Responsiveness of Unemployment To Inflation : Empirical Evidence From Nigeria

Abstract

The debate on the link between inflation and unemployment cuts across various economic interests. Researchers and economists pick on the subject since unemployment remains one of the greatest challenges facing the developing and emerging economies of the world. Other things being equal, achieving price stability is widely acknowledged to have positive effect on unemployment and growth especially if the ideal threshold can be marked. However, finding the perfect trade-off seems quite elusive and Central Banks across the globe contend to achieve high level of employment without sacrificing price level stability. Hence in this study we attempt to determine the response of unemployment to variation in price level in Nigeria using annualized data from 1989 to 2014.The error correction Model (ECM) and the Johansen analytical tools were employed to process the data set. The results of the findings show that inflation impact negatively on unemployment while money supply and exchange rate were found to have positive influence on unemployment. Although unemployment and inflation have long-run association, there is divergence along the equilibrium part which is corrected at 65 percent speed of adjustment each year. We recommend rather than relying solely on monetary targeting as means balance between unemployment and inflation level, output targeting through economic deepening can play a supporting role in maintaining optimal inflation rate and minimal unemployment level.