Thursday, May 31, 2018 1:00PM / PwC Nigeria
Despite strong economic growth which averaged 6.5% between 2000 and 2017, high unemployment remains a critical challenge facing the Nigerian economy. The latest available data puts the unemployment rate at 18.8%, and underemployment at 21.2%, the highest since the National Bureau of Statistics (NBS) adopted a new methodology for measuring unemployment in 2010.
The incidence of high unemployment in Nigeria can be attributed to the slow pace of job creation, which has been considerably weaker than labour force growth. Between 2010 and 2017, average job growth was 1.6%, weaker than labour force growth of 3.9%. To reduce the unemployment rate, we estimate that employment growth of at least 4-5% is required. This would translate to at least 3 million new jobs annually.
Delivering jobs capable of boosting incomes and reducing poverty requires creating more high productivity jobs within the formal sector. The informal economy which is usually associated with weak productivity growth is large in Nigeria and accounted for an estimated 41.4% of GDP and 68.0% of jobs created between 2013 and 2016.
The economic development model which resulted in industrialisation in advanced economies and East Asia followed a three-stage process where the Agriculture, Industry and Services sectors dominated output in that sequence. In contrast, structural change in India has made a positive contribution to growth and employment, driven by the expansion of the high productivity activities within the services sector, largely Information Technology (IT) and Business Process Outsourcing services (BPO).
Nigeria has evolved in this same pattern as declining shares of output and employment in agriculture have been absorbed by the services sector. In addition, estimates of employment elasticities suggest Nigeria’s services sector has the highest employment potential at 0.5, relative to agriculture's -0.1 and manufacturing's 0.3.
Services sector jobs require a wide range of skills from artisans in traditional services, to ICT experts in modern services. Without higher productivity in both segments, the potential of services to drive employment will be unrealised. Hence, enhancing productivity in services requires a significant investment in human capital development. Specifically, investing in tertiary education is required to provide high-skilled workers in modern services, while investing in vocational centers and technical colleges is required to improve the supply of skilled labour in traditional services.
Similarly, the services sector can be harnessed to diversify exports. This is particularly important because services is less reliant on physical infrastructure. Despite this, boosting services exports would still require significant improvements to telecommunications and power infrastructure. Turning these around would involve wide-reaching reforms to resolve structural and policy issues that currently restrict investment in these sectors.
With unemployment and underemployment on the rise, Nigeria faces tremendous challenges in terms of sustainable job creation and productivity. In fact, the incidence of high unemployment has become a major socio-economic challenge over the past decade, despite strong economic growth.
In recent years, job creation and the quality of jobs have been marred by a slowdown in economic growth, and the recession. Latest available data from the National Bureau of Statistics (NBS) puts Nigeria's unemployment rate at 18.8% as at Q3'17. Two years prior, this rate was 9.9%. Similarly, the underemployment rate reached the highest on record at 21.2%, from 17.4% over the same period.
Nigeria's population is projected to rise to 410 million by 12050 (20 18E: 206 million). With this population, the country will rank as the third largest populated country globally. As such, implementing policies that will deliver inclusive growth and engender a productive labour force is imperative.
This report, through an empirical approach, examines the socio-economic drivers of unemployment in Nigeria, analyses the sectoral employment trends, and highlights the drivers of productivity growth in the services sector.
Jobless Growth: Economic Boom and High Unemployment
The Nigerian economy expanded rapidly between 2000 and 2014, recording an average annual growth of 7.6% y/y. Over the same period, employment growth was 1.2%, markedly below the labour force growth of 2.9%. As a result, the unemployment rate, which also reflected underemployment at the time, increased from 13.1% in 2000 to 24.3% in 2014.
This suggests that the responsiveness of employment to economic growth, also known as employment elasticity, has not been large enough to reduce unemployment. Empirical studies which examine the relationship between growth and employment in Nigeria (Ajaikaye et al, 2016) show that Nigeria experienced a period of jobless growth between 2005 and 2014. The authors attribute this to a positive but weak employment rate, especially in the manufacturing sector.
The Informal Sector continues to Support Employment Growth
Based on trends observed in recent years, the informal sector continues to absorb the largest proportion of Nigeria's workforce, accounting for 73.7% of jobs created 2in 20 16, up from 54.0% in 2013 . This sharp increase in new jobs created in the informal sector was associated with a decline in the share of jobs created in the formal and public sectors from 37.2% and 8.8% in 2013 to 29.9% and 0.0% respectively in 2016. Informal jobs are defined by the NBS as those generated by individuals or businesses employing less than 10 persons or businesses operating with little or no structure.
The sizeable share of informal employment and its prominence in new jobs created is a reflection of the pace of structural transformation, which has been accompanied by the shift towards labour-intensive jobs in the services sector. Other important drivers include the rise in entrepreneurial activity and more recently, the economic slowdown. In fact, the 2016 economic recession saw job creation decline to 422,000, the weakest in four years. The implication was an increase in the informal sector share of new jobs created to 73.7%.