AN EMPIRICAL INVESTIGATION INTO THE DETERMINANTS OF INCOME DISTRIBUTION IN THE NIGERIAN ECONOMY - UNIPROJECTS

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AN EMPIRICAL INVESTIGATION INTO THE DETERMINANTS OF INCOME DISTRIBUTION IN THE NIGERIAN ECONOMY




AN EMPIRICAL INVESTIGATION INTO THE DETERMINANTS OF INCOME DISTRIBUTION IN THE NIGERIAN ECONOMY
ABSTRACT
The purpose of this study was to carry out an empirical investigation into the determinants of income distribution in the Nigerian economy between 1977 and 2005. The study made use of time series data and adopted the co-integration technique and error correction model to carry out an empirical analysis of the relationship between income distribution and some selected explanatory variables in Nigeria.  The study also investigated the direction and nature of causality which existed among the selected variables, using the Vector Error Correction Model (VECM).  The empirical findings in the study revealed that, Gini Coefficient is very high in Nigeria, indicating a high level of income inequality.  Also, employment rate, inflation rate, growth rate of output (GDP) and social spending were true determinants of income distribution in the Nigerian economy during the period under review. The study also found that, both growth rate of output and government health expenditure exhibited an inverse relationship with Gini coefficient of income distribution in the Nigerian economy.  Moreso, the findings showed the existence of a long run relationship between income distribution and its determinants in Nigeria.  Finally, from the empirical findings in this research work and based on the relationship each determinant exhibited with the Gini coefficient of income distribution in the Nigerian economy, a set of policy recommendations were made such as: government ensuring the formulation and implementation of more pragmatic employment  policies in Nigeria, government ensuring proper monitoring of its spending on education and health through appropriate policy measures and policies that bring about more equitable distribution of income and associated income earning opportunities were suggested among others.
LIST OF TABLES
Table                   Description
4.1                                    Descriptive Statistics of Selected Variables                             70
4.2                                    Correlation Matrix of Selected Variables                       70
4.3                                    Philip Peron Unit Root Test for Selected Series            71
4.4                                    Johansen Multivariate Co-integration Test                    72
4.5                                    Overparametized ECM                                                  75
4.6                                    Vector Error Correction and Granger Causality Test    78




TABLE OF CONTENTS
Title Page                                                                                          i
Certification                                                                                      ii
Dedication                                                                                         iii
Acknowledgements                                                                           iv
Abstract                                                                                            v
List of Tables                                                                                    vi
Table of Contents                                                                             vii
CHAPTER ONE: INTRODUCTION
1.1            Background to the Study                                                                  1-6
1.2            Statement of Problem                                                              6-9
1.3            Objectives of the Study                                                           10
1.4            Hypotheses                                                                             10
1.5            Justification for the Study                                                       11-12
1.6            Scope of the Study                                                                            12
CHAPTER TWO: LITERATURE REVIEW
2.1            Introduction                                                                                      13
2.1.1    Concept of Income Distribution                                              13-19
2.1.2    Employment and Income Distribution                                              20-23
2.1.3    Inflation and Income Distribution                                           23-28
2.1.4    Output Growth and Income Distribution                                28-31
2.1.5    Income Distribution and Social Expenditure on Education     32-33
2.1.6    Income Distribution and Social Expenditure on Health          33-35
2.2             Theoretical Framework                                                          35
2.2.1    Pasinetti Theory of Income Distribution                                 35-40
2.2.2    Collins Theory of Income Distribution                                    40-43
2.3            Review of Empirical Works                                                    43-59
2.4            Summary of Empirical Works                                                59-60

CHAPTER THREE: METHODOLOGY
3.1            Introduction                                                                            61
3.2            Model Specification                                                                 61
3.3            Identification of Variables                                                       61-62
3.4            Apriori Expectation                                                                62
3.5            Estimation Technique                                                              62-63
3.5.1    Unit Root Test                                                                        63
3.5.2    Co-integration Regression                                                       64-66
3.5.3    Error Correction Model                                                                    66-67
3.5.4    Causality Test                                                                         67-68
3.6            Sources of Data                                                                       68
CHAPTER FOUR: RESULTS AND DISCUSSION
4.1            Introduction                                                                                      69
4.2            Empirical Results                                                                    69-71
4.2.1    Time Series Properties of Variables in Model                         71-72
4.2.2    Johansen’s Co-integration Rank Test on the Determinants of
Income Distribution in Nigeria Economy                                72-74
4.3            Error Correction Mechanism (ECM)                                       74-77
4.4            Causality Test                                                                         77-79
4.5            Discussion of Findings                                                            79-83
CHAPTER FIVE: SUMMARY, CONCLUSION
AND RECOMMENDATION
5.1            Summary                                                                                 84-85
5.2            Conclusion                                                                              85-86
5.3            Policy Recommendations                                                                  87-89
References                                                                               Appendix I                                                                                       Appendix II                                                                           


CHAPTER ONE
INTRODUCTION
1.1            Background to the Study
The increasing income inequality and poverty continue to be the most challenging economic issues facing most developing countries, particularly Nigeria. There are enough evidences to show that poverty and income inequalities are on the increase. For instance, Canagarajah, et al (1997), reported increased level of poverty over the period spanning the 1980s and 1990s in Nigeria. The study further revealed high level of income inequality over the same period. This inequality was established by an increase in Gini coefficient from 38.1 per cent in 1985 to 44.9 per cent in 1992
The Nigerian economy is characterized by a large rural agricultural-based traditional sector that encompasses about two-third of the population in the low-income class. Most of these people at the bottom of the income distribution chart are living in abject poverty {Canagarajah, et al (1997)}. Also, a high rate of unemployment and under employment, a large public sector, low wage and poor working conditions characterized the labour market in Nigeria. Also, varying degree of income inequality compounded by a keen middle class has continued to exhibit a strong influence on the nature and pattern of income distribution in the Nigerian economy (Alayande, 2003).
In the 1960s and 1970s, the Nigerian economy provided jobs for its teeming population and absorbed considerable imported labour in the key sectors of the economy. The wage rate which dictated the income level competed favourably with international standard and there was relative industrial peace in the whole economy (Nnnanna, et al 2003).
Following the oil boom of the 1970s, there was mass migration of people, especially the youth to the urban areas seeking for jobs. This movement worsened the employment situation in the urban areas as the employers of  labour found it difficult to accommodate this massive influx of rural dwellers who are mostly youths. The reason however, was not unconnected with the shortage of funds to pay the income of the prospective job seekers. However, following the downturn in the economy in the 1980’s, the problem of unemployment started to manifest, precipitating the introduction of the Structural Adjustment Programme (SAP), the rapid depreciation of the naira exchange rate and inability of most industries to import raw materials required to sustain their output levels (Nnnanna, et al 2003).
A major consequence of the rapid depreciation of the naira after SAP was the sharp rise in the general price level, leading to a significant decline in the real income. The low income inturn aggravated a weakening purchasing power of income earners and declining aggregate demand. Consequently, industries started to accumulate unintended inventories and all sectors in the economy started to rationalize their work force thereby compounding the problem of unemployment and income inequality in the country. As a corollary to this, the public sector of the Nigerian economy places an embargo on employment due to lack of the required capacity to pay their income. With the simultaneous rapid expansion in educational sector, new entrants into the labour market increased beyond the absorptive capacity of the economy. Thus the avowed government objective of achieving full employment failed to materialize. 
Nnnanna et al (2003), posited that, with the divestment of government interest in public enterprises, there has been a general increase in prices due largely to naira exchange rate depreciation, resulting in decline in real income, a rise in unemployment and the inevitable lowering of the living standard of workers. In other words, the income, fringe benefits and the general terms of employment have not been deregulated thereby causing disparity in the income between the public and the private sectors employees. The public service workers have interpreted this development as a reduction in their existing rates of remuneration in cash and kind, as well as their freedom and capacity to negotiate in a meaningful way.
The Federal Civil Service Studies (1979), indicated a substantial increase in income concentration from 1969-1976 reflected a trend towards overall income inequality, exacerbated perhaps by the large income given to high-ranking administrators by the Udoji commission on wages and salaries in 1975. This aggravated the discrepancies between the wages of the junior and senior workers. This inequality, however eased from 1976 to the end of the decade due to the increased salaries for low income earners. Thus unstable pattern of income distribution characterized the wide pay structure of the Nigerian economy.
Anyanwu (2000) posited that, the heavy proceeds from oil during the oil boom was not invested in the key sectors of the economy hence the efforts to reduce income inequality has been dwindling over the years. This marginal growth in the economy compared with the income generating sector (oil sector), with a high performance which is externally propelled, best described Nigeria as an inert economy. 
Moreover, a report of the World Institute for Development Economic Research (WIDER) (2005), attributed the varying degrees of income inequalities noticeable in various sectors of the economy to increase in quest to acquire higher educational qualification. They posited that the newly employed well educated administrators clamoured for high wage rate thereby aggravating the problem of income inequality
However, to ameliorate these problems, several commissions on wages and salaries were inaugurated in the country to correct the imbalance in the pay structure of the junior and senior workers in the public service. Longe and Ayida commissions of 1991 and 1995 were among the wage commissions which favoured the senior staff in the public sector at the detriment of the junior workers from grade level 01 – 06. This was evident in the work of Aigbokhan (2003) where several allowances were added to the senior staff pay structure. Other wages and salaries commissions such as Onosode commission (1997), Justice Fatai Williams Commission (1999) and the vision 2010 committee sprang up with the responsibility of harmonizing and enhancing existing salary structures nationwide.
Moreover the pattern of income distribution between the junior and senior workers is almost the same, it is imperative to note that since the enthronement of democracy in the country, the average minimum wages in the public service has risen considerably. Many staff in the public service nowadays earns more than their counterparts in the same level in the private sector, the situation which is contrary to what was obtained in the 1980s and early 1990s.  (Anyanwu 2000).
Finally, government is now convinced that any policy on income distribution which fails to take adequate care of training and skills development may not succeed. The conviction of government has been demonstrated in the introduction of various programmes like; the National Policy on Education (NPE), popularly known as the 6 – 3 – 3 – 4 system which gave birth to the present 9 – 3 – 4 system with the first nine years captured by the Universal Basic Education Programme (UBE). This programme was meant to provide the type of education that would help Nigeria youths to find employment in both formal and informal sectors of the economy on completion of their studies, in order to close income gap in the economy.
Another programme is the Industrial Training Fund (ITF) established in 1973 to promote and encourage the acquisition of skills in industry and to meet the needs of the economy. However, all these efforts of the government have been plagued with poor implementation, hence the desired result of achieving the key macro economic objectives of the economy is still far from being achieved.
1.2            Statement of Problem
The earliest work on income distribution was done by the classical economist like Adam Smith, David Richardo, J.B. Say and John Staurt. This was done between 1770 and 1870. Income distribution is central to the development of any nation. This simply explains the popularity which issues on income distribution have gained among various scholars  in Economics.
Income distribution has become a contemporary issue in the developing economies which has enjoyed the patronage of some researchers such as Aboyade (1978), Fajana (1985), Deininger & Squire (1996), Gartel and Roberto (2000), Bulir (2001), Rossana and Hoeven (2001), Jose and Teilings (2002), Alayande (2003), Ogwumike et al (2004), Dodson (2005), Bulama (2005), Awoyemi (2005), Jones (2007), Oguntuase (2007), among others who have contributed to the concept of income distribution. For instance, the classical economists expressed income differential as a major determinant of employment in an economy. They expressed employment rate as a function of income or wage, the major underlying principle behind their theory is that supply create its own demand. They believed that income can be lowered (wage cut) so that producer can employ more and gradually attaining full employment.
The most notable work on employment that followed the classical theory is that of Keynes (1930). Keynes criticized the idea of wage cut of the classical economists and also opposed the idea that market forces can determine employment rate. He specifically stated in his hypothesis that employment rate depend on effective demand, he simplified effective demand to be the difference between the actual and expected income of the producer hence his employment  function expressed employment as a function of differential in actual and expected earnings of the producers. According to Keynes, if the actual earnings is greater than expected earnings then a producer will employ more and vice versa. Following the classical and Keynesian economist, the likes of Todaro (1969), Haris and Todaro (1970),  Phelps (1999), Todaro (2003) to mention a few expressed income differential as a major determinant of employment in an economy.
On the other hand, Aboyade (1978), Fajana (1985), Gartel and Roberto (2000), Jose and Teilings (2002) to mention a few, expressed the Gini Coefficient of income distribution as a function of a number of explanatory variables such as; employment rate, tax rate, unemployment rate, education, government social expenditure, inflationary rate, GDP per capita and percentage of old people above sixty years, using the ordinary least square (OLS) method of analysis.
In the same vein, Oguntuase (2007) in an empirical work on determinants of income distribution in the manufacturing sector of the Nigerian economy,   expressed Gini Coefficient of income distribution as a function of employment rate, literacy rate (proxy for education), inflationary rate and manufacturing sector share of the GDP. He made use of the co-integration analysis and the error correction model to establish the nexus between the variables.
In another perspective, Bulama (2003) in an empirical work on economic growth, inequality and poverty in Nigeria, expressed economic growth as a function of inequality and poverty. The estimation technique he employed was multiple regression model to determine the nexus existing between the variables. Philip (2006) also conducted an empirical study on the relationship between economic growth, income inequality and political instability. The model expressed growth rate of output as a function of income inequality and political instability. He employed an ordinary least square (OLS) technique to estimate the nexus between the variables.
Deogaonkar (2004), viewed the relationship in another perspective by considering factors that can influence healthcare delivery in developing countries. The model expressed healthcare delivery as a function of income and socio-economic inequality.
However, considering critically the various views earlier explained, the major questions that arises are; what is the true nature and direction of causality among income distribution, employment rate, inflation, growth rate of output and social spending?, What is the long-run relationship that existed among the variables?. It was observed that none of these views explained the time series properties of the variables, which may help to determine whether there is a long run relationship among the variables in the Nigerian economy. Only Oguntuase (2007) who delved into the verification of the long-run relationship among income distribution and some explanatory variables focused on the manufacturing sector of the Nigerian economy.
A sectoral appraisal of the determinants of income distribution is only a necessary condition but not a sufficient condition to formulate policies on income distribution in the economy.  Also, the disparity in the income of senior and junior workers in the Nigeria economy has contributed so much to the problem of income inequality in the country.  In other to ensure effective policies on income distribution in the economy, a well articulated measures to close the gap between the rich and the poor in the economy is necessary.  Therefore, the study is set to fill the missing gap created by past researchers.  Firstly; by incorporating variables which represents the existing views on determinants of income distribution, secondly; by assessing the long run relationship among the variables; thirdly, by adopting a broader methodology to capture the nature and direction of causality among the variables which part researchers emphasized. Finally, the articulation of policy measures to reduce income inequality via the findings of the study formed part of the focal points of the study.


1.3            Objectives of the Study
The broad objective of this research work is to empirically investigate the determinants of income distribution in the Nigerian economy using time series data spanning from 1977 to 2005.
However, the specific objectives are to;
(a)        assess the long run relationship between income distribution and employment rate, inflation rate, growth rate of output and social spending in Nigeria
(b)       examine the nature and direction of causality between income distribution and employment rate, inflation rate, growth rate of output and social spending in Nigeria.  
1.4            Hypotheses
In order to achieve the objectives of this study, the undermentioned hypotheses have been formulated. These are;
(1)             There is no long-run relationship between income distribution and employment rate, inflation rate, growth rate of output and social spending in the Nigerian economy.
(2)             There is no bi-directional causality between income distribution and employment rate, inflation rate, growth rate of output and social spending in the Nigerian economy.


1.5            Justification for the Study
The World Institute for Development Economics Research (WIDER) has advocated the need to embrace policies that will have a far reaching effect on poverty resulting from income inequality. The Institute suggested sectoral appraisal of income inequality in various sector of the economy as a means of evolving policies that will touch some remote segments of the economy which their pattern of income distribution might not have been critically studied when the economy is viewed as a whole (WIDER Report, 2006).
The inherent structural changes which the introduction of SAP cause in the economy have been expected to lead to higher growth rates of output in the economy, and which should further enhance the equitable distribution of income in the economy. The reverse has been the case in the country due to the general instability in the system and the inability of the various government to objectively implement economic policies that favour the distribution of income in the economy.
Nigerian economy has her own unique pattern of income distribution. Hence, there is need to examine this pattern and identify those factors that might be responsible for such pattern. Thus, the WIDER (2006), believed would give birth to policies that will particularly address the problem of income inequality in the Nigerian economy. Nigerian economy being a less developed economy is ravaged by the problem of poverty resulting majorly from the pattern of income distribution.
In order to ensure effective policies in the economy, a well defined relationship, especially in the long run, should be established between the dependent variables (Income Distribution) and the explanatory variables (Employment Rate, inflation rate, growth rate of output and social spending) in the Nigerian economy. This study is therefore, justified even as it examines the true nature and direction of causality among income distribution and employment rate, inflation rate, growth rate of output and social spending captured by a broader methodology and also to assess the degree of disequilibrium of the variables in the Nigerian economy and not just the short run analysis which was peculiar to the past studies. 
1.6            Scope of the Study
The study covers the period between 1977 and 2005. The study concentrates on the period between 1977 and 2005 simply because it was the period Nigerian economy started witnessing an unprecedented rise in public expenditure especially during the oil boom period. Anyanwu (2000) has traced this phenomenon to the present trend of income inequality in Nigerian economy today.