Informal Sectors and Unemployment in Nigeria: A Vector Error Correction Model (VECM) Approach

Abstract

Using the period between1981 and 2015, the study examined the impact of informal sector on unemployment in Nigeria. Unlike many other studies, various macro measures of informal sector were considered in the study. The study employed the Vector Error Correction Model (VECM). Findings from the study showed that informal sector proxied by the discrepancy between aggregate expenditure and aggregate income; currency ratio; discrepancy between labour force and formal employment; and human capital had a negative and statistically significant relationship with unemployment both in the short and the long run. Also, the results showed that in the short run, informal sectors and human capital had an automatic adjustment mechanism with the negative error-correction term which is statistically significant. The study concluded that informal sectors are capable of reducing unemployment in both the short and long-run in Nigeria.