procedure and the Phillips-Ouliaris Cointegration tests.

Subsequent developments related to these approaches have relied on the use of the new

techniques to identify Cointegration relationships, as for example, the Johansen method

(1988, 1991). We employ the Johansen Cointegration test in exploring the long run

relationship between the variables.

We had mentioned earlier that it is possible for data distortions to occur due to structural

breaks in time series data. In the event of this, the Cointegration vector will witness a shift at

an unknown time.

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Durbin–Watson d Test

The most celebrated test for detecting serial correlation is that developed by statisticians

Durbin and Watson. It is popularly known as the Durbin–Watson d statistic, which is simply

the ratio of the sum of squared differences in successive residuals to the RSS. Note that in the

numerator of the d statistic the number of observations is n− 1 because one observation is lost

in taking successive differences.

A great advantage of the d statistic is that it is based on the estimated residuals, which are

routinely computed in regression analysis. Because of this advantage, it is now a common

practice to report the Durbin–Watson d along with summary measures, such as R2, adjusted

R2, t, and F. Although it is now routinely used, it is important to note the assumptions

underlying the d statistic.

The Durbin-Watson statistic is a test for first-order serial correlation. More formally, the DW

statistic measures the linear association between adjacent residuals from a regression model.

The Durbin-Watson is a test of the hypothesis.

If there is no serial correlation, the DW statistic will be around 2. The DW statistic will fall

below 2 if there is positive serial correlation (in the worst case, it will be near zero). If there is

negative correlation, the statistic will lie somewhere between 2 and 4.

Positive serial correlation is the most commonly observed form of dependence. As a rule of

thumb, with 50 or more observations and only a few independent variables, a DW statistic

below about 1.5 is a strong indication of positive first order serial correlation. There are three

main limitations of the DW test as a test for serial correlation. First, the distribution of the

DW statistic under the null hypothesis depends on the data matrix. The usual approach to

handling this problem is to place bounds on the critical region, creating a region where the

test results are inconclusive. Second, if there are lagged dependent variables on the right-hand

side of the regression, the DW test is no longer valid. Lastly, you may only test the null

67
hypothesis of no serial correlation against the alternative hypothesis of first-order serial

correlation.

Ordinary Least Squares

This technique minimizes the sum-of-squared residuals for each equation, accounting for any

cross-equation restrictions on the parameters of the system. If there are no such restrictions,

this method is identical to estimating each equation using single equation “ordinary least

squares”.

It is imperative to find one to as much tests as possible in an empirical research, this will aid

conclusions and decision processes, though this test is the only way that large variables for

different years could be tested and calculated for. An example is our regression analysis.

4.1.2 Data definition and sources

The data for Unemployment Rate (UNEMP); Lending Interest Rate (LIR); Inflation Rate

(INF) is gotten from the Central Bank of Nigeria (CBN) statistical bulletin (2008) 50 th

anniversary special edition, African Development Indicators (2010) and World Development

Indicators (WDI) (2010). The data for Minimum Wage was extracted from various National

Minimum Wage (amendment) Acts.

4.1.3 Scope of Study

This study focuses on graduate proportion of the total unemployment in Nigeria, taking into

consideration those unemployed, who own B.A/ B.SC/ B.ED/ HND certificates. This study

provides a robust empirical review and theoretical argument on the causes and cure of

graduate unemployment. In specifics, it analyses the relationship between graduate

unemployment and economic growth through the factors of graduate unemployment;

68
government policy, trade union activities, inflation, existing domestic investment and labour

force in Nigeria. This study covers the period from 1980 to 2009.

4.1.4 Analytical Framework

From the theoretical review in chapter three of this study, it is observed that the Augmented

Solow growth model whose operational framework is the Augmented Cobb-Douglas

production function would be suitable to assess the relationship between graduate

unemployment and economic growth in Nigeria. Augmented Cobb-Douglas is adopted in this

study because it is a nonlinear model relationship of variables that can easily be transformed

into linear by log-transform so that we can work within the framework of the classical linear

regression model. It is also an appropriate framework for this study.

Model Specification

The econometric model to consider in this study takes minimum wage, lending interest rate

(%), inflation rate, unemployment rate (%), gross domestic investment and existing labour

force as the explanatory variables and economic growth as explained variable. The core

explanatory variables that influence economic growth are thus described in the model below.

The variables included in the model are to test if there is a relationship between graduate

unemployment and economic growth.

Statistical or Econometric Model

Graduate unemployment= f (inflation rate, minimum wage, lending interest rate and

unemployment rate)

Based on existing literatures the above mentioned factors were identified to be responsible

for graduate unemployment in Nigeria:

69
Oladeji (1987); identified economic recession as a factor affecting the level of graduate

unemployment. Since the general economic situation is usually associated with economic

recession (which inflation rate can be used as a proxy, since persistent price increase is

associated with it). The country’s economic system, being closely linked with the world

market system, would in no doubt be faced with the general unemployment situation in view

of the weak demand for the country’s petroleum since the early 1970’s. Due to lack of foreign

exchange to import necessary raw material, most establishments have been constrained to

operate very much below capacity while others have been forced to close down.

Oladeji (1987) also identified unemployment level already existing in the country as a factor

to be considered.

Keynes also in his book “The General Theory of Employment, Interest and Money”

identified wage-units as determined by the bargains reached between employers and

employed (which minimum wage could be used as a proxy) and the quantity of money as

determined by the action of the central bank (which lending interest rate can be used as a

proxy).

Culbertson (1968) also stressed the importance of price push as a factor (which inflation rate

can be used as a proxy, since persistent price increase is associated with it).

Economic Recession, Trade Union Agitation, Government policy and unemployment level

have been identified as the factors responsible for graduate unemployment. All of which can

be measured with inflation rate; consumer price index (% change), minimum wage, lending

interest rate and unemployment rate.

Following from the theoretical propositions explored in the theoretical framework and factors

identified to be responsible for graduate unemployment in the empirical studies of this study

70
and also for the successful examination of the relationship between graduate unemployment

and the economic growth of the Nigerian economy to be done, we recall the Solow growth

model reviewed in the theoretical framework of this research project. We specify our model

in an attempt to determine the relationship between graduate unemployment and economic

growth in Nigeria.

The model to be used can be explicitly specified as follows;

(1)

The identified factors are then incorporated in the Solow growth model through the efficiency

parameter or factor productivity “A”

A= f (inflation rate; consumer price index (% change), minimum wage, lending interest rate

and unemployment rate)

(2)

Substitute equation (2) into equation (1)

(3)

Y represent gross domestic product (GDP) used to measure level of economic growth

UNEMP represents unemployment rate in Nigeria

C represents the constant

INF represents Inflation rate (%)

MW represents Minimum wage

LIR represents Lending interest rate (%)

71
L represents labour

K represents capital (which GDI-gross domestic investment, can be used as a proxy)

We then take the natural log to linearize the function above for our OLS regression analysis.

---(4)

Equation 4 can be specified as

Where;

y = natural log of GDP (gross domestic product)

inf = natural log of INF (inflation rate)

mw = natural log of MW (minimum wage)

lir = natural log of LIR (lending interest rate)

unemp = natural log of UNEMP (unemployment rate)

gdi = natural log of GDI (gross domestic investment)

l = natural log of L (labour)

A priori Specification: the expected signs of the coefficients of the explanatory variables are:

Estimation Techniques

72
This study employs ordinary least squares (OLS) multiple regression to estimate the

relationship between the Economic growth (GDP) and the explanatory variables such as

inflation rate, minimum wage, gross domestic investment, existing labour force, lending

interest rate and unemployment rate, which determine graduate unemployment in turn.

CHAPTER FIVE

MODEL ESTIMATION AND INTERPRETATION

This research work explores the relationship between graduate unemployment and economic

growth, using the ordinary least square method (OLS).

5.1 Descriptive Analysis

Table 7 presents a summary of the descriptive statistics of the data used in the study. Over the

period, the average total gross domestic product in the economy is 13.82 million; while the

average growth rate of inflation rate is 2.74%; also the average growth rate of unemployment

rate is 1.91%. In addition to the mean figures, standard deviation for each variable is also

reported. Evidently, labour force has the lowest variability over the period 1980-2009, while

gdp has the highest.

Table 7: Descriptive Statistics on Selected Variables (1980-2009)

Variables Number of Mean Standard Deviation

Observations

73
gdp 30 13.81898 2.222102

inf 30 2.742976 0.769696

mw 30 6.589805 1.843859

lir 30 2.824663 0.361211

unemp 27 1.913234 0.696605

gdi 30 11.67772 1.821343

l 30 17.33374 0.235263

Source: Computed By Author

Note: all variables have been logged

A correlation matrix shows the magnitude and direction of the relationship between each pair

of variables being analysed is presented in Table 8. A negative sign of correlation coefficient

shows there is an inverse relationship between the two variables. The correlation matrix is

symmetric about the diagonal and the diagonal the values of 1.000000 since there is perfect

correlation of the variables with itself. The correlation matrix shows that all but inflation rate

(inf) among the explanatory variables has a positive relationship with the dependent variable

gdp. However, it is observed that gdp and l have a strong positive correlation coefficient

0.991795. The relationship of other variables with the dependent variable is reported as well.

Table 8: Correlation Matrix of Variables

Variables gdp Inf mw lir unemp gdi L

gdp 1.000000 -0.133391 0.905138 0.624906 0.555946 0.987893 0.991795

inf -0.133391 1.000000 -0.334134 0.307748 -0.518262 -0.164695 -0.178851

mw 0.905138 -0.334134 1.000000 0.458122 0.784986 0.908701 0.926004

lir 0.624906 0.307748 0.458122 1.000000 -0.017055 0.574984 0.600162

unemp 0.555946 -0.518262 0.784986 -0.017055 1.000000 0.569028 0.626084

gdi 0.987893 -0.164695 0.908701 0.574984 0.569028 1.000000 0.980709

l 0.991795 -0.178851 0.926004 0.600162 0.626084 0.980709 1.000000
Source: Computed By Author
Note: all variables have been logged
74
5.2 Stationarity Test

In carrying out research, especially with time series, it is imperative to fully understand the

nature of the variables being employed before going ahead to check for the long run

relationships between the variables. The stationarity or not, of a time series, is of paramount

importance to a researcher whose intent is on proposing empirical evidences that can be

relied upon. The non stationarity of a time series, for which long run relationships are

estimated, can result in spurious correlation. The degrees of integration of the variables

employed in the test were estimated using the Augmented Dickey-Fuller (ADF) unit root test.

At their level forms, the ADF test suggests that gross domestic product, inflation rate,

minimum wage, lending interest rate, unemployment rate, gross domestic investment and

labour force variables are non- stationary, at 5% level, with intercept alone. Furthermore, the

said variables are discovered to be stationary in their first difference, hence are said to be

integrated of order I (1) at 5% level, with intercept alone. This is because the ADF value of

each of these variables at 1st difference is greater than the McKinnon 5% critical values. Table

9 shows the result of our unit root test.

TABLE 9: AUGUMENTED-DICKEY FULLER TEST

VARIABLES INTERCEPT PROB.VALUE TREND AND PROB.VALUE

INTERCEPT

gdp LEVEL 0.069925 0.9576 -2.239606 0.4515

75
 1ST -4.217585** 0.0028 -4.070443** 0.0177

DIFFERENCE

inf LEVEL -1.989399 0.2893 -3.350372 0.0789

1ST -3.570331** 0.0142 -5.598376** 0.0005

DIFFERENCE

mw LEVEL -0.462542 0.8849 -2.022633 0.5651

1ST -5.562707** 0.0001 -5.474112** 0.0007

DIFFERENCE

lir LEVEL -1.934102 0.3128 -1.838139 0.6599

1ST -4.757050** 0.0007 -4.722632** 0.0040

DIFFERENCE

unemmp LEVEL -0.922969 0.7637 -1.962588 0.5925

1ST -4.742966** 0.0010 -4.800052** 0.0042

DIFFERENCE

gdi LEVEL 1.011607 0.9956 -3.144848 0.1153

1ST -3.820460** 0.0073 -3.978345** 0.0216

DIFFERENCE

l LEVEL -0.002000 0.9498 -4.226715* 0.0129

1ST -3.105953** 0.0396 -3.283916 0.0896

DIFFERENCE

Source: Compiled By Author

NOTE: All variables are already in logarithmic form

gdp = Gross Domestic Product

inf = Inflation Rate

mw= Minimum Wage

lir = Lending Interest Rate

76
 unemp = Unemployment Rate

gdi = Gross Domestic Investment

l = Labour

* = Stationary at Level, I(0)

** = Stationary at First Differencing, I(1)

5.3 Cointegration test

Cointegration of dependent and independent variables forms a dynamic basis for functional

relationship between two or more variables, thus, help in forecasting purposes. In this study,

we carried out cointegration test using Johansen’s test of cointegration.

The test statistic indicates that the hypothesis of no cointegration among variables can be

rejected for Nigeria. The results in table 10 below shows that there exist at least 3

cointegrating equations at 1% level of significance and at least 4 cointegrating equations at

the 5% level of significance.

TABLE 10: Johansen Co-integration Test

Trend assumption: Linear deterministic trend

Series: gdp inf mw unemp gdi l
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test

Hypothesized Eigenvalue Trace 5 Percent 1 Percent
No. of CE(s) Statistic Critical Value Critical Value

None ** 0.967442 256.5338 124.24 133.57

At most 1 ** 0.960893 174.3403 94.15 103.18
At most 2 ** 0.856022 96.54527 68.52 76.07

77
 At most 3 * 0.599491 50.03103 47.21 54.46
At most 4 0.496377 28.07056 29.68 35.65
At most 5 0.383461 11.60831 15.41 20.04
At most 6 4.62E-05 0.001110 3.76 6.65
*(**) denotes rejection of the hypothesis at the 5%(1%) level
Trace test indicates 4 cointegrating equation(s) at the 5% level
Trace test indicates 3 cointegrating equation(s) at the 1% level

5.4 Ordinary Least Squares

The results we obtain as our coefficients will stand in for the values the elasticities of the

variables we employ. Therefore, we shall be able to then discuss the implication of the

results. The table 11 below shows the summary of the Ordinary Least Squares method of

linear regression.

TABLE 11: Regression Results of Ordinary Least Squares

Variable Coefficient Std. Error t-Statistic Prob.

C -82.05914 17.90925 -4.581941 0.0002
inf 0.054092 0.064742 0.835498 0.4133
mw 0.078361 0.078857 0.993716 0.3322
lir -0.006776 0.171670 -0.039472 0.9689
unemp -0.246313 0.113781 -2.164797 0.0427
gdi 0.513932 0.124463 4.129211 0.0005
l 5.176418 1.121453 4.615814 0.0002
Source: Computed By Author
Note: all variables have been logged
R-Squared: 0.993231
Adjusted R-Squared: 0.991201
Standard Error of Regression: 0.195691
Durbin Watson Statistic: 1.110323
F-statistics: 489.1399
Akaike Info Criterion: -0.206145
Mean Dependent of Variable: 14.15249
78
The equation derived from the above analysis can be stated as follows:

Table 12: Modified Equation With Autoregressive Lag 1: AR(1) Included to Account for

Serial Correlation in the Initial Ordinary Least Square Result.

Variable Coefficient Std. Error t-Statistic Prob.

C -74.20551 40.90775 -1.813972 0.0874
inf 0.064846 0.051076 1.269610 0.2213
mw -0.051762 0.074009 -0.699406 0.4938
lir -0.083535 0.224947 -0.371353 0.7150
unemp -0.021636 0.103792 -0.208453 0.8374
gdi 0.514297 0.210428 2.444057 0.0257
l 4.766918 2.447095 1.947990 0.0681
AR(1) 0.834381 0.227711 3.664219 0.0019
Inverted AR Roots .83

Source: Computed By Author

Note: all variables have been logged
R-Squared: 0.995068
Adjusted R-Squared: 0.993038
Standard Error of Regression: 0.161892
Durbin Watson Statistic: 2.003354
F-statistics: 490.0185
Akaike Info Criterion: -0.549433
Mean Dependent of Variable: 14.41236

The results from table 11 shows that there is a positive relationship between inflation rate

(inf) and economic growth which goes against our apriori expectation. We will see that a 1%

increase in inflation rate will lead to only a 5.4% increase in gross domestic product in

Nigeria.

79
The result also shows that there is a positive relationship between minimum wage (mw) and

economic growth which is in accordance with the apriori expectation. We see that a 1%

increase in minimum wage will lead only a 7.8% increase in gross domestic product.

The result also shows that there is a negative relationship between lending interest rate (lir)

and economic growth which is in accordance our apriori expectation. We see that a 1%

increase in lending interest rate will lead to only a 0.68% decrease in gross domestic product.

In the result, there exist a negative and significant relationship between unemployment rate

(unemp) and economic growth which is in accordance with our apriori expectation and with

the findings of sodipe et el (2011). We see that a 1% increase in unemployment rate will lead

to only a 25% decrease in gross domestic product.

The result also shows that there is a positive and significant relationship between gross

domestic investment (gdi) and economic growth which is in accordance with our apriori

expectation. This is in accordance with one of the findings of Iwayemi (2006) that domestic

investment has a significant impact on economic growth. We see that a 1% increase in gross

domestic investment will lead to only a 51% increase in gross domestic product.

In the result, there exist a positive and significant relationship between labour force (l) and

economic growth which is in accordance with our apriori expectation. We see that a 1%

increase in labour force will lead to well above 100% increase in gross domestic product.

In terms of goodness of fit of the model, the coefficient of determination R2 in the model is
0.99. This indicates that about 99% of the total variations in gross domestic product are

explained by variation in included independent variables. This shows that our model explains

large proportion of variations in economic growth in Nigeria. The model also represents a

good measure of fit. The F-statistics shows overall significance at 5% level. Its value

(489.1399) is greater than the table value (2.55) at 5% level of significance. We therefore,

80
reject the null hypothesis that the model is not significant in explaining the variations in

economic growth. The Durbin Watson test of autocorrelation shows presence of serial

autocorrelation. This is because the calculated value of DW (1.110323) falls between 0 and 2.
The initial presence of serial autocorrelation is accounted for in table 12 by introducing the

AR (1), now putting Durbin Watson value at 2.003354, which is well above 2. This shows

that there is no presence of serial autocorrelation.

CHAPTER SIX
SUMMARY, CONCLUSION AND POLICY RECOMMENDATIONS

6.1 Summary and Conclusion

Over the years unemployment has received a considerable amount of attention due to some

reasons; amongst others include the ever mounting increase in graduate unemployment which

has being detrimental to economic growth.

This study in trying to empirically investigate the cure and causes of graduate unemployment

in Nigeria, with particular interest in investigating the relationship between graduate

unemployment and economic growth, found some interesting results which are summarized

below as follows:

81
First, we demonstrate, with the use of an Augmented Dickey-Fuller test for stationarity, that

our variables are stationary at first difference, that is our variables are integrated of order one

(1). Following this, we check for the existence of long run relationships between our

variables, employing a Johansen test for cointegration. From the results, we conclude that

indeed, there is a long run relationship between the Economic growth and the variables

employed.

Hence, we go further to determine the major factors of graduate unemployment that

determine economic growth in Nigeria. Our results indicate that the unemployment rate,

gross domestic investment and the labour force of Nigeria emerges as the main determinants

of economic growth. Minimum wage and inflation rate is largely insignificant in determining

economic growth, while lending interest rate is also insignificant. The insignificance of

lending interest rate in determining economic growth could also be as a result of the

inadequate mobilization funds due to unattractive deposit rate of interest, inefficient

management of loan facilities and the alarming collateral demanded by financial institutions

in the first place. The logic behind this is that since the supply of loans are in itself limited by

several other factors as mentioned above. This shows that lending interest rate deregulation

(as part of the structural adjustment programme) since 1986 has not really made much impact

on economic growth. Also minimum wage is insignificant because increases in nominal wage

as always being complimented by increased inflation rate which leaves the real wage

unchanged even when nominal wage as increased; this could be caused by inflation, therefore

making the increase in minimum wage insignificant with respect to economic growth. Also

inflation rate is insignificant because its effect is better reflected in economic development

and not economic growth. Gross domestic product takes into account goods and services

produced within a country by both nationals and non-nationals. The fact that any increase in

cost of input due to inflation incurred by producers of good and services within the country
82
are added to the prices of goods and services should not be ignored. So therefore might not

affect output and so also economic growth.

Based on our results, we can conclude by accepting that there is a relationship between

economic growth and graduate unemployment; through the factors of graduate

unemployment.

6.2 Policy Recommendation

The empirical analysis of the relationship between Graduate unemployment and economic

growth of Nigeria would give aid to policy formulations.

The results, with respect to the values of the coefficients are by and large, in concordance

with the findings of comparable studies using similar approaches. From this study, we have

observed that instead of minimum wage, lending interest rate and inflation rate, it is

unemployment rate, gross domestic investment and labour force that play a significant role in

determining economic growth in Nigeria. Hence, it is our opinion that until the lending

interest rate is well managed and collateral demands relaxed, the supply of loans for

investment will remain a problem therefore inhabiting unemployment and slow economic

growth. Also until government finds a way to control inflation rate, increase in minimum

wage will continue not to reflect in economic growth.

With regards to the existing gap between demand of labour and supply of labour in Nigeria,

the following policies are recommended:

Job-oriented Education Programmes

It is considered that if educational programmes have a good percentage of skill content, the

problem of unemployment would be drastically reduced. Thus, the greater the skill contents

of educational curricula, the more the employment chances of graduates.

83
Labour Market Information System
One of the major causes of unemployment is labour market friction. This is brought about by

lack of information concerning available jobs. Employment exchanges which are operative in

many urban centres or government establishments are seldom effective in matching potential

workers with available jobs. A labour market information system (LMIS), on the other hand,

can generate all job-related information to job seekers as well as employers of labour. This

should include existing vacancies and job specifications, qualifications needed salaries and

other working conditions, etc. Both public and private sector employers should be induced to

patronize the LMIS, possibly by directing job advertisements through other channels. If job

seekers are indirectly compelled to patronize this system, it should be easier to match them

with existing jobs. This would drastically reduce the duration of frictional unemployment for

most qualified job seekers

Adoption of a Labour-Intensive Strategy of Industrialization

Most manufacturing industries in LDCs are capital intensive, relying on imported technology.

This means that only few local people can be absorbed by industries. Efforts to industrialize

with labour-intensive technology should be made by encouraging indigenous technological

innovation in this direction. The ILO has successfully experimented with labour-based

technology in road construction which can be adopted in many countries. Most industries are

now highly labour intensive with the advent of information technology.

Use of Entrepreneurship Development Programme (EDP)

One of the development constraints facing Africa today is the limited number of

entrepreneurs. Which if increased, a country stands a good chance of growing many

businesses and correspondingly creating jobs.

Modern entrepreneurs need skill training and access to resources like credit and modern

technology. Well designed programmes of EDP both within the school system and outside

can increase the pool of entrepreneurial talents available to the country.

84
6.3 Limitations of the Study and Suggestions for Further Study
The major challenge to research in Nigeria is the problem of data availability. Hence, this

affects two areas of our study. Firstly, the choice of the time span of the study is limited to the

available data frame obtainable from respective sources. Secondly, in carrying out our study,

we are not exposed to variables which have been employed in more developed economies;

like graduate unemployment rate. Based on the above mention limitations; i suggest that

further study on graduate unemployment should make use of both primary data and

secondary data analysis, so as to get a broader picture of the effects of graduate

unemployment on economic growth.

85
86