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.
