CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Government spending, often referred to as public or government expenditure, constitutes one

of the principal instruments through which the state intervenes in economic activity to

influence output, prices, employment, and overall macroeconomic stability. Since the seminal

contribution of Keynes (1936), government expenditure has been regarded as a strategic fiscal

policy instrument capable of stimulating aggregate demand during periods of economic

downturn, correcting market failures, and supporting long-term economic development.

Recent studies continue to affirm that well-targeted public expenditure enhances economic

growth through investments in infrastructure, education, healthcare, and other productive

sectors, while poorly managed expenditure tends to generate limited developmental outcomes

and fiscal inefficiencies (International Monetary Fund [IMF], 2023; World Bank, 2024). In

developing economies such as Nigeria, government spending assumes even greater

significance because of the relatively underdeveloped private sector, weak industrial base, and

the state's historical role as the dominant employer of labour and financier of infrastructural

development (African Development Bank [AfDB], 2024).

Nigeria's fiscal operations over the period 2010 to 2024 have been characterised by a

progressive expansion in the size of the national budget, driven largely by rising personnel and

overhead costs, increasing debt-service obligations, expanding subsidy-related expenditures,

and recurring political commitments to infrastructural and social investment programmes

1
(Budget Office of the Federation, 2024; IMF, 2024). Government expenditure in Nigeria is

broadly classified into recurrent expenditure, which covers salaries, overheads, pensions,

transfers, and debt servicing, and capital expenditure, which consists of investments in

infrastructure, education, healthcare, agriculture, transportation, energy, and other

developmental projects. Recent fiscal reports indicate that recurrent expenditure has

consistently accounted for a substantially larger proportion of total federal expenditure than

capital expenditure, thereby constraining the government's ability to finance productive

investments capable of stimulating sustainable economic growth and employment creation

(Budget Office of the Federation, 2024; World Bank, 2024). This expenditure structure has

attracted sustained criticism from economists and policy analysts, who argue that excessive

recurrent spending limits fiscal sustainability and reduces the employment-generating capacity

of public investment (IMF, 2023; Organisation for Economic Co-operation and Development

[OECD], 2023).

Unemployment, on the other hand, remains one of the most persistent and politically sensitive

macroeconomic challenges confronting Nigeria. The trajectory of Nigeria's unemployment rate

over the review period has been characterised by considerable fluctuations resulting from

domestic structural weaknesses and external economic shocks. Following the global financial

crisis and subsequent macroeconomic challenges, unemployment increased steadily

throughout the early 2010s. However, with the adoption of the internationally harmonised

Nigeria Labour Force Survey (NLFS) methodology by the National Bureau of Statistics (NBS)

in 2023, the reported unemployment rate declined sharply from the double-digit figures and,

in some estimates, above 30 percent recorded under the previous methodology around 2020 to

approximately 4–5 percent under the revised International Labour Organization (ILO)

2
standards (National Bureau of Statistics, 2023; International Labour Organization, 2024). This

substantial change reflects not only improvements in certain labour market indicators

following the COVID-19 pandemic but also significant methodological revisions in the

measurement of employment and unemployment. Consequently, comparisons across time

require careful interpretation, as differences in definitions may influence empirical assessments

of the relationship between government spending and unemployment (ILO, 2024).

Despite consistent year-on-year increases in the nominal value of government expenditure—

from budgets of less than ₦5 trillion in 2010 to over ₦28 trillion by 2024—the anticipated

proportional reduction in unemployment has not always materialised (Budget Office of the

Federation, 2024). Several years within the review period witnessed simultaneous increases in

public expenditure and worsening labour market conditions, particularly between 2015 and

2020, when Nigeria experienced two economic recessions, declining international crude oil

prices, foreign exchange instability, rising inflationary pressures, insecurity, and the severe

economic disruptions associated with the COVID-19 pandemic (World Bank, 2024; IMF,

2024). This apparent paradox, in which expanding government expenditure coexists with

persistent labour market challenges, constitutes the central empirical puzzle motivating the

present study. It raises important questions regarding the efficiency, composition, quality, and

productivity of public expenditure as an instrument for employment generation in Nigeria, and

whether the Keynesian proposition of an inverse relationship between government spending

and unemployment is supported under Nigeria's prevailing institutional and macroeconomic

conditions. Recent empirical studies further suggest that the employment effects of fiscal

policy depend not only on the magnitude of government expenditure but also on expenditure

3
quality, governance effectiveness, fiscal transparency, and institutional capacity (World Bank,

2024; IMF, 2023; AfDB, 2024).

Against this background, this study seeks to critically examine the relationship between

government spending and the unemployment rate in Nigeria over the period 2010 to 2024 by

disaggregating government expenditure into recurrent and capital components. Specifically,

the study investigates whether each expenditure category exerts a statistically significant

influence on unemployment and whether the composition of public spending matters for

employment creation in Nigeria. The findings are expected to contribute to the growing

literature on fiscal policy effectiveness and provide evidence-based recommendations for

improving the employment outcomes of public expenditure in developing economies.

1.2 Statement of the Problem

The Nigerian government has, over the years, defended the steady expansion of public

expenditure on the grounds that increased spending on infrastructure, agriculture, education,

healthcare, and social investment programmes would stimulate economic activity, create

employment opportunities, and consequently reduce the unemployment rate. This expectation

is broadly consistent with Keynesian fiscal theory, which posits that an increase in government

expenditure raises aggregate demand, stimulates production, and generates employment

through the multiplier effect (Keynes, 1936). Contemporary studies similarly argue that

productive public expenditure, particularly on capital projects and human development, can

promote inclusive economic growth and labour market expansion when supported by sound

fiscal management and effective institutions (International Monetary Fund [IMF], 2023; World

Bank, 2024).

4
However, the Nigerian experience between 2010 and 2024 presents a puzzling departure from

this theoretical expectation. Despite a more than fourfold increase in the nominal size of the

federal budget over the review period, unemployment remained a chronic and, for much of the

period, worsening macroeconomic challenge, particularly among the youth population, before

recording a statistically significant decline following the adoption of a new labour force

measurement methodology in 2023 (National Bureau of Statistics [NBS], 2023). This

divergence between expanding public expenditure and persistent unemployment raises

concerns regarding the effectiveness, composition, and efficiency of fiscal policy in promoting

employment generation within the Nigerian economy (World Bank, 2024).

A substantial proportion of government expenditure during the review period was devoted to

recurrent obligations, including personnel costs, administrative overheads, pensions, transfers,

and an increasingly burdensome debt-service bill arising from rising domestic and external

borrowing. Consequently, a relatively smaller share of the national budget was allocated to

capital expenditure, and even these allocations frequently suffered from implementation delays

and low budget execution rates, thereby limiting their capacity to stimulate productive

investment and employment creation (Budget Office of the Federation, 2024; IMF, 2024).

Furthermore, several structural constraints—including excessive dependence on crude oil

revenue, exchange rate instability, high inflation, insecurity in major agricultural regions, weak

institutional capacity, corruption, and poor project implementation—have repeatedly

undermined the translation of government expenditure into tangible employment outcomes

(African Development Bank [AfDB], 2024; World Bank, 2024).

5
Although numerous empirical studies have examined the relationship between government

expenditure and unemployment in Nigeria, much of the existing evidence is either dated,

methodologically inconsistent, or limited to relatively short sample periods that fail to capture

the country's recent structural and policy changes. In particular, many earlier studies do not

account for major economic events such as the 2020 COVID-19-induced recession, the

economic disruptions associated with the pandemic, the 2023 removal of the petrol subsidy,

the exchange rate unification reforms, and the adoption of the new Nigeria Labour Force

Survey methodology by the National Bureau of Statistics (NBS, 2023; IMF, 2024). These

developments have significantly altered Nigeria's macroeconomic environment and labour

market dynamics, thereby necessitating an updated empirical investigation.

Consequently, a significant gap exists in the literature regarding a comprehensive empirical

assessment covering the period 2010 to 2024 that disaggregates government expenditure into

recurrent and capital components while examining their individual and combined effects on

unemployment. Existing studies have generally concentrated on aggregate government

expenditure, thereby overlooking the possibility that different expenditure categories may

exert varying effects on employment generation. Addressing this gap is particularly important

because fiscal policy effectiveness depends not only on the magnitude of government

expenditure but also on its composition, efficiency, implementation quality, and institutional

environment (Organisation for Economic Co-operation and Development [OECD], 2023;

IMF, 2023).

It is this gap that the present study seeks to fill by providing current, comprehensive, and

empirically grounded evidence on the extent to which recurrent and capital government

6
expenditure have influenced the unemployment rate in Nigeria between 2010 and 2024. The

findings are expected to contribute to the growing body of literature on fiscal policy and labour

market outcomes while providing useful evidence for policymakers on how public expenditure

can be better structured to promote sustainable employment generation and inclusive economic

development in Nigeria.

1.3 Objectives of the Study

The broad objective of this study is to examine the relationship between government spending

and the unemployment rate in Nigeria between 2010 and 2024. The specific objectives are to:

i. examine the effect of total government expenditure on the unemployment rate in

Nigeria;

ii. assess the effect of government recurrent expenditure on the unemployment rate in

Nigeria;

iii. evaluate the effect of government capital expenditure on the unemployment rate in

Nigeria;

iv. determine the direction of causality between government spending and the

unemployment rate in Nigeria,

1.4 Research Questions

In line with the objectives stated above, this study seeks to provide answers to the following

research questions:

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 i. What effect does total government expenditure have on the unemployment rate in

Nigeria?

ii. What effect does government recurrent expenditure have on the unemployment rate in

Nigeria?

iii. What effect does government capital expenditure have on the unemployment rate in

Nigeria?

iv. What is the direction of causality between government spending and the unemployment

rate in Nigeria?

1.5 Research Hypotheses

The following null hypotheses are formulated to guide the empirical investigation:

H01: Total government expenditure has no statistically significant effect on the

unemployment rate in Nigeria.

H02: Government recurrent expenditure has no statistically significant effect on the

unemployment rate in Nigeria.

H03: Government capital expenditure has no statistically significant effect on the

unemployment rate in Nigeria.

H04. There is no statistically significant causal relationship between government spending

and the unemployment rate in Nigeria.

8
1.6 Significance of the Study

This study is significant to several categories of stakeholders. To government and fiscal

policymakers, particularly the Federal Ministry of Finance, Budget and National Planning, the

National Assembly, and the Central Bank of Nigeria, the findings of this study will provide

empirical evidence on the specific components of government expenditure that most

significantly influence unemployment, thereby informing more effective budget design and

public expenditure prioritisation aimed at employment generation.

To the academic community, this study contributes to the ongoing scholarly debate on the

effectiveness of fiscal policy in developing economies, extends the empirical literature on the

government spending–unemployment nexus in Nigeria to cover the period up to 2024, and

provides a reference point for future researchers seeking to explore related themes such as

fiscal sustainability, public debt, and labour market dynamics.

To development partners, multilateral institutions, and foreign and domestic investors, the

study offers useful insight into the structural and fiscal factors shaping Nigeria's labour market,

which is relevant to investment decision-making and the design of employment-focused

development assistance programmes. Finally, to students and future researchers, this study

serves as a resource base and a foundation upon which further studies on fiscal policy and

labour market outcomes in Nigeria and other developing economies may be built.

1.7 Scope of the Study

This study is delimited to the Nigerian economy at the national aggregate level and covers the

period from 2010 to 2024, a fifteen-year window chosen to capture the post-global-financial-

9
crisis recovery period, the 2016 and 2020 economic recessions, the COVID-19 pandemic and

its aftermath, the 2023 change in the official unemployment measurement methodology, and

the subsequent macroeconomic reforms introduced from mid-2023, including the removal of

the petrol subsidy and the unification of the foreign exchange market. The study focuses on

three principal fiscal variables, namely total government expenditure, recurrent expenditure,

and capital expenditure, as the independent and explanatory variables, and the national

unemployment rate as the dependent variable. Data for the study are obtained from secondary

sources, including the Central Bank of Nigeria Statistical Bulletin, the National Bureau of

Statistics, the Budget Office of the Federation, and relevant publications of the World Bank

and the International Monetary Fund. Other macroeconomic variables, such as inflation,

exchange rate, and interest rate, are considered only as control variables where necessary and

are not the primary focus of the analysis.

1.8 Limitations of the Study

This study is subject to certain limitations. First, it relies entirely on secondary data obtained

from official government and multilateral sources, and the reliability of the findings is

therefore contingent on the accuracy and consistency of these data. Second, the change in the

methodology used by the National Bureau of Statistics to compute the unemployment rate in

2023 introduces a structural break in the unemployment series, which required careful

statistical treatment and which may still limit the direct comparability of pre-2023 and post-

2023 figures. Third, the study focuses on aggregate national data and does not disaggregate

unemployment by sector, gender, age group, or geopolitical zone, which may mask important

structural variations within the labour market. Finally, as with most macroeconometric studies,

10
the findings are limited by the annual or quarterly frequency of the available fiscal and labour

market data, which restricts the granularity of the analysis relative to what higher-frequency

data might otherwise allow. Notwithstanding these limitations, appropriate econometric

techniques are employed to ensure that the conclusions drawn are as robust and reliable as the

available data permit.

1.9 Definition of Terms

For the purpose of clarity, the key terms used in this study are defined as follows:

Government Spending/Expenditure: The total amount of money spent by the federal

government of Nigeria within a fiscal year on recurrent and capital items, as reported in the

national budget and the Central Bank of Nigeria Statistical Bulletin.

Recurrent Expenditure: Government spending on regular and repetitive obligations such as

personnel costs, salaries, overheads, pensions, and debt servicing, which does not result in the

creation of new fixed assets.

Capital Expenditure: Government spending directed towards the creation, acquisition, or

improvement of long-term physical assets and infrastructure, such as roads, power, education,

and health facilities.

Unemployment: A situation in which persons within the labour force who are willing and able

to work, and are actively seeking employment, are unable to find suitable paid work.

Unemployment Rate: The proportion of the labour force that is unemployed, expressed as a

percentage, as measured and reported by the National Bureau of Statistics.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter reviews existing literature relevant to the study of government spending and

unemployment in Nigeria. The review is organised into four broad sections. The first section

undertakes a conceptual review of the key variables of the study, namely government

expenditure and unemployment, including their components and measurement. The second

section presents a theoretical review of the major economic theories that explain the

relationship between government spending and employment outcomes, culminating in the

identification of the theoretical framework adopted for the study. The third section presents an

empirical review of prior studies conducted within Nigeria and, where relevant, other

countries, on the government spending–unemployment nexus. The final section synthesises

the reviewed literature to identify the research gap that this study seeks to fill.

2.2 Conceptual Review

2.2.1 Concept of Government Expenditure

Government expenditure refers to the total spending undertaken by the public sector,

comprising the federal, state, and local tiers of government, in the pursuit of its statutory,

developmental, and welfare obligations to the citizenry. It represents the fiscal counterpart of

government revenue and constitutes one of the two principal instruments of fiscal policy, the

other being taxation. Government expenditure is undertaken to provide public goods and

services that the private sector, on account of market failure, is unable or unwilling to provide

optimally, including defence, infrastructure, education, health, and social welfare. In Nigeria,

12
government expenditure is presented annually in the form of the national budget, which is

prepared by the executive arm of government, subjected to legislative scrutiny and approval

by the National Assembly, and implemented through the Ministries, Departments, and

Agencies of government over the course of the fiscal year.

2.2.2 Components of Government Expenditure

Government expenditure in Nigeria is conventionally classified, on the basis of economic

character, into recurrent expenditure and capital expenditure. Recurrent expenditure comprises

spending on the day-to-day running of government, including personnel costs such as salaries

and wages, overhead costs, pensions and gratuities, and, increasingly significantly in recent

years, debt-service obligations arising from domestic and external borrowing. Recurrent

expenditure is consumptive in character and does not directly result in the creation of new

physical or productive assets. Capital expenditure, on the other hand, comprises spending

directed towards the acquisition, construction, or rehabilitation of long-lived physical assets

and infrastructure, such as roads, railways, power installations, schools, and hospitals. Capital

expenditure is generally regarded as more directly growth- and employment-enhancing than

recurrent expenditure because it expands the productive base of the economy and creates both

direct employment during project execution and indirect employment through backward and

forward economic linkages. A recurring theme in Nigeria's fiscal history is the disproportionate

share of the national budget allocated to recurrent rather than capital expenditure, a pattern

widely attributed to the size of the public wage bill, the burden of debt servicing, and weak

capital budget implementation.

13
2.2.3 Concept of Unemployment
Unemployment describes a situation in which individuals who are willing and able to work,

and who are actively searching for paid employment, are unable to secure such employment.

Economists conventionally distinguish among several types of unemployment. Frictional

unemployment arises from the normal turnover of labour as individuals move between jobs or

enter the labour market for the first time. Structural unemployment results from a mismatch

between the skills possessed by the labour force and the skills demanded by employers, often

arising from technological change or shifts in the structure of the economy. Cyclical

unemployment is associated with downturns in the business cycle, during which aggregate

demand falls and firms reduce their workforce. Seasonal unemployment occurs in industries,

such as agriculture, where labour demand fluctuates predictably across the year. In the Nigerian

context, unemployment is widely acknowledged to be predominantly structural in nature,

reflecting the mismatch between the output of the country's educational system and the

absorptive capacity of the formal economy, compounded by weak industrialisation and an

oversized informal sector.

2.2.4 Measurement of Unemployment in Nigeria

The measurement of unemployment in Nigeria has evolved considerably over the period under

review. Prior to 2023, the National Bureau of Statistics computed the unemployment rate using

a definition that classified anyone who worked fewer than twenty hours in the reference week

as unemployed, a threshold considerably more stringent than the International Labour

Organisation standard. This methodology produced unemployment rates that rose from single

digits in the early part of the review period to a rate as high as 33.3 percent by the fourth quarter

of 2020. In 2023, the National Bureau of Statistics adopted the Nigeria Labour Force Survey,

14
which aligns with International Labour Organisation standards by classifying as employed

anyone who worked for at least one hour for pay or profit in the reference week, and as

unemployed only those who did not work at all, were available for work, and were actively

seeking work (National Bureau of Statistics, 2023). This change produced a marked statistical

decline in the reported unemployment rate to a single-digit figure from 2023 onward, a

development that has important implications for the interpretation of the government

spending–unemployment relationship across the review period, as any empirical analysis

spanning both methodological regimes must account for the resulting structural break in the

data.

2.2.5 The Government Expenditure–Unemployment Nexus

The conceptual link between government expenditure and unemployment rests on the premise

that public spending, by injecting purchasing power into the economy and directly or indirectly

creating jobs, can influence the level of employment and, by extension, the unemployment

rate. Government expenditure may affect employment through several channels. Direct

channels include the employment of civil servants and public-sector workers, as well as the

direct engagement of labour on public capital projects. Indirect channels operate through the

multiplier effect, whereby government spending stimulates private consumption and

investment, which in turn generates additional rounds of employment across the economy.

However, the effectiveness of this channel depends critically on the composition and efficiency

of government spending; expenditure that is skewed towards recurrent, consumption-oriented

items, or that is undermined by corruption, poor project implementation, and weak institutional

capacity, may fail to generate the anticipated employment outcomes despite increasing in

nominal size. It is this conceptual tension between the theoretical expectation of an inverse

15
spending–unemployment relationship and the practical constraints on the productive

deployment of public funds in Nigeria that underlies the empirical puzzle addressed by this

study.

2.3 Theoretical Review

2.3.1 Keynesian Theory of Employment

The Keynesian theory of employment, propounded by John Maynard Keynes in his 1936 work,

The General Theory of Employment, Interest and Money, remains the dominant theoretical

foundation for analysing the relationship between government spending and unemployment.

Keynes challenged the classical assumption that market economies automatically gravitate

towards full employment, arguing instead that aggregate demand, rather than aggregate supply,

determines the level of output and employment in the short run. According to Keynes, in the

event of insufficient aggregate demand, an economy may settle into an equilibrium

characterised by involuntary unemployment, which cannot be self-correcting without external

intervention. Keynes therefore prescribed active fiscal intervention, particularly increased

government expenditure, as a means of stimulating aggregate demand, boosting output, and

reducing unemployment. Central to this theory is the concept of the fiscal multiplier, which

holds that an initial increase in government spending generates successive rounds of induced

consumption and investment spending throughout the economy, producing a total increase in

output and employment that exceeds the initial injection of spending. The Keynesian

framework provides the primary theoretical justification for the expectation that increased

government expenditure, particularly on productive and infrastructural projects, should reduce

unemployment in Nigeria.

16
2.3.2 Wagner's Law of Increasing State Activity
Wagner's Law, formulated by the German economist Adolph Wagner in the nineteenth

century, offers an alternative perspective on the relationship between government spending

and economic activity. Rather than treating government expenditure as a causal driver of

output and employment, Wagner's Law posits that public expenditure is a consequence, rather

than a cause, of economic growth and development. As an economy industrialises and per

capita income rises, Wagner argued, the demand for public goods and services, including

infrastructure, regulation, and welfare provision, rises even faster than income, resulting in a

secular increase in the share of government expenditure in national output. Applied to the

Nigerian context, Wagner's Law suggests that the direction of causality in the government

spending–unemployment relationship may run from economic activity and employment

outcomes to government spending, rather than the reverse, a possibility that has direct

relevance to the causality objective of the present study.

2.3.3 Neoclassical Theory

The neoclassical, or classical, school of economic thought, associated with economists such as

Adam Smith and later refined by twentieth-century neoclassical theorists, holds a more

sceptical view of the efficacy of government spending as an instrument of employment

generation. This school of thought maintains that markets are inherently self-correcting and

tend towards full employment equilibrium through the flexible adjustment of wages, prices,

and interest rates, without the need for government intervention. From this perspective, an

expansion of government expenditure, particularly when financed through borrowing, may

crowd out private investment by raising interest rates and competing with the private sector for

17
scarce loanable funds and resources, thereby offsetting, or even reversing, any positive

employment effect of the spending itself. The neoclassical crowding-out hypothesis is

particularly relevant to the Nigerian context, where a substantial share of government

expenditure is financed through domestic borrowing, which may constrain the availability of

credit to the private sector and dampen private-sector employment generation.

2.3.4 Okun's Law

Okun's Law, formulated by the American economist Arthur Okun in 1962, establishes an

empirical relationship between output growth and changes in the unemployment rate, holding

that unemployment falls when the rate of economic growth exceeds the growth rate of the

economy's productive potential, and rises when growth falls below this threshold. While

Okun's Law does not directly model government expenditure, it provides an important

theoretical link between fiscal policy and unemployment, given that government spending is

itself a component of aggregate output. To the extent that increased government expenditure

raises the rate of economic growth, Okun's Law implies that unemployment should decline;

however, the strength of this relationship, commonly referred to as Okun's coefficient, has been

found in various studies to vary considerably across countries and over time, particularly in

developing economies characterised by large informal sectors, such as Nigeria, where output

growth does not always translate proportionately into formal employment generation.

2.4 Empirical Review

A considerable body of empirical literature has examined the relationship between government

expenditure and unemployment in Nigeria, employing a variety of methodologies and covering

18
different sub-periods. This section reviews the most relevant of these studies, organised

thematically to highlight the divergent findings that characterise the literature.

Several studies have found evidence broadly consistent with the Keynesian expectation of an

inverse relationship between government expenditure and unemployment. Obayori (2016)

investigated the effect of fiscal policy on unemployment in Nigeria over the period 1980 to

2013 using an error correction model, and found that both government capital and recurrent

expenditure had a negative and statistically significant relationship with the unemployment

rate, implying that increases in both components of government spending were associated with

a reduction in unemployment over the period studied. Similarly, Onodugo, Obi, Anowor,

Nwonye, and Ofoegbu (2016), using annual data from 1990 to 2013, found that capital

expenditure and private-sector investment were both effective in reducing unemployment in

the long run, although recurrent expenditure did not exert a statistically significant effect.

Mahmood and Sadiq (2020), applying an Autoregressive Distributed Lag model to Nigerian

data, similarly found that capital expenditure significantly reduced unemployment, while

recurrent spending and higher tax rates tended to exacerbate joblessness, reinforcing the view

that the composition, and not merely the size, of government expenditure matters for

employment outcomes.

Ebi and Ibe (2019) examined the relationship between government expenditure, disaggregated

into recurrent and capital components, and unemployment in Nigeria over the period 1981 to

2017 using the Johansen multivariate cointegration technique, and found that, rather than

reducing unemployment, government expenditure tended to exacerbate the unemployment

rate, a result the authors attributed to the unproductive and politically driven nature of much

public spending in Nigeria. Ekong, Effiong, and colleagues (2020) examined the influence of

19
fiscal policy on unemployment in Nigeria between 1990 and 2018 and found a positive, though

statistically non-significant, relationship between government capital expenditure and

unemployment. Agu, Okwo, Ugwunta, and Idike (2015) similarly observed, on the basis of

descriptive analysis of Nigerian fiscal data, that as total government expenditure increased, the

unemployment rate also tended to rise, a pattern the authors linked to the growing dominance

of recurrent expenditure, which rose from about 66 percent of total spending in 2000 to about

79 percent by 2010, leaving a shrinking share of the budget for the capital projects more

directly associated with job creation. In a related vein, Chukwuemeka (2022), focusing

specifically on government security and defence spending between 2000 and 2023, found that

defence expenditure had a positive, but statistically insignificant, effect on the unemployment

rate.

Raifu, Aminu, Afolabi, and Obijole (2024), in one of the most comprehensive recent studies

on the subject, investigated the government expenditure–unemployment nexus in Nigeria over

the period 1984 to 2019 using causality tests and the Autoregressive Distributed Lag estimation

technique, while also accounting for the moderating role of institutional quality. The study

found a unidirectional causal relationship running from unemployment to both total and capital

government expenditure, and a partial unidirectional causal relationship running from recurrent

expenditure to unemployment. In terms of effects, the study found that total and capital

expenditures were pro-employment, that is, associated with lower unemployment, in the long

run, whereas recurrent expenditure was pro-employment only in the short run, with

institutional quality found to significantly moderate these relationships. This finding is

particularly instructive for the present study, as it suggests that the direction of causality

between government spending and unemployment in Nigeria may not run uniformly in the

20
direction assumed by simple Keynesian theory, lending empirical support to the inclusion of a

causality objective in this study.

Beyond the Nigerian context, related studies have examined similar relationships in other

developing economies. Fosu (2019) investigated the effect of government expenditure on

unemployment across a panel of sub-Saharan African countries and found evidence of

considerable heterogeneity in the strength and direction of the relationship, underscoring the

importance of country-specific institutional and structural factors. Studies conducted in

comparable developing-country contexts, such as Jordan and Egypt, have similarly found that

the effectiveness of government expenditure in reducing unemployment depends heavily on

the composition of spending, with capital and infrastructure-oriented expenditure generally

exerting a more robust negative effect on unemployment than recurrent, consumption-oriented

expenditure. These cross-country findings are broadly consistent with the pattern observed in

the Nigerian literature and lend further support to the theoretical distinction between the

employment effects of recurrent and capital expenditure that motivates the disaggregated

approach adopted in this study.

2.5 Research Gap

The foregoing review reveals several important gaps in the existing literature on government

spending and unemployment in Nigeria. First, the findings of prior studies are notably

inconsistent, with some studies finding a negative and significant relationship between

government expenditure and unemployment, consistent with Keynesian theory, while others

find a positive or statistically insignificant relationship, or no long-run relationship at all. This

lack of consensus underscores the need for further empirical investigation, particularly using

21
updated data and rigorous econometric techniques capable of capturing both short-run and

long-run dynamics.

Second, the majority of existing studies on this subject in Nigeria cover sub-periods that end

well before 2020, with the most recent and comprehensive study reviewed, Raifu et al. (2024),

covering data only up to 2019. Consequently, none of the studies reviewed adequately captures

the effects of major recent structural shocks and policy shifts, including the 2020 economic

recession precipitated by the COVID-19 pandemic and the collapse in global oil prices, the

2023 removal of the petrol subsidy, the unification and floating of the naira exchange rate from

mid-2023, and, critically, the 2023 change in the methodology used by the National Bureau of

Statistics to compute the unemployment rate. This last point is particularly significant, as the

methodological shift produced a structural break in the unemployment series that has not yet

been adequately addressed in the empirical literature on the government spending–

unemployment nexus.

Third, while a number of studies have disaggregated government expenditure into recurrent

and capital components, few have done so consistently while also examining the direction of

causality between government spending and unemployment within a single, unified analytical

framework covering the most recent data available. Fourth, much of the existing literature,

with the exception of Raifu et al. (2024), does not adequately account for institutional or

structural factors that may moderate the effectiveness of government spending in generating

employment in Nigeria.

It is against this background that the present study seeks to fill the identified gaps by providing

an updated empirical assessment of the relationship between government spending,

22
disaggregated into total, recurrent, and capital expenditure, and the unemployment rate in

Nigeria over the period 2010 to 2024. In doing so, the study explicitly incorporates the post-

2020 structural shocks and the 2023 unemployment measurement methodology change,

thereby extending and updating the existing body of knowledge on this important subject and

providing empirical evidence relevant to current fiscal and labour market policy formulation

in Nigeria.

23
 CHAPTER THREE

THEORETICAL FRAMEWORK AND METHODOLOGY

This chapter presents the methodology used to examine the relationship between government

expenditure and infrastructure development in Nigeria from 2008 to 2024. It covers the

research design, theoretical framework, model specification, data sources, estimation

techniques, and diagnostic tests.

3.1 Theoretical Framework

The Keynesian theory of employment was propounded by Keynes (1936) in his seminal work,

The General Theory of Employment, Interest and Money. The theory challenged the classical

assumption that market economies automatically gravitate towards full employment, arguing

instead that the level of output and employment in the short run is determined by the level of

aggregate demand rather than aggregate supply. Keynes held that in the event of insufficient

aggregate demand, an economy may settle into an equilibrium characterised by involuntary

unemployment, a condition that is not self-correcting and therefore requires active fiscal

intervention. Government expenditure, according to this theory, is a strategic instrument

through which the state can inject purchasing power into the economy, stimulate consumption

and investment, and thereby generate employment. Central to this framework is the concept of

the fiscal multiplier, whereby an initial increase in government spending is expected to

generate successive rounds of induced spending throughout the economy, producing a total

increase in output and employment that exceeds the size of the initial expenditure. This theory

forms the primary anchor for the present study, which sets out to determine empirically

whether this theoretical expectation holds for total, recurrent, and capital government

expenditure in Nigeria.

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3.2 Methodology

The model for this study is anchored on the Keynesian theory of employment and the

neoclassical crowding-out theory. The Keynesian framework posits that government

expenditure, by stimulating aggregate demand through the fiscal multiplier, reduces

unemployment, whereas the neoclassical crowding-out theory suggests that debt-financed, and

particularly recurrent, government expenditure may fail to generate this effect, or may generate

an opposing effect, by displacing private investment. Government spending, operationalised

in this study through total expenditure, recurrent expenditure, and capital expenditure, is

hypothesised to influence the unemployment rate through these two competing channels, with

the balance between them expected to depend on the composition, rather than merely the size,

of government expenditure.

3.2.1 Model Specification

With reference to the theoretical frameworks reviewed above, and following the empirical

work reviewed in Chapter Two, an empirical model to establish the relationship between

government spending and the unemployment rate in Nigeria is specified to include the

following variables: the unemployment rate, total government expenditure, recurrent

expenditure, capital expenditure, the inflation rate, and the official exchange rate. These

variables represent the principal fiscal positions of government spending that are theoretically

and empirically linked to unemployment outcomes in Nigeria.

Functional Form of the Model

The broad objective of this study is to empirically investigate the relationship between

government spending and the unemployment rate in Nigeria. Thus, an increase in productive

25
government expenditure is expected to stimulate output and reduce unemployment. Based on

this theoretical postulation, the study specifies the unemployment rate as a function of

government spending. The model for this study is therefore specified functionally as:

UNEMP = f(TGE, REC, CAP, INFL, EXR) (3.1)

Definition of Model Variables

For convenience of calculation and analysis, the variables stated above are defined as follows:

Dependent Variable

This is taken as the explained variable in this study. UNEMP = Unemployment rate, measured

as the percentage of the labour force that is unemployed.

Independent Variables (Government Spending)

The study evaluates the various measures of government spending, taken as the explanatory

variables:

TGE = Total Government Expenditure, value in ₦'Billion

REC = Government Recurrent Expenditure, value in ₦'Billion

CAP = Government Capital Expenditure, value in ₦'Billion

INFL = Inflation Rate, measured as the annual percentage change in the Consumer Price

Index, as a control variable

EXR = Official Exchange Rate (₦/US$), as a control variable

26
The Empirical Model

Because total government expenditure is, by definition, the sum of recurrent and capital

expenditure, all three cannot be entered into a single equation without introducing perfect

multicollinearity. The respective objectives of the study are therefore specified as two baseline

equations. The equation for the estimation of the relationship between total government

expenditure and the unemployment rate (Model I) is specified as:

UNEMPₜ = β₀ + β₁logTGEₜ + β₂INFLₜ + β₃logEXRₜ + uₜ (3.2)

The equation for the estimation of the relationship between disaggregated government

expenditure and the unemployment rate (Model II) is specified as:

UNEMPₜ = δ₀ + δ₁logRECₜ + δ₂logCAPₜ + δ₃INFLₜ + δ₄logEXRₜ + vₜ (3.3)

where β₀ and δ₀ are the constant parameters, β₁ to β₃ and δ₁ to δ₄ are the slope parameters to be

estimated, and uₜ and vₜ are white-noise stochastic disturbance terms, with t measured annually.

To examine the relationship between the dependent and independent variables, an approximate

logarithmic-linear transformation is applied to TGE, REC, CAP, and EXR in the model, in

order to reduce heteroscedasticity, improve the linearity of the model, and allow the estimated

coefficients to be interpreted as elasticities. INFL is retained in its original percentage form, as

is conventional, since it is already expressed as a rate.

A-Priori Expectation

Theoretically, the a priori expectation of the sign and magnitude of each included parameter is

outlined based on the provisions of theory and the findings of previous studies reviewed in

Chapter Two. Equations (3.2) and (3.3) represent the level relationships between the

27
unemployment rate and the corresponding explanatory variables. In line with Keynesian

theory, it is expected that β₁ and δ₂, the coefficients of total government expenditure and capital

expenditure respectively, will be less than zero, implying a negative relationship between

government spending and unemployment, such that an increase in productive government

spending leads to a reduction in the unemployment rate. The coefficient of recurrent

expenditure, δ₁, is theoretically ambiguous in sign, consistent with the competing predictions

of the Keynesian and neoclassical crowding-out theories reviewed above; it may be negative

if recurrent spending sustains aggregate consumption, or positive if it is dominated by

unproductive and debt-financed outlays. The coefficients of the control variables, β₂, β₃, δ₃,

and δ₄, representing inflation and the exchange rate, are expected to be greater than zero,

implying that rising inflation and currency depreciation are associated with higher

unemployment. Where an estimated coefficient is negative, it implies an inverse relationship

between the dependent variable and the explanatory variable in question; where it is positive,

it implies a direct relationship between the two.

3.2.2 Method of Data Estimation

Empirical Analysis Steps

With the models formulated in equations (3.2) and (3.3), an appropriate estimation procedure

was adopted. This study aims to investigate the conditional relationship between government

spending variables and the unemployment rate in Nigeria. In this case, an econometric model

was formulated and adequate econometric techniques were employed. The goal of this study

is achieved through the following steps:

28
a) Variable Trend Analysis

Trends give an initial clue about the likely nature of the time series, that is, whether the series

exhibit a trend or not, and whether they have an intercept or not. This helps to informally

identify the presence of any trending behaviour in the variables in question over time. An

uptrend means that data points are increasing; for example, an upward movement in

government capital expenditure would generally indicate a favourable fiscal condition for

employment generation, while a downward movement in the unemployment rate would

indicate an improving labour market. Visual examination of time series plots for all variables

is undertaken to identify patterns, trends, structural breaks, and potential relationships over the

study period (2010–2024), with particular attention paid to the structural break introduced by

the 2023 change in the methodology used by the National Bureau of Statistics to compute the

unemployment rate.

b) Descriptive Statistics

Descriptive statistics provide a concise summary of the dataset through measures of central

tendency (mean, median) and dispersion (standard deviation, minimum, maximum), allowing

the essential characteristics of each variable to be quickly understood. They enable assessment

of data quality by identifying potential errors, outliers, and distribution patterns (skewness,

kurtosis), which is crucial for selecting appropriate statistical tests. Descriptive statistics reveal

the magnitude and variability of the variables over time, helping to contextualise the

subsequent regression results. In this study, the computation of summary statistics, including

the mean, median, standard deviation, minimum, maximum, skewness, and kurtosis, provides

essential baseline information about government expenditure and unemployment over the

29
2010–2024 period, establishing the empirical context before proceeding to unit root,

cointegration, and parameter estimation analysis.

c) Unit Root Test

To avert the problem of spurious regression and erroneous inference, the study conducts a unit

root test to determine the stationarity, or otherwise, of the time series data, using the

Augmented Dickey-Fuller (ADF) test, the most widely used unit root test (Dickey & Fuller,

1979). The ADF test is adopted in this study because it has stood the test of time as a robust

tool that gives good results over a wide range of applications. This enables the order of

integration of each variable to be ascertained, whether stationary at levels, I(0), or at first

difference, I(1). Stationarity of the variables and their individual order of integration is tested

and determined prior to model estimation. The ADF test constructs a parametric correction for

higher-order serial correlation by assuming that the series follows an autoregressive process

and adding lagged difference terms of the dependent variable to the test regression. The number

of lagged difference terms to include is determined empirically, using the Akaike Information

Criterion, with the aim of ensuring that the error term in the test regression is serially

uncorrelated. The test is carried out both at level and first difference, using the 1 percent and 5

percent MacKinnon critical values, and the null hypothesis of a unit root is tested against the

alternative hypothesis of stationarity.

d) Cointegration Test

Following the determination of the order of integration of the variables, the study examines

the long-run equilibrium relationship among the variables using the Johansen cointegration

test, in order to establish whether a stable long-term relationship exists between government

30
spending and the unemployment rate. The procedure developed by Johansen (1988) and

Johansen and Juselius (1990) is used to test for the presence of cointegration among the

variables. The purpose of the cointegration test is to determine whether a group of non-

stationary series is cointegrated; two or more individually non-stationary series may

nonetheless possess a linear combination that is itself stationary, with the generalisation

extending to more than two series. Economically, two or more variables are cointegrated if a

long-run relationship exists between them. The technique of cointegration therefore arises from

the need to integrate short-run dynamics with long-run equilibrium. The presence of

cointegration implies that a long-run relationship exists among the non-stationary variables in

the model. This study uses the Johansen trace and maximum eigenvalue tests to examine the

presence of a long-run relationship between the unemployment rate and government spending

in both Model I and Model II. Given the relatively limited number of annual observations

available for the study, particular care is taken in lag length selection, using the Schwarz

Information Criterion, to preserve degrees of freedom while adequately capturing the dynamic

structure of the data.

e) Cointegrating Regression Parameter Estimation Using Fully Modified Ordinary

Least Squares (FMOLS)

With the cointegrating relationships established, an appropriate estimation procedure is

adopted to estimate the long-run parameters. The study uses the Fully Modified Ordinary Least

Squares (FMOLS) technique, developed by Phillips and Hansen (1990), to estimate the long-

run relationships in the cointegrating regressions. The literature suggests that the FMOLS

estimator is superior to the conventional Ordinary Least Squares estimator in the context of

cointegrated time series, as it corrects for endogeneity bias and serial correlation in the

31
regressors that would otherwise render OLS estimates inconsistent, using a semi-parametric

correction procedure. The main advantage of the FMOLS method is that it produces unbiased,

consistent, and efficient long-run parameter estimates even in the presence of endogenous

regressors, which is a plausible feature of the relationship between government spending and

unemployment given the possibility of reverse causality implied by Wagner's Law. The

estimation of the long-run relationships between government spending and the unemployment

rate using the FMOLS method is undertaken to obtain robust and efficient parameter estimates

for both Model I and Model II.

f) Statistical Test of Significance

These criteria, also referred to as first-order tests, are used for the evaluation of the parameter

estimates and are defined by statistical theory. They include the coefficients, t-statistics, and

p-values, and the coefficient of determination (R²).

In the models used in this study, each coefficient represents the marginal effect of the

corresponding independent variable on the unemployment rate, holding all other variables

constant. To determine whether an independent variable is statistically significant, the t-

statistic, calculated as the ratio of the estimated coefficient to its standard error, is used to test

the null hypothesis that the true coefficient is equal to zero. The associated p-value indicates

the probability of obtaining the observed result if the null hypothesis were true; where the p-

value falls below the chosen 5 percent significance threshold, the null hypothesis that the true

coefficient is zero is rejected in favour of the alternative that a statistically significant

relationship exists.

32
The R² statistic measures the proportion of the variation in the unemployment rate that is

explained by the government spending and control variables included in the model. The overall

significance of each model is assessed using the F-statistic, which tests the joint null hypothesis

that all of the slope coefficients in the regression are simultaneously equal to zero, thereby

indicating whether the explanatory variables are, as a group, appropriate for explaining

movements in the unemployment rate.

g) Econometric Criteria: Diagnostic Tests

The quality of the estimated econometric models is assessed through a comprehensive set of

diagnostic tests designed to identify and address potential econometric problems, including

autocorrelation, heteroscedasticity, and non-normality of the residuals.

To test for autocorrelation, or serial correlation, in the residuals, the study uses the correlogram

of residuals together with the associated Ljung–Box Q-statistic. The correlogram visually

displays the autocorrelation and partial autocorrelation coefficients of the residuals at

successive lags, while the Q-statistic provides a formal test of the joint significance of these

autocorrelations. Where the autocorrelation and partial autocorrelation spikes fall within the

95 percent confidence bounds and the associated Q-statistic p-values exceed 0.05, it is

concluded that the residuals behave as white noise and that the model has adequately captured

the dynamic structure of the data. To test for heteroscedasticity, the correlogram of the squared

residuals is examined in a similar manner, complemented by the Breusch-Pagan-Godfrey test

(Breusch & Pagan, 1979); autocorrelation coefficients of the squared residuals that remain

close to zero and fall within the confidence bounds suggest that the variance of the residuals is

constant, implying the absence of heteroscedasticity.

33
To test whether the residuals are normally distributed, an assumption critical for valid

hypothesis testing and reliable statistical inference, the study employs the Jarque-Bera test

(Jarque & Bera, 1980), which examines whether the skewness and kurtosis of the residuals

match those of a normal distribution. The Jarque-Bera statistic follows a chi-square distribution

with two degrees of freedom under the null hypothesis that the residuals are normally

distributed. Following the p-value approach, the null hypothesis is accepted where the p-value

exceeds 0.05, and rejected where the p-value is less than or equal to 0.05.

This sequential analytical framework, moving systematically from exploratory trend and

descriptive analysis through formal stationarity and cointegration testing to long-run parameter

estimation and diagnostic validation, ensures a rigorous empirical investigation and provides

reliable evidence on the relationship between government spending and unemployment in

Nigeria.

3.2.3 Nature, Sources and Scope of Data

a) Nature of Data

The data employed in this study are quantitative, annual time series observations expressed in

appropriate units. The unemployment rate, the dependent variable, is measured as the

percentage of the labour force that is unemployed, as reported by the National Bureau of

Statistics. Government spending indicators, serving as the independent variables, include total

government expenditure, recurrent expenditure, and capital expenditure, each measured in

billions of naira, while inflation is expressed as a percentage and the exchange rate is expressed

in naira per United States dollar. All monetary variables are obtained in nominal terms and

subsequently transformed into natural logarithms where necessary for analytical purposes.

34
b) Sources of Data

Data for this study are obtained from authoritative and reliable secondary sources to ensure

accuracy and credibility. Specifically, data on total government expenditure, recurrent

expenditure, capital expenditure, inflation, and the exchange rate are collected from the Central

Bank of Nigeria Statistical Bulletin, which provides comprehensive annual data on Nigeria's

fiscal and monetary aggregates, and are corroborated with figures published by the Budget

Office of the Federation. Unemployment rate data are sourced from the National Bureau of

Statistics, drawing on its Labour Force Statistics reports for the pre-2023 period and the Nigeria

Labour Force Survey for 2023 and 2024 (National Bureau of Statistics, 2023). Additional

contextual information and cross-verification of figures are obtained from relevant World Bank

publications to ensure consistency and completeness across the entire study period.

c) Scope of Data

The temporal scope of this study covers fifteen annual observations from 2010 to 2024. This

period was selected to capture the post-global-financial-crisis recovery, the 2016 and 2020

economic recessions, the COVID-19 pandemic and its aftermath, and the major fiscal and

macroeconomic reforms introduced from mid-2023, including the removal of the petrol

subsidy, the unification of the foreign exchange market, and the accompanying change in the

methodology used by the National Bureau of Statistics to compute the unemployment rate.

Given the relatively limited number of annual observations available, the study gives particular

attention to parsimonious lag selection and robust diagnostic testing at the estimation stage in

order to preserve degrees of freedom and safeguard the reliability of the results.

Geographically, the study focuses exclusively on Nigeria, examining nationwide aggregate

35
data rather than disaggregated state or regional information. In terms of coverage, the study

concentrates on federal government expenditure and the national unemployment rate, as

defined by national accounting and labour force classifications, and does not extend to state or

local government fiscal operations.

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