Nigeria’s Weak Labour Market Suggests Need for Reforms – Analysts
Investment banking experts at Chapel Hill Denham Limited has said that weak labour market underlines the need for reform in Nigeria as misery index jerked up.
In its macroeconomic note, experts at the investment frim advise policy makers to expand economic growth frontier beyond service to industry and agriculture through ease of doing business reforms and economic liberation policies.
Unemployment rate rose by 4% to 27.1% in the second quarter of 2020 from 23.1% in the third quarter of 2018.
Reacting to the development, Chapel Hill said the near term outlook for the labour market remains bleak, due to the negative feedback effect of COVID-19 and government restrictions on growth, and pre-existing structural fault lines that existed before the pandemic.
Recall that as part of its COVID-19 response, the government plans to launch a Special Public Works Programme (SPWP), to employ 1,000 people in each local government, summing up to 774,000 jobs.
“While this could provide some temporary relief, it is unlikely stop the trend of rising unemployment rate, considering over 3m people (net) historically enter the labour force every year, and the people that left the labour market during the pandemic are likely to return”, Chapel Hill Denham stated.
The investment firm explained that to make a bigger dent in the unemployment numbers over the medium- to long-term, structural reforms are important.
This include expanding Nigeria’s economic growth frontier, beyond services, to industry and agriculture, through ease of doing business reforms and economic liberalisation policies.
Deepening investment in infrastructure, education and healthcare, in order to create a major boost for economic productivity, and enhance the global competitiveness of Nigeria’s private sector.
The National Bureau of Statistics (NBS) published the abridged labour market report for Q2-2020 last week, Friday, August 14, 2020.
This is the first labour market report since the publication of the Q3-2018 dataset in 2019.
The report oddly skipped the outstanding data series from Q3-2018 to Q1-2020, and jumped to the most recent quarter, Chapel Hill noted.
As expected, the report revealed that the labour market slackened further, as unemployment rate increased by 4% to a record high of 27.1% in Q2-2020 from 23.1% in Q3-2018.
Also, as more people worked less hours due to COVID-19 restrictions, underemployment rate rose more steeply by 8.4% to a record high of 28.6% from 21.1% in Q3-2018.
Taken together, under- and unemployment rate spiked by 12.4% to 55.7% from 43.3%.
Meanwhile, Nigeria’s Misery Index, the sum of the inflation and unemployment rates, used to gauge the level of economic hardship, rose by 5.2 percentage points to a record high of 40%.
Youth unemployment is a major concern as it remains stubbornly high and pervasive.
Notably, youth unemployment increased by 5.2% to 35% from 29.7% in Q3-2018.
More importantly, 64% of the unemployed are youth (between the ages of 15 and 34), up slightly from 63% in Q3-2018.
Also worrying, university education has not been particularly rewarding in aiding social mobility, with graduates of higher institutions (BA/ BSc /Bed /HND) ranking as the second highest unemployed category (40.9%) based on education qualification.
Positive surprise, but record low labour participation rate may have flattered the eventual unemployment outturn, Chapel Hill remarked.
Analysts explained that while the labour market report generally makes for a sombre reading, the firm thinks the unemployment rate outturn was actually better-than-expected.
Particularly after adjusting for the trend level of expansion, and also considering the COVID-19 induced economic disruption during the period.
Chapel Hill stated that two important variables underline this positive surprise.
The investment firm cited that the pace of expansion in unemployment rate slowed sharply to the level last seen before the economic recession in 2016.
Between 2016 and 2018, unemployment rate and the number of unemployed increased by 7.7% and 7.4 million every two years, respectively.
In Q2-2020, these slowed to 4.4% and 1.4mn respectively.
Also, the number of people in the labour force who worked zero hours actually declined by 3.9% to 9.4mn people from 9.7mn in Q3-2018.
Nigeria’s unemployment rate is based on the number of people in the labour force who worked zero hours, and those who worked for 1 to 19 hours.
On the surface, the better-than-expected unemployment rate could imply that COVID-19 had a minimal impact on the labour market in Nigeria, or the labour market was in a much better shape before the pandemic.
Unfortunately, the lack of recent historical numbers, particularly between Q3-2018 and Q1-2020, has denied analysts the ability to accurately tell how COVID-19 affected the labour market.
“However, we think the more probable explanation is that the unexpected shrinking of the labour force may have flattered the eventual unemployment out turn.
“Labour Force Participation (LFP) rate fell by 10% to a record low of 68.7% in Q2-2020 from 78.3% in Q3-2018.
“Indeed, if Nigeria had maintained the trend level of LFP (75%), the unemployment rate would have been northward of 33%, by our estimate”, Chapel Hill Denham said.
Analysts said perhaps one of the most striking observations in the labour market data is the seeming structural changes ongoing in the labour market.
Notably, 10.2mn people left the labour force between Q2-2020 and Q3-2018.
The labour force, defined as people who are willing and able to work regardless of whether they have a job or not, declined by 11.3% to 80.3mn from 90.5mn in Q3-2018.
Chapel Hill said the labour force is driven by working age population growth and LFP rate, and both factors combined to produce the unprecedented shrinking of the labour force.
“We believe that the transitory impacts of COVID-19 restrictions might have partly contributed to the low LFP, as individuals temporarily dropped out of the labour market in the absence of opportunities”, analysts stated.
However, Nigeria also had an unprecedented record low increase in the economy’s active workforce, which cannot be completely explained by cyclical factors.
Given Nigeria’s demographics, working age population should be growing at 3% to 3.5% (which is the historical rate), but this slowed sharply to an annualised rate of 0.7% between Q3-2018 and Q2-2020.
Chapel Hill explained that methodology changes in the survey could also be responsible for the changes in the composition of the labour market.
The substantial slowdown in working age population growth could either mean the population is ageing, or the number of people entering the workforce is now beginning to slow.
“For now, it is hard to tell if the changes are due to secular factors, or a momentary decline associated with COVID-19, or inability to gather comprehensive data due to movement restrictions which hampered the work of the NBS”, analysts explained.
MarketForces reported that NBS deployed the Computer Assisted Telephone Interview (CATI) model for the survey, rather than fieldwork.
The Bureau also noted that it made other methodological changes, such as reduction in sample size of households covered, and streamlining of survey questionnaires.
Analysts said the publication of the comprehensive version of the report (possibly with the outstanding historical data), will help in affirming or dispelling the hypotheses.
Anambra had the lowest unemployment rate amongst states, but interpreting sub-national data requires some nuances.
Amongst states, Anambra (13.1%), Kwara (13.8%), Sokoto (13.9%), Zamfara (14.0%) and Ebonyi (14.6%) had the lowest unemployment rates.
On the other hand, states majorly within the South East and South-South regions had the highest unemployment rates, including Imo (48.7%), Akwa Ibom (45.2%), Rivers (43.7%) and Delta (40.3%).
Nonetheless, the NBS urged some caution in interpreting the sub-national data, for two reasons.
Firstly, states with high propensity for women to be housewives or stay home husbands or that have negative attitude towards working tend to have lower unemployment rates, as they are not considered part of the labour force.
“This could explain why some states with high prevalence of poverty have relatively low unemployment rate.
“More so, favourable conditions in one state could lead to influx of job seekers to other states, thereby leading to higher unemployment rates in the performing states”, analysts explained.
Nigeria’s Weak Labour Market Suggests Need for Reforms – Analysts