Trade openness and unemployment: Empirical evidence for Nigeria

Abstract

In the wake of the global financial crisis, unemployment rates and openness to trade have been the subject of considerable research, especially in developing countries. This study analyses the impacts of trade policy on unemployment rates in Nigeria. Using time series data from 1970 to 2010, it adopts the vector error correction methodology. In order to explore the impact of a range of variables on the relationship between trade openness and national unemployment rates, these variables, in a system of equations, include measures of trade openness, public recurrent spending on education, foreign price shocks and real gross domestic product or alternatively income per capita. The findings reveal that in the long run, real output and income per capita lead to a decline in unemployment, but trade openness policy is associated with an increase in unemployment. Foreign policy shocks, as proxied by commodity prices, also exert a positive effect on unemployment rates and do not contribute subsequently to restoring the system to equilibrium. However, the initial impact of openness and foreign price shocks captured by short-term dynamics are observed to reduce unemployment.