Article

Providing an Empirical Journal of Development

Policy and Practice
Insight into Nigeria’s 3(2) 179–190
© 2018 SAGE Publications India (Pvt) Ltd
Non-acceleration Rate and Aequitas Consulting Pvt. Ltd
SAGE Publications
of Unemployment sagepub.in/home.nav
DOI: 10.1177/2455133318777161
http://journals.sagepub.com/home/jdp

Richardson Kojo Edeme1

Abstract
This study was necessary since inflation and unemployment are twin
macroeconomic variables that exert influence on the policy decision of any
economy. Using time series from 1972 to 2015, the ordinary least-squares
method was employed to determine both the short-run and long-run Phillips
curve to ascertain if it is evident in Nigeria. The non-accelerating inflation rate of
unemployment (NAIRU) was also estimated. The results establish the presence
of a negative relationship of both inflation and unemployment in the short-run
and long-run unemployment, though not significant. Since NAIRU is 11.63, the
policy implication is that if the economy was to achieve full employment, an
unemployment rate of 11.63 per cent is inevitable.

Keywords
Inflation, unemployment, Phillips curve, NAIRU

Introduction

A review of literature reveals studies that try to quantify non-acceleration rate of

unemployment (NAIRU) predominantly in advanced and other African countries.
For Nigeria, studies have focused on the relationship between inflation and
unemployment and thence test the validity of Phillip’s curve. But as enunciated by
Gordon (1997) and Coibion, Gorodnichenko and Kamdar (2017), considering
their varying nature, the estimation of the NAIRU for a country plays a significant
role in macroeconomic theory; this has not been empirically tested for Nigeria.
1
Department of Economics, University of Nigeria, Nsukka, Nigeria.
Corresponding author:
Richardson Kojo Edeme, Department of Economics, University of Nigeria, Nsukka, Nigeria.
E-mails: richard.edeme@unn.edu.ng; kojodynamics@yahoo.com
180 Journal of Development Policy and Practice 3(2)

This is a major departure of this present study. Apart from determining the short-
run and long-run Phillips curve, an attempt is made to estimate NAIRU for
Nigeria. This will be of great significance in making macroeconomic policies.
Following this brief introduction, other sections of this article are literature review,
methodology, empirical results and conclusion.

Literature Review
Theoretically, the Phillip’s curve is visualised using two approaches: the
short-run curve which links wage inflation and level of unemployment and
the long-run curve that links inflation and unemployment. Since price
expectations are found to be the same at actual prices, the long-run level of
unemployment is seen as NAIRU. But the reality of the Phillips curve in both
developed and developing economies has been criticised by many economists
and even though it has proved to be real in most developed countries, still it is
not evident in others (Laubach, 2001). Since 1958, the relationship between
inflation and unemployment has been changing from time to time. A critical
instance existed during the trade-off between inflation and unemployment
which was evident in the 1950s and 1960s where the short-run Phillips curve
played a very important role in the macroeconomic policy (Gordon, 1972;
Cashell, 2004). Although there was a breakdown in this relationship in the
1970s, there was resurgence in 1986 which disappeared again in the late
1990s. This continual gyration in the relationship, especially for developing
economies, has left some unanswered questions as to whether the Phillips
curve really holds or not and if it holds, under what circumstances. In countries
where empirical evidence does not exist, the Lucas critique seems evident,
thus posing a question whether it is also true for Nigeria. The knowledge gap
in this regard is filled by the present study
A plethora of literature exists on the relationship between unemployment and
inflation with varying outcomes. Notable studies that tested the validity of Phillips
curve include DiNardo and Moore (1999) and Turner and Seghezza (1999) for
Organisation of Economic Cooperation and Development (OECD) countries. In
their study, DiNardo and Moore (1999) employed panel data analysis from nine
OECD countries while Turner and Seghezza (1999) extended the study by using
21 OECD countries. Even though the two studies adopted both ordinary least
squares (OLS) and generalised least squares method, the first study found that
there exists a significant negative relationship between relative unemployment
and relative inflation while the second study provided evidence in support of the
Phillips curve. But with the Kalman filter method, Boone, Dave, Rae, Giorno,
Meacci and Richardson (2002) estimated the natural rate of unemployment across
the 21 OECD countries together with New Zealand between 1980 and 1999 and
found that in the short run, there was a trade-off between unemployment and
inflation but there was no evidence of such in the long run. Another study by
Furuoka (2009) used panel data from five Association of Southeast Asian Nation
Edeme 181

(ASEAN) countries, namely, Malaysia, Singapore, Indonesia, Thailand and

Philippines, and found that a trade-off exists in the relationship between
unemployment and inflation in these countries covered by the study. Dickens
et al. (2006), in support of Akerlof, Dickens and Perry (2000), also found out that
there is a trade-off between inflation and unemployment. For both studies, it was
found that unemployment rate increases as inflationary level decreases. This is
evidenced in the fact that a 2 per cent decrease in unemployment led to a 1.5 per
cent increase in inflation. Also, Tang and Lean (2007) used data from 1971 to
2004 in Malaysia to test the Phillips curve stability and found that the results
supported the negative relationship between unemployment and inflation both in
the short run and in the long run. This study was linked to another study by
Furuoka (2007) in the same country using a different set of data, 1973–2004. Like
Tang and Lean (2007), that result shows that there is both a long-run and a causal
relationship between inflation and unemployment.
In a review of plethora of empirical studies for the South African economy,
Levin and Horn (1987) came to a conclusion that there was no evidence of trade-
off in unemployment and inflation. A basic shortcoming of the studies however is
that the long-run trend for unemployment was not estimated. This perhaps
prompted the study by Elalaoui, Ezzahid and Eladnani (2014) that evaluated the
Phillips curve for Morocco and estimated NAIRU for the country using data from
1998 Q1–2012 Q4. With the Kalman filter technique, the NAIRU was estimated
to be averagely 10.8 per cent. Another study was conducted by Stephanides (2006)
that employed the maximum likelihood (Kalman filter) and the non-linear least
squares to estimate the constant and time-varying natural rate of unemployment in
the USA, the European union and Japan. It was also found that specifications and
variability across the countries were very extensive. The study by Meļihovs and
Zasova (2009) was somehow variant from the rest because he estimated both
NAIRU and Non-Accelerating Inflation rate of Capacity Utilisation (NAIRCU)
for the Latvian economy using both structural and reduced form of the Kalman
filter approach. It was found the NAIRU decreased from 14.3 per cent to 7.4 per
cent at the beginning of 1997 and at the end of 1998, respectively. But from the
end of 2005 to mid-2008, the time-varying natural rate of unemployment exceeded
the actual rate of unemployment. Implied is that there was a rise in inflation rate
during this period.
Studies on the Phillips curve and the NAIRU have also been conducted.
Notable among this are Gordon (1997) for the USA economy and Eaqub and
Ward (2001) for New Zealand. Despite different approaches and periods
adopted, such variables as unemployment gap, real non-oil import prices and
lagged inflation were found to be statistically significant in explaining
inflation. It was, however, noted the use of Kalman filter approach in the
estimation of the relationship tends to give better results than those realised
from other methods.
Muhammad, Sa’idu Bello, Nwokobia and Yakubu (2013) and Orji, Orji-
Anthony and Okafor (2015) further confirm that inflation and unemployment are
the twin macroeconomic variables that are significant in influencing wages and
182 Journal of Development Policy and Practice 3(2)

other macroeconomic policies, especially in developing countries. Umaru and

Zubairu (2012) investigated this relationship through the application of Johansen
co-integration technique and a long-run relationship was found to exist between
them. The main objective of this study by Adebowale (2015) was to examine the
relationship between inflation and unemployment in Nigeria for the period 1977–
2013 and test the validity of the Phillips curve relationship in Nigeria. The Granger
causality test shows that inflation Granger causes the unemployment and inflation
and unemployment were found to be destructive in the growth process of the
economy. A negative relationship was also found between inflation and
unemployment rates which justify the existence of the Philips Curve in Nigeria.
Jelilov, Obasa and Isik (2016) examined the impact of inflation on unemployment
and concluded that monetary and fiscal policy are effective in the control of the
inflation and unemployment.

Methodology
In the consideration of the short-run Phillips curve, the relationship between wage
inflation and unemployment is always considered. With this, the wage rate
adjustment equation is usually represented as:

( )
 = f Ld − Ls f / > 0 (1)
W

But for a complete labour market model, empirical estimates for labour demand,
labour supply and wage adjustment function are required. But this is difficult to
obtain. For this reason, the excess demand expression is transformed into
unemployment (Phillips, 1958). Wage adjustment function can be obtained
independent of labour demand and supply functions where excess supply is:

(
Ls − Ld = − Ld − Ls (2) )
Wage rate adjustment, Equation (2) above, is therefore rewritten as:

W (
 = −f Ls − Ld ) (3)

Unemployment rate is introduced as a proxy for excess supply and it is directly

related to excess supply. From this relationship it is evident that there is positive
unemployment even when there is labour market equilibrium or when excess
supply is zero. Equation (3) becomes:

 = b ( Ur ) ; b / < 0 (4)
W

Equation (4) presents the short-run Phillips curve. Augmenting to the above
equation with anticipated variables (increasing prices due to increase in demand
for labour), Equation (4) is represented as:

 = b ( Ur ) + P (5)
W
 Edeme 183

In its linear form, the expectations-augmented short-run Phillips curve assumes

the following form:

( )
Irt = Irt e + η j* − j t + ut (6)

where Irt is the inflation rate; φte is the inflation expectations; φ* is the NAIRU; ut
is the unemployment rate, εt is the error term and at t time period
From Equation (6), the short-run (SR) trade-off between unemployment
and inflation is taken to be constant over time even though the Phillips curve’s
slope is predicted to be a function of macroeconomic conditions by quite a
number of theoretical models of price-setting behaviour.
If we assume that is constant, then Equation (6) changes to Equation (7) as
next:
Irt = a + Ir e + hj t + ut (7)

where α = ηφ*.
According to Gordon (1997) and Thomas (2012), the concept of NAIRU is
closely associated with the short-run trade-off between inflation and
unemployment. This is evident in the general form of expectations-augmented
Phillips curve presented as:

( ) ( )
Irt − Irt e = a ( L ) Irt −1 − Ir e t −1 + h ( L ) Urt −1 − Ur *t −1 + ∂ ( L ) ∏ t + u t (8)

where Irt and Irte is actual inflation and expected inflation respectively, α(L), η(L)
and ∂(L) is the polynomials in their lag operators, Ur*t is the NAIRU and ∏t a
vector of supply shocks.
Following Ball and Mankiw (2002), Yamada (2014) and in line with the
variables under consideration, the following models were specified. Firstly,
we specify the short-run Phillips model as:
∆w t = f + ∆w t −1 + s ∆Urt −1 + ∅1 ∆opst −1 + ∅2 ∆Exrt −1 + ∅3 ∆pdst −1 + ∅4 ∆dumt −1 + u
w t −1 + s ∆Urt −1 + ∅1 ∆opst −1 + ∅ 2 ∆Exrt −1 + ∅3 ∆pdst −1 + ∅ 4 ∆dumt −1 + ut ut ~ N 0 ,σ 2 (9)
         
( ε )
where Ex exchange rate, pd is public debt and dum is the dummy variable. It is
included to account for economic crises that might cause a temporary shift in the
economy.
The long-run Phillips model was specified as:
Irt = a + bUpt + γ 1opst + γ 2 Exrt + γ 3 pdst + γ 4 dumt + ut ut ~ N 0, σ2 (10)
( ε )
The NAIRU models were specified as:
∑ a j H j −1 (t ) + ∝ ∆Irt −1 + b ∆ (Urt ) + g 1∆opst + g 2 ∆Exrt + g 3 ∆pdst + g 4 ∆dumt + ut
i
∆ Irt = j =1

∑ a j H j −1 (t ) + ∝ ∆Irt −1 + b ∆ (Urt ) + g 1∆opst + g 2 ∆Exrt + g 3 ∆pdst + g 4 ∆dumt + ut

i
∆ Irt = j =1
ut ~ N 0, σ2 .
( ε )
− ∑ j =1 b H (t )
i j −1
 = (11)
Ur
j
t
184 Journal of Development Policy and Practice 3(2)

The essence of Equation (11) is to generate the constant value and

unemployment coefficient to be used in estimating NAIRU value. The
unemployment gap enters equation as lagged values so as to avoid simultaneity.
The number of lags of Irt-1 - Iret-1 included in the model depended on the signi-
ficance of auto-correlated errors as well as significance of the last lag included
in the model. In the above equation, CPI2 is consumer price index in the current
year, CPI1 = consumer price index in the previous year, It is the index, Pti is
the price of the ith commodity, P0i is the price of the ith commodity at the base
period and Wi is the weight of the ith commodity. The unemployment rate is
measured as a percentage of the labor force that does not have jobs.
Data for this study are time series sourced primarily from the World Bank
Development Indicator data base of the World Bank and Statistical Bulletin of
the Central Bank of Nigeria and all data are estimated on an annual growth
basis, 1972–2015.

Empirical Results

Stationarity Test
By nature, most time-series data have unit root and estimates based on non-
stationary time series which are at most times misleading. It therefore became
imperative to check whether the time-series data for this study are stationary or
not. The Augmented Dickey–Fuller (ADF) test of stationarity was employed for
this purpose and the results are presented in Tables 1–3.
Table 1. Result of the Short-run ADF Stationarity Tests
Variable 5% Critical Value Order of Integration
∆ −2.8901 I(1)
∆Wt−1 −2.9011 I(0)
∆Urt−1 −2.9677 I(0)
∆pdt−1 −2.9690 I(0)
∆Ert−1 −2.9690 I(0)
Ops 2.4560 1(0)
Dum −2.9690 I(0)
Source: Own calculation.

Table 2. Result of the Long-run ADF Stationarity Tests

Variable 5% Critical Value Order of Integration
∆ −2.9242 I(1)
∆Wt−1 −2.9231 I(0)
∆Urt−1 −2.9230 I(0)
∆pdt−1 −2.9230 I(0)
∆Ert−1 −2.9249 I(1)
Ops −2.9766 1(1)
Dum −2.9249 I(1)
Source: Own calculation.
Edeme 185

Table 3. Result of the Non-accelerating Inflation Rate of Unemployment ADF

Stationarity Tests
Variable 5% Critical Value Order of Integration
∆Ir −2.9788 I(1)
∆Irt−1 −2.9752 I(0)
∆Urt−1 −2.9752 I(0)
∆pdt−1 −2.9752 I(0)
∆Ert−1 −2.9752 I(0)
Dum −2.9752 I(0)
Source: Own calculation.

In Table 1, apart from change in current wage which became stationary at

first-order difference, all other variables were stationary at levels, while in
Table 2, change in current wage and change in previous exchange rate became
stationery at first difference while other variables were stationary at levels. In
Table 3, all other variables were stationery at levels apart from change in
current inflationary rate which was stationary at first-order difference.
To establish the significance of a specific or group of explanatory variables, the
conduct of Wald test is imperative. If the test is not significant, the null hypothesis
is accepted and therefore concluded that some of the variables have no significant
impact on the dependent variable. This implies that it is possible to exclude some
variables in the estimation of the model. For the purpose of this study, both short-
run, long-run and NAIRU Wald was conducted and the results are presented in
Tables 4–6.
Table 4. Results of Short-run Wald Test
Test Statistic Coefficient Difference Probability
F-statistic 12.8900 (5, 38) 0.0000
Chi-square 98.9800 7 0.0001
Source: Own calculation.
Table 5. Results of the Long-run Wald Test
Test Statistic Coefficient Difference Probability
F-statistic 34.7120 (4, 41) 0.0001
Chi-square 117.2333 6 0.0000
Source: Own calculation.
Table 6. Results of Non-accelerating Inflation Rate of Unemployment Wald Test

Test Statistic Coefficient Difference Probability

F-statistic 12.2308 (6, 37) 0.0000
Chi-square 98.9098 7 0.0001
Source: Own calculation.
From the above results, it is inferred that all the explanatory variables are
significant since the F-statistic p-value and the Chi-square p-value are all less
than 1 per cent and therefore need to be included in the model.
186 Journal of Development Policy and Practice 3(2)

Table 7. Short-run Chow Forecast Test Summary

Coefficient Difference Probability

F-statistic 24.2133 (38, 5) 0.0000
Likelihood 100.9822 7 0.000
Source: Own calculation.
Table 8. Long-run Chow Forecast Test Summary
Coefficient Difference Probability
F-statistic 0.9109 (35, 6) 0.0000
Likelihood 6.5421 7 0.0001
Source: Own calculation.
Table 9. Non-accelerating Inflation Rate of Unemployment Chow Forecast Test

Coefficient Difference Probability

F-statistic 1.0032 (5, 38) 0.1122
Likelihood 3.5412 7 0.0332
Source: Own calculation.
In Tables 7–9, the Chow Forecast test results provide evidence that in the null
hypothesis no structural change can be accepted.

Results of the Short-run Phillips Curve

Table 10. Short-run Results

Variable Estimated Coefficient Std Error t-Statistic Probability

C 4.0990 9.0988 2.7814 0.0853
2.0810 0.3439 4.3194 0.0002
∂Ur−1 2.5440 0.0073 3.7044 0.0009
∂Pds−1 2.1100 2.0203 1.2775 0.2115
∂Ops−1 1.9877 2.1243 5.8732 0.0000
∂EXr−1 1.4859 0.3439 4.3195 0.0002
∂Irr−1 1.1151 0.0169 6.8304 0.0000
Dum −0.0112 3.5852 -6.8336 0.0003
R 2
0.7726
Source: Own calculation.
Note: *Indicates significance at 5% while **indicates significance at 10%.

The above result shows that a percentage increase in previous wage

inflation, change of the previous rate of unemployment, change of the previous
rate of public debt, change of the previous rate of crude oil prices and change
of the previous rate of exchange rate lead to increase in unexpected wage
inflation by 2.08, 2.54, 2.11, 1.99, 1.49 and 1.11 per cent, respectively, keeping
all other variables constant (Table 10).
Edeme 187

Results of the Long-run Phillips Curve

Table 11. Long-run Results

Variable Estimated Coefficient Std Error t-Statistic Probability
C 0.4509 0.8727 3.6724 0.0009
Ur+1 −0.0072 0.0040 −1.7992 0.0825
Pds+1 0.8921 0.0719 3.4130 0.7000
Ops+1 0.9012 0.4164 1.9695 0.0579
EXr+1 0.3543 3.8532 7.3789 0.0004
Dum+1 0.9292 1.1556 2.0938 0.0009
R2 0.8659
Source: Own Calculation.
Note: *Indicates significance at 5% while **indicates significance at 10%.

The result from above indicates that, apart from unemployment rate, all
other variables are positively related with the dependent variable. The specific
coefficient of the variables suggests that, keeping all other variables constant,
a percentage increase in crude oil prices growth rate, public debt growth rate
and exchange rate growth will lead to increase in price inflation by 0.89, 0.90
and 0.35 percentage points, respectively. This is at variance with the finding
of Adebowale (2015). In essence, as depicted by the value of the coefficient of
determination (R2), about 86 per cent of the variations in the dependent is
accounted for by the explanatory variables (Table 11).
Table 12. Results for Non-accelerating Inflation Rate of Unemployment
Variable Estimated Coefficient Std Error t-Statistic Probability
C −0.8140 0.5698 −1.2857 0.7800
∂Urt 0.0700 0.0578 2.3607 0.8370
∂Pdst −0.0325 0.0138 −2.3607 0.0378
∂Opst 0.0278 0.0141 1.9723 0.0742
∂Ext 0.0174 0.0085 2.0578 0.0001
∂Irt −0.2665 0.0186 −1.3302 0.8010
Dumt 0.0271 0.0212 1.2807 0.0066
R2 0.7512
Source: Own Calculation.
Note: *Indicates significance at 5% while **indicates significance at 10%.

From the results presented in Table 12 and relying on Equation (11), the
NAIRU for Nigeria can be estimated thus:

− ∑ j =1 b H j −1 (t )
i

r =
U t
j
0.8140
= = 11. 63percent.
0.0700
188 Journal of Development Policy and Practice 3(2)

Conclusion
This study establishes that in the short run, wage-induced inflation in the current
period is negatively related with wage inflation in the previous period,
unemployment rate, public debt service and crude oil prices. Meanwhile, in the
long run, all other explanatory variables are negatively related to price inflation,
except unemployment rate. Furthermore, the result of the NAIRU model depicts
that change in current price inflation is negatively related to change in previous
price inflation and change in current public debt. Change in current unemployment
rate, crude oil prices and exchange rate are positively related to price inflation.
The NAIRU in Nigeria was estimated to be 11.63 per cent.
The inverse relationship between inflation rate and unemployment exhibited in
the short run implies that Phillips curve is not evident in Nigeria since the
relationship is not significant even though it is negative. In the long run the
relationship is also not significant even though it was found to be negative. Since
NAIRU is 11.63, the policy implication is that if the economy was to achieve full
employment, an unemployment rate of 11.63 per cent is inevitable. Arising from
the above, it is necessary to introduce and adopt policies that would stimulate
domestic production such as keeping the exchange rate stable since any increase
of exchange rate may lead to an increase in inflation in the long run.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the
research, authorship and/or publication of this article.

Funding
The author(s) received no financial support for the research, authorship and/or
publication of this article.

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