EFFECT OF MONEY SUPPLY ON UNEMPLOYMENT IN NIGERIA (A CASE STUDY OF SELECTED COMMERCIAL BANKS IN LAGOS STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Understanding the link between money supply and unemployment has become paramount for economic agents in Nigeria following the country’s economic crisis that started in the last quarter of 2014. It is generally believed that the more liquid money is available in an economy, the more opportunities exist for continued growth. Nevertheless, the recent economic crisis in Nigeria was entwined with dampened output growth despite the relatively stable increase in total monetary liabilities (M2) recorded by the Central Bank of Nigeria (CBN) over the same period. As the crisis persisted, firms cut back on hiring new work force, many consumers lacked income needed to boost economic activities and allow businesses to bounce back, and unemployment rates heightened. According to Nickolas (2015), when business sales and revenues decrease and businesses stop expanding with massive layoffs of workers due to business latency and paucity of job creation, consumers tend to save money, leading to liquidity crunch (tightening of money supply). In other words, lower consumer spending, lower aggregate demand and lower growth rates could be attributed to tightening of money supply. When firms stopped hiring new work force and unemployment rises, ideally, there is need for governments to grow the economy and for central banks to stimulate aggregate demand. The stimulation could be allied to three factors (Kandil, 2014): (i) the elasticity of money demand with respect to change in income, (ii) the elasticity of demand of money with respect to a change in the interest rate, and lastly, (iii) the elasticity of aggregate spending with respect to change in interest rate. When central banks wish to stimulate the economy through increase in the money supply, they do so through appropriate monetary policies that could be used (either singly or in combination). These include: (a) by reducing reserve requirement: so that deposit money banks could be able to loan out more of their deposits and money supply would increase; (b) by reducing interest rates: this would make it cheaper for investors to borrow money, as more borrowing translates to increase in money supply; and (c) by buying government securities in open market operations: this would enable central banks to influence the cost and availability of reserves and bring about desired changes in bank credit and money supply. In principle, increase in money supply is expected to allow more economic activities to occur, and when more economic activities occur, unemployment is expected to decline. In retrospect, the Russian high level unemployment of 2002 was attributed to the 1998 financial crisis and the subsequent tightening of monetary policy (Lakstutiene et al., 2011). Cascio (2016) also opined that monetary shocks influence unemployment significantly but differently across countries in a study on the relationship between monetary policy and unemployment rate in eleven OECD countries. Under the monetary targeting framework of the CBN, the target variable is the growth in money supply and the aim is to achieve a long-term objective of price stability. The Bank watches growth in the monetary aggregates very closely in order to predict the future size of money supply. If the monetary aggregates grow too quickly, inflationary pressures could be triggered and if it does, the Bank raises interest rates to halt growth in money-supply. The Bank uses expansionary monetary policy to increase the total supply of money in the economy rapidly when there is need to stimulate domestic economic activities, or contractionary policy to decrease the total money supply, or increase it slowly, when the rate of growth of money supply is higher than the growth rate of output in the economy. However, most economists believed that in the long run, output is usually fixed, so that any changes in the money supply only cause prices to change, but in the short run, changes in the money supply can affect the actual production of goods and services, given that prices and wages usually do not adjust immediately. This is the salient feature in the link between growth in money supply and unemployment rate in Nigeria. The episodes of rising unemployment have inspired numerous studies in recent times. Most of the studies in the literature showed that money supply has been consistently on the increase while employment seems not to be increasing proportionately, thereby resulting in persistent inflation and rising unemployment rates. Some of the studies focused on the relationship between money supply and economic growth, while others focused on unemployment and economic growth or inflation and economic growth. On the other hand, Akeju and Olanipekun (2014) showed that there is both short- and long-run relationship between unemployment rate and output growth in Nigeria. Orji and Okafor (2015) posited that unemployment is a significant determinant of inflation with a positive relationship between them, suggesting that the proposition on the Phillips curve hypothesis has been invalidated in Nigeria. As the surge in unemployment continues, the concern by policy makers becomes paramount due to the associated socio-economic implications. This paper therefore examines the effect of money supply on unemployment in Nigeria.

STATEMENT OF PROBLEM

Money supply has a dual mandate of guaranteeing high employment rate and price stability. At one time or another, economic agents around the globe have also tried to use monetary policy to achieve almost every conceivable economic objective with economic growth and low level unemployment often high in the list. In Nigeria, the Central Bank of Nigeria (CBN) reviews developments in the economy over a period to examine the risks to price stability as the core objective of monetary policy and formulates policies to mitigate its effect. Since 1980 when the country was engulfed in a serious economic crisis, Nigeria’s economy has witnessed several structural changes with varying effects on the level of unemployment which is one of the major threats to macroeconomic stability in the country. As part of its monetary policy strategy, the monetary authority in Nigeria has also been focusing on adjusting the monetary aggregates, the policy rate or the exchange rate, depending on the level of development in the economy, especially the financial sector, in order to affect the variables which it does not control directly. The policy process which is fairly complex in practice majorly involves using a price based nominal anchor that targets interest rate as a potent instrument for stabilizing inflation and output over the business cycle. According to Ndukwe (2013), the change in the interest rate which is engineered by the CBN unambiguously accounts for three market rates (prime lending rates, the interbank rates and the Treasury Bills rates) which also change in the same direction with a change in the interest rate. Since money supply is expected to affect the economy in general and the price level in particular, the variability of the short-term nominal interest rate (monetary policy rate) in response to a variety of economic events including crises in domestic and foreign financial markets has become a prominent feature in the Nigerian economy. As studies on the effects of money supply advances, the way in which it relates with real variables like unemployment varies significantly from country to country, and in many developing nations like Nigeria, there are few studies conducted to explore their relationship. This paper seeks to shed more light on the dynamic relationship by investigating the effect of money supply on unemployment in Nigeria.

AIMS OF THE STUDY

The major purpose of this study is to examine the effect of money supply on employment in Nigeria. Other general objectives of the study are:

1. To examine the nature of money supply in Nigeria.
2. To examine how interest rate and exchange rate influences unemployment in Nigeria.
3. To examine the effects of money supply on unemployment in Nigeria.
4. To investigate the implication of unemployment crisis on economic growth in Nigeria.
5. To examine the relationship between money supply and unemployment in Nigeria.
6. To examine the different ways of combating unemployment in Nigeria.

RESEARCH QUESTIONS

1. How is the nature of money supply in Nigeria?
2. How does interest rate and exchange rate influences unemployment in Nigeria?
3. What are the effects of money supply on unemployment in Nigeria?
4. What are the implications of unemployment crisis on economic growth in Nigeria?
5. What is the relationship between money supply and unemployment in Nigeria?
6. What are the different ways of combating unemployment in Nigeria?

RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant effect of money supply on unemployment in Nigeria.

H1: There is a significant effect of money supply on unemployment in Nigeria.

Hypothesis 2

H0: There is no significant relationship between money supply and unemployment in Nigeria.

H1: There is a significant relationship between money supply and unemployment in Nigeria.

SIGNIFICANCE OF THE STUDY

The significance of this study lies on the fact that huge amount of resources (human and capital) are unemployed which could cause poor economic performance. This study will help policy makers to establish the extent of the effect of money supply on unemployment in Nigeria. This research will improve the body of existing literature and also serve as a policy document. The problems of high level unemployment and money supply need to be addressed in order to improve economic growth. This research work will benefit policy makers, students, businessmen, financial experts, the academic and researchers because it will help improve their general understanding of these concepts. The banking sector will also benefit from this by comparing their past mistakes with the present and devising better strategies to handle future operations on investment decisions. Thus, this study will be significant to policy makers to make appropriate policy which will go a long way toward alleviating investment problems and bring about the desired improvement in the nation’s economy since developing economy like Nigeria which is bedevilled by need to determine the appropriate policy mix to achieve stability. Finally, this research work will be useful to students and researchers who might wish to undertake study and research work on this area.

SCOPE OF THE STUDY 

The study is based on the effect of money supply on employment in Nigeria, case study of selected commercial banks in Lagos state.

LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

DEFINITION OF TERMS

Money Supply: In economics, the money supply is the total value of monetary assets available in an economy at a specific time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits

Unemployment: Beggs (2012) denoted that unemployment is a circumstance in which an individual in an economy is searching for a job and cannot discover one. Pettinger (2010) considers unemployment to be a circumstance where somebody of working age is not ready to get. Job but rather might want to be in full time employment.