The Effects of Output Shock on Unemployment: An Application of Bounds Testing Approach to Nigeria

Abstract

There exists a plethora of literature that links unemployment with restiveness as being experienced in Nigeria, especially amongst the youth. Okun’s law suggests a negative relationship between output and unemployment. So it would appear that improving the economy would reduce unemployment and by consequence (youth) restiveness.  This study investigated the effect of output (GDP) on unemployment rate in Nigeria, if short- and long-run relationship exists between them; a relationship necessary for the validity of Okun’s law in Nigeria. The study made use of annual time series data from 1985 – 2013. A robust and recent time series technique known as the Autoregressive Distributed Lag Bounds Test was used which is applicable whether the regressors are I(0) and I(1). The results shows that with the present structure of the economy, output changes in Nigeria, have no significant effect on unemployment rate. The findings in this study implies that for Government or the monetary authority to tackle the issue of unemployment (and poverty) in Nigeria, structural changes need to be made to the economy so that high-job generating sectors like manufacturing and agriculture, will be the drivers of the Nigerian economy.

Keywords: Unemployment, Output, ARDL, Wald Test, Bounds Test, Okun’s law,  Impulse Response, Variance Decomposition