Reducing Unemployment Through the Informal Sector


challenges of unemployment in Nigeria.

Unemployment is one of the developmental problems that face every developing economy in the 21st century. International statistics portray that industrial and service workers living in developing regions account for about two-thirds of the unemployed. This among many other crises resulted in the introduction of the structural adjustment programme (SAP) in 1986 and the current economic reforms. The core objective of the economic structural reform is a total restructuring of the Nigerian economy in the face of population explosion. However, these economic and financial structural reforms put in place have not yielded significant results. In the light of this, this term paper seeks to examine how a major macroeconomic variable, unemployment could be reduced through the informal sector.

BACKGROUND

The Nigerian economy since the attainment of political independence in 1960 has undergone fundamental structural changes. The domestic structural shifts have however not resulted in any significant and sustainable economic growth and development. Available data show that the Nigerian economy grew relatively in the greater parts of the 1970s, with respect to the oil boom of the 1970s; the outrageous profits from the oil boom encouraged wasteful expenditures in the public sector dislocation of the employment factor and also distorted the revenue bases for policy planning. Unemployment as one of the macroeconomic problems could be reduced through the informal sector participation provided it is well supported and managed. The informal sector in itself may not be able to achieve much as we have presently due to inaccessibility to credit, but with the on-going policy of the Federal Government through the Central Bank of Nigeria on micro-financing the macroeconomic objective of reduced unemployment, if not full employment will become a reality in Nigeria.

CONCEPTUAL AND THEORETICAL ISSUES

According to Briggs (1973) unemployment is the difference between the amount of labour employed at current wage lends and working conditions, and the amount of labour not hired at these levels, however, Gbosi (1997) defined unemployment as a situation in which people who are willing to work at the prevailing wage rate are unable to find jobs. The implication of the definition by Gbosi is that anyone who is not be counted as part of the unemployed labour force, in order to avoid overestimation of the official rate of unemployment. In recent times, the definition of unemployment by the International Labour Organization (ILO) is said to be more encompassing, “the unemployed is a member of the economically active population, who are without work but available for and seeking for work, including people who have lost their jobs and those who have voluntarily left work (World Bank, 1998).

The application of this definition across countries has been faulted, especially for the purpose of comparison and policy formulation, as countries characteristics are not the same in their commitment to resolving unemployment problems, more, the preponderance of housewives who possess the ability and willingness to work, the definition of the age bracket all stand as limitations to the definition by ILO (Douglason et al, 2006). According to the Central Bank of Nigeria (2003), the national unemployment rate rose from 4.3 percent in 1970 to 6.4 percent in 1980. The high rate of unemployment observed in 1980 was attributed largely to depression in the Nigerian economy during the late 1970s. Specifically, the economic downturn led to the implementation of stabilization measures which included a restriction on exports, which caused import dependency of most Nigerian manufacturing enterprises, which in turn resulted in Operation of many companies below their installed capacity. This development led to the close down of many industries while the survived few were forced to retrench a large proportion of their workforce.

Furthermore, the Nigerian Government also placed an embargo on employment. Specifically, total disengagement from the Federal Civil Service rose from 2, 724 in 1980 to 6,294 in 1984 (Odusola, 2001). Owing to this, the national unemployment rate fluctuated around 6.0% until 1987 when it rose to 7.1 percent. It is important to state here, that SAP adopted in 1986, had serious implications on employment in Nigeria, as unemployment rate declined from 7.1 percent in 1987, to as low as 1.8 percent in 1995, after which it rose to 3.4 percent in 1996, and hovered between 3.4 and 4.7 percent between 1996 and 2000 (Douglason et al, 2006).

The analysis by educational status also suggests that people who have been majorly affected by unemployment are those without basic education. For instance, persons with and without primary school education accounted for 76.8/80.6 percent of the unemployment in 1974 and 1978 respectively. In recent times, however, the situation has been compounded by the increasing unemployment of professionals such as accountants, engineers, among others. According to a 1974 survey, reported by Aigbokhan (2000), graduate unemployment accounted for less than 1 percent of the unemployed, in 1974, by 1984, the proportion rose to 4 percent for urban areas and 2.2 percent in the rural areas. Graduate unemployment, (Dabalen et al, 2000) accounted about 32% of the unemployed labour force between 1992 and 1997.

It is impressive to note here that, in 2003, Nigerian’s unemployment rate declined substantially to 2.3 percent. This decline was attributed to the various government efforts aimed at addressing the problem through poverty alleviation programmes. This decline also pointed to an increased number of people who got engaged in the informal sector activities. A couple of recent studies have attempted to examine the contributions of Informal Sector to employment creation. Ajibefun and Daramola (2003) examined the efficiency of micro-enterprises in the Nigerian economy using a sample of 180 micro enterprises. They reported evidence of a wide variation in technical and allocative efficiencies, both within and across industries. They also found that education of owner of a business enterprise was a significant factor influencing efficiency. They conclude that the evidence of variations in efficiency is indicative of the need for more proactive actions to raise the level of efficiency and employment among the firms in the sample.

READ:  Investing On Agriculture to Reduce Poverty

Also, Sanda et al.(2006) used a sample of 360 firms in Kano and its environs to examine whether or not, in comparison to large firms, small firms are relatively better at the creation of employment opportunities. Their results were positive in that small firms were found to be relatively better, and the conclusion they derived was that a policy that gives special preference to small firms is justified.

THE INFORMAL SECTOR

The informal sector is unorganized, unregulated and mostly legal, but unregistered. As observed by Todaro (1997), the massive additions to the urban labour force by this sector do not show up in formal modern sector unemployment statistics. The buck of new entrants to the urban labour force creates their own employment or work for small-scale family-owned enterprises.

The concept of “informal sector” since its invention in the 1970s has attracted much interest, discussion and disagreement. There are currently two approaches to defining informal sector activities: the definitional and behavioural (Farrel, Roman and Fleming, 2000).

Farrel defines the informal sector as one which consists of economic activities which are not recorded in the Gross Domestic Product (GDP) and or the national income accounts. The behavioural which is a time referred to as the legalistic definiting is based on whether or not an activity complies with the established judicial, regulatory, and institutional framework (Feige, 1990) however, Sethuraman (1981) defines the informal sector as consisting of small scale units engaged in production and distribution of goods and services with the primary objective of generating employment and income, notwithstanding the constraints on capital, both physical and human, and the technical-know how, Arimah (2001), opines that the informal sector does not appear to have a meaning independent of the formal sector, as it only derives its meaning when contrasted with the formal sector.

Ademu (2006) also defines the formal sector as comprising those employment generating activities of some urban residents, undertaken for survival in the absence of formal employment. These activities are characterized by the lack of regulations by institutions of society in a social and legal environment in which similar activities are regulated. Common features of operators in the informal sector include:

  • Easier access to production factors which are derivable from social organization of family and friends.

  • Involves entrepreneurs in virtually all branches of the economy ranging from productive activities general services and specialized services.

  • Technology is determined more by the constraints of the social relations.

  • The motivation for production by the operators in the informal sector is becoming more profit oriented. (Ademu, 2006).

EFFORTS MADE AT COMBATING UNEMPLOYMENT: NATIONAL DIRECTORATE OF EMPLOYMENT (NDE)

One of the steps taken by the Nigerian government to reduce the problem of unemployment in Nigeria was the establishment of the National Directorate of Employment (NDE), which was established on November 22, 1986. The objective of NDE was to promptly and effectively fight unemployment by designing and implementing innovative programmes, which are directed towards the provision of training opportunities through the guidance and management support services to graduate farmers and small-scale entrepreneurs. The objectives of NDE spanned the following programmes:

  1. Agricultural development programme.

  2. Youth employment and vocational skills development programme.

  3. Special public works.

  4. Small scale industries and graduate employment programme.

The aim of the agricultural programme is to generate employment for graduates, non-graduates and school leavers in the Agricultural sector, with emphasis on self-employment in agricultural production and marketing. The programme is monitored by a team of Agricultural professionals in the Agricultural department of the directorate. However, factors which include inadequate funding and late release of funds from the federation account among others have impaired the effectiveness of the NDE agricultural programmes (Chinedum, 2006).

As stated earlier, this study seeks to recommend the informal sector as a medium of reducing unemployment in Nigeria, while outlining some of the pointers needed in making the objectives achievable.

National Economic Employment and Development Strategy (NEEDS)

The National Economic Employment and Development Strategy (NEEDS) was introduced in March 2004, in order to confront the various macroeconomic imbalances, social challenges and structural problems in the Nigerian Economy. One of the principal goals is to build a modern Nigerian that maximizes the potential of every citizen so as to become the largest and strongest African economy, and a force to be reckoned with in the world. To achieve this goal NEEDS, as a development strategy anchored on the private sector is to engineer wealth creation, employment generation and poverty reduction, however, for NEEDS to achieve its objectives there’s need to design many integrated programmes that can generate employment for women and youths to enhance growth and development (Adebayo, 2006).

As it is a medium – termed reform based development strategy, and action plan for the period 2003 – 2007, the impact of NEEDS is yet to be felt, in combating unemployment problem and these further points to the need to seek help in the informal sector in order to drastically reduce unemployment. The tables below are presented in order to make for an easier analysis and comparison of the unemployment situation in Nigeria both in previous and recent times.

Table 1: National Unemployment Rates (1985-2004)

Survey Period

Composite

Urban

Rural

December 1985

6.1

9.8

5.2

December 1986

5.3

9.1

4.6

December 1987

7.0

9.8

6.1

December 1988

5.1

7.8

4.8

December 1989

4.5

8.1

3.7

December 1990

3.5

5.9

3.0

December 1991

3.1

4.9

2.7

1992 (annualized

3.5

4.8

3.0

1993

3.4

4.0

3.2

1994

3.2

4.0

2.8

1995

1.9

3.6

1.6

1996

2.8

4.4

2.4

1997

3.4

5.7

2.8

1998

3.5

4.5

3.1

1999

17.5

11.6

19.6

2000

18.1

14.2

19.8

2001

13.7

10.3

15.1

2002

12.2

9.5

13.3

2003

14.8

17.1

13.8

2004

11.8

11.0

12.1

March 2005

11.9

10.1

12.6

READ:  Government Approach In Tackling Poverty and Inequality Problems In Nigeria

Source: Federal Office of Statistics (FOS) and National Bureau of Statistics (NBS) (June 2005).

.

Table 2: Unemployment Rates in Nigeria (2005)

STATES

PERCENTAGE (%)

STATES

PERCENTAGE (%)

Nigeria

11.9

Adamawa/Taraba

21.4/3.4

Abuja

6.5

Imo/Abia

16.5/7.9

Akwa-Ibom

14.4

Kwara/Kogi

2.9/8.7

Anambra/Enugu

9.8/27.4

Lagos

6.5

Bauchi

29.7

Niger

0.2

Edo/Delta State

9.9/4.5

Ogun

2.5

Benue

18.6

Ondo

6.2

Borno/Yobe

6.3/8.0

Oyo/Osun

5.3/1.9

Cross River

11.1

Plateau

2.8

Kaduna

12.1

Rivers

7.0

Kano/Jigawa

19.1/19.1

Sokoto/Kebbi

4.1/19.9

Katsina

23.8

Source: Federal Office of Statistics, 2005.

Table 3: Registered unemployed and vacancies declared in lower grade professional and executive levels

Year

Unemployed

Vacancies

Placement

Unemployed

Vacancies

Placement

1991

89752

7637

1917

10182

3695

986

1992

110513

14529

2926

12624

3989

164

1993

75143

3864

985

22206

30188

10

1994

75387

3735

1251

1081531

12605

79

1995

72277

3786

859

28123

3307

8

1996

81730

4182

1119

32942

3708

49

1997

85441

7873

2020

67252

250

91

1998

85832

7831

2134

66461

83

2

1999

84727

6895

1352

99376

38

15

2000

86102

7313

1611

63669

138

75

2001

85368

6583

923

104960

115

110

Source: CBN, 2002

COMBATING UNEMPLOYMENT THROUGH THE INFORMAL SECTOR

Studies on the industrial development of different countries have shown that the informal sector constitutes an integral part of the overall industrial sector and play an active role in the growth and development of these countries. These enterprises contribute significantly to the employment generation and output growth of different developed and developing countries (Quarterly Newsletter of IYMC, 2005). In Nigeria, this sub-sector accounts for about 70% of the total industrial employment, generates about 6.2 percent of the aggregate employment in the United States, 22.3 percent in China, about 80 percent in India, as well as about 50 percent employment in Israel (Maryland, 2004). The foregoing therefore points to the fact that the informal sector given the needed support and regulatory framework could be a major player in the combat against unemployment saga in Nigeria, as well as in other developing countries.

However, the informal sector cannot operate effectively at this task without the support of other key players, which is basically the availability of credit, as the best of ideas may never translate to reality without the wherewithal to make it happen – CREDIT, FUND; hence the availability of credit to finance the informal sector cannot be under placed.

ROLES OF THE MICROFINANCIAL INSTITUTIONS

Micro Finance continues to assume increasing importance as a result of the foregoing. The emphasis on microcredit in this century is such that the Global conscience believes that if unemployment is reduced, the world would be a better place as there would be a reduction in poverty, an improved living condition, increased productivity, and an overall resultant effect of an enhanced economic performance. Khandker (1998) observes that the lack of savings and capital makes it difficult for many poor people to become self-employed and to undertake productive employment generating activities. Furthermore, lack of capital makes it difficult for the disadvantaged to become self-employed. Consequently, the informal sector’s productive base and contributions remain small due to inaccessibility to credit (Ademu, 2006).

In the light of the above, microfinance institutions in whatever social and economic climes can deliver credit to the informal sector which in turn makes use of the borrowed fund profitably, thereby reducing the level of unemployment in the country. Microfinance service providers are expected to:

  1. Provide efficient and effective financial services, such as credit, deposits, commodity/inventory collateralization, leasing, and innovative transfer/payment services;

  2. Undertake appropriate recruitment and retention of qualified professionals through transparent and competitive processes;

  3. Adopt continuous training and capacity building programmes to improve the skills of staff; and (iv) Strictly observe their fiduciary responsibility, remain transparent and accountable in protecting savers’ deposits.

GOALS OF MICROFINANCIAL BANKS

The establishment of microfinance banks has become imperative to serve the following purposes:

  1. Provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, that would enable them to undertake and develop long-term, sustainable entrepreneurial;

  2. Mobilize savings for intermediation;

  3. Create employment opportunities and increase the productivity of the poor in the country, thereby increasing their individual household income and uplifting their standard of living;

  4. Enhance organized, systematic and focused participation of the poor in the socio-economic development and resource allocation process;

  5. Provide veritable avenues for the administration of the microcredit programmes of government and high net worth individuals on a non-recourse case basis. In particular, this policy ensures that state governments shall dedicate an amount of not less than 1% of their annual budgets for the on-lending activities of microfinance banks in favour of their residents; and

  6. Render payment services, such as salaries, gratuities, and pensions for various tiers of government.

With the effective implementation and monitoring of the on-going microfinance policy in Nigeria, it is expected that the issue of unemployment in Nigeria will be a thing of the past by the year 2020.

THE ROLES AND RESPONSIBILITIES OF STAKEHOLDERS

The roles and responsibilities of stakeholders in ensuring the effective performance of the informal sector are hereby outlined. Government shall be responsible for:

  1. Ensuring a stable macroeconomic environment, providing basic infrastructures (electricity, water, roads, telecommunications, etc), political and social stability;

  2. Fostering adequate land titling and other properly rights sufficient to serve the collateral needs of borrowers and financial institutions;

  3. Instituting and enforcing donor and foreign aid guidelines on micro-finance to streamline their activities in line with this policy; and

  4. Setting aside an amount of not less than 1% of the annual budgets of state governments for on-lending activities of microfinance banks in favour of their residents.

READ:  Economic Growth as an Objective for Macroeconomic Policy in Developing Countries

CENTRAL BANK OF NIGERIA (CBN)

The roles of the CBN shall include the following:

  • Establishing a National Microfinance Consultative Committee.

  • Evolving a clear micro-finance policy that spells out eligibility and licensing criteria, provides operational/prudential standards and guidelines to all stakeholders;

  • Evolving a microfinance sub-sector and institutional policies aimed at providing regulatory harmony, promoting healthy competition and mainstreaming microfinancing with formal intermediation;

  • Adopting an appropriate regulatory and supervisory framework;

  • Minimizing regulatory arbitrage through periodic reviews of the policy and guidelines;

  • Promoting linkage programmes between universal/development banks, specialized financial institutions and the microfinance banks;

  • Continuously advocating market-determined interest rates for government-owned institutions and promote the channelling of government microfinance funds through MFBs; and

  • Implementing appropriate training programmes for regulators, promoters and practitioners in the sub-sector, in collaboration with stakeholders.

DONORS AGENCIES AND NGO’s

Donor agencies offer free or subsidized funds, donations or technical assistance for the development of the microfinance industry in Nigeria. They include bilateral and multilateral institutions, NGOs and missionaries with a pro-poor orientation. The services provided by donor agencies include grants, donations, technical assistance, etc.

The donor agencies, in conducting their microfinance activities, shall comply with the relevant provisions of this policy. The target clients for donors’ support may include MFIs, NGOs, regulators and other relevant agencies. However, for the purpose of leveraging the evolving micro financial initiative, donors are expected to direct most of their assistance to licensed MFBs to ensure an orderly resource injection, transparency and synergy. (CBN, 2005).

METHODOLOGY AND DATA ANALYSIS

This term paper utilized primary data for assessing the reduction of unemployment through the informal sector in Nigeria using the information getting from some selected small-scale outlets in Gwagwalada as the area of study. About a total of fifty (49) questionnaires were designed to sample their opinions. Their response is presented and analysis through simple percentage method of data analysis.

Table 4; RESPONSE TO THE MAJOR QUESTION OF THE TERM PAPER

DESCRIPTION

TOTAL

PERCENTAGE %

YES

44

89.8%

NO

5

10.2%

TOTAL

49

100%

Source: field survey (2012)

From the table above, it is clear that the small-scale global has a significant effect on the reduction of unemployment in Nigeria with 89.8% respondent supporting it why 10.2% disagreed.

CONCLUSION AND POLICY IMPLICATIONS

From our study, employment generation has been seen as a means of alleviating poverty, increasing the level of economic activities which translate into economic growth. The situation of unemployment in Africa, Nigeria as a case study has been on the increase which has resulted in an increase in social vices among other negativities. Although the Nigerian Government in previous times had put in place policies and programmes which are meant to combat this menace, few of which are considered in this study, but up till now, these programmes have not made much impact. We, therefore, examine how unemployment can be reduced, by expanding the activities of the informal sector. Although the informal sector has its challenges, which revolves around the inaccessibility of credit to finance its activities there is a glimmer of hope, considering the on-going policy of the Federal Government through the Central Bank of Nigeria, on microfinance, which has brought microfinance banking into the limelight making it a more realistic programme.

It is hoped that if the microfinance programme continues to enjoy the support and regulatory framework it presently enjoys from Government and stakeholders, it will no longer be crippled by lack of fund, while the employment generation and job creation goals of the millennium also become a reality. We hereby recommend the informal sector as a medium of reducing unemployment in Nigeria and advise that Government and all relevant stakeholders continue in their quest towards reducing unemployment, as well as give their support in ensuring that the informal sector is not downtrodden but embraced in this task.

REFERENCES

  • Adebayo, A. and Ogunrinola, I.O. (2006)”Contemporary Dimensions of the unemployment problem in Nigeria: A special challenge under the National Economic Empowerment and Development Strategy”. NES 2006, Ibadan, Nigeria.
  • Ademu, W.A (2006) ”The informal sector and employment generation in Nigeria: The role of credit”. NES 2006 Annual Conference.
  • Akintoye, I.R(2006) “Enhancing the performance of the Informal Sector for the Economic Development of Nigeria: A Case Study of Lagos State” International Journal of Social Sciences, Vol. 5 No 1, pp 100-112
  • Alabi, R.A and Osasogie I.D (2006) “Income Generation by participants in the National Directorate of Employment in Edo State”. NES 2006, Ibadan, Nigeria.
  • Arimah, B.C. (2001)”Nature and determinants of the linkages between informal and formal sector enterprises in Nigeria”. African Development Review 13 (1).
  • CBN/FOS/NISER (2001) A study of Nigeria’s informal sector/statistics of Nigeria’s informal sector, Vol. 1, Lagos.
  • Central Bank of Nigeria (2005)Microfinance Policy, Regulatory and Supervisory framework for Nigeria, Abuja, Nigeria.
  • Douglason, G.U and Gbosi, A (2006) ”The Dynamics of productivity and unemployment Nexus: Implications for employment generation in Nigeria NES 2006”. An annual conference, Ibadan, Nigeria.
  • Federal Office of Statistics (1998) Review of the Nigerian Economy 1997, Lagos.
  • Feige, E.L. (1990) Defining and estimating underground and informal economies: The new institutional economics, approach world development.
  • Gbosi, A.N. (2006) Modern Labour Economics and Policy Analysis. Abakaliki, Pack Publishers.
  • Khandker, S.R. (1998) Micro-credit programme evaluation: A critical review. IDS Bulletin 29(4).
  • National Bureau of Statistics (2005) The Nigerian statistical fact sheets on Economic and Social Development, FOS, Nigeria.
  • Odusola, A.F. (2001) Nigeria’s unemployment problem in the 80s and 90s: Implication for policy directions in the 21st century. NCEMA Policy Seminal Series. Ibadan, Nigeria.
  • Patterson, Okafor & Williams (2006) “Globalization and Employment Generation” Evaluating the impact of trade on Aggregate employment in Nigeria’s In Industrial Sector” NES 2006 Annual Conference Nigeria.

Have any Question or Comment?

Email, Name & Website are not compulsory! Leave Blank for anonymous comment.


Archives