Price stability and achieving full employment are among the core goals of every economy’s macroeconomic policies. In this case, there are two main approaches to curtailing inflation, recession, unemployment, and other macroeconomic phenomena. These approaches are monetary and fiscal policies. While monetary policy refers to the activities of the central bank that are directed toward influencing the quantity of capital (money) and credit in an economy; fiscal policy refers to the government’s decisions on taxation and spending. Both monetary and fiscal policies are used to regulate economic activities over time. They can be used to accelerate growth when an economy starts to slow or to moderate growth and when an economy starts to overheat. In addition, fiscal policy can be used to redistribute income and wealth.
The overall goal of these monetary and fiscal policies is the creation of a healthy economic environment that could sustain economic growth, facilitate positive employment, and maintain a stable inflation rate.
In plain language, the main aim of these two policies is to steer an economy in such a way that it does not experience an economic boom that could be followed by a period of low or negative growth, high level of unemployment, and an unstable price. In this situation, people can feel safe with their savings, and investment decisions, and the government can concentrate on economic decision-making. And this is where the idea of the monetarist, classical, and keynesian schools of economics comes into play, where they have different views with respect to the effectiveness of the two policies.
The issue of inflation and unemployment is not a new concept in the realm of economics, and it’s one of the concepts that reflect the science of economics as a true reflection of reality. Almost everyone is feeling the impact of either of the two.
The history of the Phillips curve can be traced to the research findings of A.W. Philip, an economist who analysed the relationship between unemployment and the rate of change of money wages in the United Kingdom between 1861 and 1957. At the end of his findings, he suggested an inverse or negative relationship between wages and unemployment. In simple terms, he meant that whenever there’s growth in unemployment, there will be a low level of inflation. And the rationale behind the justification of his idea is that where there’s employment, people have more money, which leads to high demand for goods and services, pushing prices up. On the other hand, when there’s a rise in unemployment, inflation will go down since there will be low demand for goods and services as there’s less money in circulation.
There are different opinions with regard to the application of the curve and the measures to contain the phenomenon. According to the monetarist school, the issue of unemployment is a supply-side phenomenon; therefore, demand-side measures cannot be used to curtail it, and even if it occurs, it can be temporary and will accelerate price instability at the end. According to the Keynesian school, there can only be “demand-deficient unemployment,” and in times of recession, demand-side measures can reduce unemployment long-term with little inflation.
In Nigeria, since its independence, unemployment and inflation have been among the major distractions from the growth and development of the nation’s economy. This is evident as we are all witnessing a scenario where too much money is chasing a few goods and another case of high supply of labour with low demand for it. According to data from the National Bureau of Statistics, inflation rate has been consistently high, averaging around 11 per cent in the past decade. The high inflation rate can be attributed to a number of factors such as the devaluation of the naira, an increase in the cost of imports, and a rise in fuel prices.
In an effort to curb inflation, the Central Bank of Nigeria has introduced and implemented a number of monetary policies, such as the recent cashless-driven economy module, a strictly enforced weekly withdrawal limit, increasing interest rates, tightening liquidity, and naira devaluation. However, these policies have not been entirely successful in bringing inflation under control. Additionally, the government has also implemented fiscal and monetary policies, such as capping government debt. As cash withdrawals are limited to a minimal amount, increasing taxes and cutting government spending are implemented to curb inflation. The effectiveness of these policies, however, remains uncertain and challenging.
The same goes for the apex bank’s ongoing monetary policy, especially the weekly withdrawals limit policy, which poses an unprecedented threat to urban and rural businesses due to the poor mobile and internet banking mechanisms in the country. As such, the apex bank should address these concerns by shifting the effective implementation date until all the proper mechanisms required to operate a cashless economy are in place, in order to constitute a committee that includes technocrats, bankers, and internet service providers that will make sure effective mobile and internet services are made available to cover the whole country before the policy kicks in.
In conclusion, the relationship between inflation and unemployment as represented by the Phillips curve is a complex one that is influenced by a variety of factors. The Nigerian economy is facing significant challenges in terms of cashless economy application, high inflation, and unemployment rates, and finding effective solutions to these issues will require a rigorous political will and careful consideration of both monetary and fiscal policies. It is important for the government and the central bank to continue to monitor and analyse economic data and make adjustments to policies as needed in order to create a stable economic environment that supports growth and employment.
Sagir, a graduate of economics, writes via [email protected]
