This study evaluated the role of SMEs in tackling unemployment in Nigeria with

particular emphasis on the sustainability of the employment generated by

SMEs. Annual time-series data were sourced from World Development
Indicators (2019) for the period between 1991 and 2018. The study employed
the Dynamic Ordinary Least Square (DOLS), Fully Modified Ordinary Least
Square (FMOLS) and Canonical Cointegrating Regression (CCR) methods to
achieve the objective of this study. The results confirmed the existence of a
long-run relationship among the dependent and explanatory variables of the
study. Further, the DOLS, FMOLS and CCR coefficients of employment
generated by SMEs which is approximately 0.5%, 0.9% and 0.9% respectively
showed that employment generated in the SMEs subsector has a significant
positive impact on unemployment in Nigeria indicating that the
preponderance of SMEs has not really reduced unemployment in Nigeria as a
result of the excess supply of labour in the economy. Hence, this study
concluded that the employment generated by SMEs in Nigeria is not enough
to permanently solve the unemployment conundrum in Nigeria. Based on the
findings of this study, this study recommended that the Nigerian government
formulate and implement population control policies as well as policies geared
towards providing a conducive business environment where SMEs can thrive
and also provide adequate infrastructure to ensure an increase in the ease of
doing business index in Nigeria.

Keywords: SMEs, employment, CCR, DOLS, FMOLS, Nigeria

JEL Code: C22, D24, J21, L81

Acknowledgement
I am grateful to conference and seminar participants at International Conference
on Workers Education and Employment Relations, Michael Imodu National Institute
for Labour Studies, Ilorin, Nigeria, from November 26th-28th, 2019, for their helpful
comments.

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1.0 Introduction

Full employment is one of the primary macroeconomic goals of every

government. However, many countries, especially developing countries, find
it difficult to achieve full employment which could be attributed to either the
trade-off between achieving full employment and other macroeconomic
goals or the structural failure of the economy’s system or external vicissitude
(Raifu, 2019). Consequently, it becomes an uphill task for many countries to
provide decent jobs to their teeming labour force despite recording
remarkable economic growth (Rad, 2011). More so, growth theories have
shown that labour force growth has a positive impact on aggregate output
and have implications for unemployment.

Unemployment is a growing epidemic in Nigeria especially, among the youths.

This is because the white-collar jobs are fast eroding as the financial institutions
and manufacturing companies, which used to be the juicy sectors people
sought after, are folding up or merging as a result of the bank consolidation
crisis as well as the intermittent power supply, insecurity, inconsistency in
government policies, poor or dilapidated infrastructures and high interest rate,
among others. These increase the costs of production, raise the price of
products, undermine the profit-making potential of firms and result in layoff of
workers, thereby increasing unemployment (Ogunjimi and Amune, 2019).

The high crime rate, terrorism, pipeline vandalism, hooliganism, drug and
human trafficking and prostitution, among other social ills, can be attributed
to the high rate of unemployment in the country. Realising the dangers high
unemployment rate pose to the economy, the government established
institutions and agencies such as Small and Medium Industry Equity Investment
Scheme (SMEIS), Small and Medium Scale Enterprises Development Agency
(SMEDAN), National Directorate of Employment (NDE), National Economic
Reconstruction Fund (NERFUND), and microfinance banks, among others. Also,
several programmes and policies have been formulated overtime to ensure
that employment is generated. Such policies and programmes include Youth
Empowerment Scheme (YES) aimed at empowering youths socially and
economically; National Poverty Alleviation Programme (NAPEP) aimed at
cushioning the effect of severe economic situation on the unemployed; and
N-Power as a panacea to graduate unemployment. More so, the government
recognised the important role of the SMEs subsector in reducing
unemployment such that in the recently launched Economic Recovery and
Growth Plan (ERGP) of the federal government, one of the five goals of the
development plan is to drive industrialization through investment in SMEs.
Nonetheless, these government’s efforts have not achieved obvious success
as unemployment still remains a bane of the economy.

However, the reasons for the high rate of unemployment despite the
government’s frantic efforts at combating this malady are not far-fetched. First,
the Nigerian economy is a mono-economy which totally rely on the production
and export of crude oil, a sector which is capital intensive. Second, the services
sector which is fast gaining relevance in the economy through its increasing

P a g e 75 |
contribution to total national output is also capital-intensive (Ogunjimi, 2020).
Third, the high population growth rate resulting in a teeming labour force puts
increasing pressure on the few available resources in the country including
employment opportunities. Fourth, the real sectors of the economy are
neglected and industrialization, which could have absorbed a high amount of
labour, is at a low ebb (Ogunjimi, 2019).

At the moment, it is apparent that there is an excess supply of labour to the

Nigerian labour market and the short-term feasible panacea for youth
unemployment is the promotion of small and medium scale enterprises. SMEs
has been identified as a sub-sector that can help reduce unemployment to
the barest minimum and create jobs for the ever-increasing labour force.
Peterise (2003) stated that over 60 per cent of Nigeria’s working population are
employed in both formal and informal SMEs sub-sector. Further, Gbam (2017)
averred that about 80 per cent of the daily necessities are elementary
materials requiring little or no automation to produce, most of which comes
from SMEs.

The Nigerian tertiary institutions churn out hundreds of thousand graduate per
annum while the labour market does not have the capacity to absorb them.
As a result, the National University Commission (NUC) incorporated
entrepreneurship, where students are equipped with skills required to make
them be their own bosses and an employer of labour, into the curriculum of
tertiary institutions in a bid to make graduate self-employed and self-reliant.
This stemmed from the belief that a self-employed person will create job and
be an employer of labour rather than jostle for the limited available job
opportunities in the country. As a result, many unemployed people have
ventured into small scale businesses including livestock farming, fisheries, shoe
production, laundry and dry-cleaning services, car-wash, soap-making,
carpentry, tailoring, and barbering, among others. Accordingly, these small
businesses are spread across different geographical areas of the country. The
apparent reason for the preponderance of these SMEs is the continued efforts
of government at all level and microfinance institutions to provide capital to
SMEs owners (Gbam, 2017). It is against this background that this study aims to
examine the SMEs-unemployment nexus in Nigeria with a view to proffering
lasting solution to the unemployment conundrum in Nigeria.

This paper comprises five sections. Following this first section, the second
section reviews relevant literature on the nexus between SMEs and
unemployment. Section three presents the methodology and materials of this
study. Section four presents the empirical findings, and the last section
concludes and provides policy recommendations.

2.0 Literature Review

2.1 Theoretical Literature

Typical economic models and production functions show that the output level
is proportional to the amount of input employed in the production process

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given the variety of returns to scale. Increasing returns to scale (IRS) occurs
when the level of output increases by a greater proportion the level of input
factors; decreasing returns to scale occurs when the firm experiences
decreasing output level when input factors increases; and constant returns to
scale is a situation when the level of output and input increase/decrease at
the same rate during the production process. The employment of more input
factors (such as labour) in the production process leads to a reduction in the
unemployment rate. However, given that the natural rate of unemployment is
believed to be positive, there will certainly be some level of unemployment in
the country. Therefore, Arthur Okun unveiled the theoretical link between
productivity growth and unemployment by explaining the differences
between potential and actual level of output as well as the disparity between
unemployment and its natural rate. He alluded, in the popular Okun’s Law, that
there is an inverse relationship between unemployment and real GNP growth
(productivity growth) such that an increase in GNP growth by one percent will
plummet unemployment rate by 0.3 percent (Okun, 1962). Several studies
have been carried out to test the validity of the Okun’s Law and variations
were found in the responsiveness of unemployment to changes in productivity
(Knotek, 2007; Ball, Jalles and Loungani, 2014). The disparity in the degree of
responsiveness has been attributed to the frequency of data used and
business cycles.

2.2 Empirical Literature

There are several studies in the literature that examine the performance of
small and medium scale enterprises (SMEs) both in developing and developed
countries. While some studies focused on the impact of SMEs on economic
growth, some concentrated on evaluating the impact of SMEs on poverty
reduction and others examined how they help reduce unemployment. The
results vary and are mixed due to the structure and nature of the country or
region under review as well as the estimation techniques adopted and other
methodological issues. For instance, Benis (2014) used the augmented solo
growth model to examine the nexus between SMEs and economic growth in
Iran provinces and found than SMEs have a significant positive impact of the
growth of the Iranian economy. More so, Chughtai (2014) found that SMEs
have a strong correlation with output growth in the Pakistani economy. For the
Albanian economy, Grisejda and Krisdela (2016) also found that SMEs drives
economic growth. Similarly, Obi (2015), Bello, Jibir and Ahmed (2018) and Obi,
Ibidunni, Tolulope, Olokundun, Amaihian, Borishade and Fred (2018) showed
that small-scale enterprise is a veritable tool for stimulating economic growth
in Nigeria. However, Eze and Okpala (2015) found that SMEs output has no
significant effect on economic growth in Nigeria.

On the other hand, Afolabi (2013) evaluated how SMEs financing affects
economic growth in Nigeria between 1980 and 2010 using the Ordinary Least
Square (OLS) method and he found SMEs output and commercial banks’
credit to SMEs to be important drivers of economic growth in Nigeria. Similarly,
Ilegbinosa and Jumbo (2015) who employed the ordinary least square, co-
integration and error correction model technique found similar results showing

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that the financial capital available to SMEs stimulates the growth of the
Nigerian economy. Moreover, Osemene, Salman and Kolawole (2017)
evaluated how SMEs reduce poverty incidence in Kwara State by sampling
100 SMEs within the state. A probit regression model was employed and the
results showed that the revenue of SMEs owners helps to reduce poverty
incidence in Kwara state. Also, John-Akamelu and Muogbo (2018) assessed
the role SMEs play in eradicating poverty in Nigeria. The 150 sampled
respondents tested the hypotheses using chi-square and found that SMEs
fosters employment creation and harness local resources utilization. More so,
Oba and Onuoha (2013) made use of annual time series data from 2001 to
2011 and employed the ordinary least square method to examine the role
SMEs play in reducing poverty in Nigeria between 2001 and 2011 by focusing
on the employment channel through which SMEs lessen poverty. The results
showed that SMEs’ income is a driver of employment as well as a veritable tool
for reducing poverty in Nigeria.

Oduntan (2014) opined that SMEs provides a platform for capacity building;
capable of generating employment; promote economic growth; serve as
facilitators of industrial dispersion and rural development; facilitate backward
and forward linkages; aid technological/industrial development; and
eradicate poverty. However, Wang (2016) argued using the World Bank
Enterprise Survey covering data from 119 developing countries found that the
key inhibitors of SMEs include: lack of access to finance, high tax rate, stiff
competition, “poor or inadequate electricity supply and political instability. In
addition, the study of Muritala, Awolaja and Bako (2012) in five selected local
government areas in Ogun state, Nigeria, showed that the major hindrances
to SMEs growth in Nigeria are: lack of or inadequate finance, corruption, poor
infrastructure, lack of training and experience, low demand for goods and
services and poor management.

On the nexus between SMEs output and employment, Gbam (2017) carried
out a study on one hundred and thirty-three SMEs in Plateau State, Nigeria,
using the chi-square technique. The results showed that SMEs is a vital tool for
employment generation in the state. On the other hand, Otugo, Edoko and
Ezeanolue (2018) assessed the impact of SMEs on economic growth in Nigeria
using the ordinary least square method and found that SMEs have a positive
impact on employment generation as well as economic growth in Nigeria.
Similarly, Fiseha and Oyelana (2015) evaluated the role of SMEs play in fostering
growth in developing countries. They found that SMEs play a crucial role in
income generation, wealth creation, employment generation and poverty
alleviation in South Africa. More so, in their study on the impact of
entrepreneurship development on unemployment reduction in Anambra
state, Asogwa and Dim (2014) sampled 150 youths and found that
entrepreneurship training, traits and empowerment attenuates unemployment
rate. However, Opafunso and Adepoju (2014) sampled 150 SMEs owners in Ekiti
state to know the effect SMEs have on the economic growth of the state. They
employed a multistage sampling method and found that poverty nosedived,
employment was generated, and the standard of living was improved with an
increase in the output of SMEs in the state.

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Employing the multiple regression model to estimate the effects of SMEs on
employment creation in Nigeria, Edoko, Agbasi and Ezeanolue (2018) found
SMEs to be a significant driver of income per capita and employment
generation in Nigeria but also found that foreign aids, commercial bank credits
to SMEs, human capital development and infrastructure do not generate
employment in Nigeria. On the other hand, Okolie, Anidiobu and Ugwuanyi
(2018) used annual time series data from 2001-2017 to examine how
entrepreneurship financing affects unemployment rate in Nigeria employing
the Vector autoregressive (VAR) estimation technique. The results showed that
bank credit to SMEs, inflation rate and bank lending rate exert no significant
influence on employment generation in Nigeria. They argued that the funds
available to these SMEs are inadequate to improve the performance of the
sub-sector let alone reduce the unemployment rate.

Using simple percentages and chi-square to estimates the responses of 120

SMEs owners on how SMEs have created jobs in Lagos state, Safiriyu and Njogo
(2012) found a significant positive relationship between SMEs and job creation.
More so, Ndiaye, Razak, Nagayev and Ng (2018) applied the General-to-
Specific modelling on World Bank Enterprise Survey data for 266 economies to
model five performance indicators based on 80 potential factors derived from
firm characteristics, regulation taxes, technology, innovation, informality,
finance, workforce, informality, infrastructure, and trade concerning micro,
small and medium enterprises (MSMEs). The result showed that technology and
innovation increase employment in medium enterprises, but not in small
enterprises.

Summarily, it is apparent that the literature on the nexus between SMEs and
employment in Nigeria is inconclusive as the results are mixed. In addition, most
of the studies examining this nexus are done at the micro-level while studies on
the overall economy are rare. More so, most of the studies employed the
ordinary least square estimation technique without carrying out pre-estimation
and post-estimation tests in order to ascertain the appropriateness of the
model. Hence, this study will fill these gaps in the SMEs-employment nexus
literature by examining the dynamic impact of SMEs on employment
generation in Nigeria and how sustainable the employment generated
through SMEs is especially in providing a lasting solution to the unemployment
problems in Nigeria. This will be done by sourcing annual time-series data from
World Development Indicators (WDI) and estimating the specified model using
the Dynamic Ordinary Least Square (DOLS), Fully-Modified Ordinary Least
Square (FMOLS) and Canonical Cointegrating Regression estimation
techniques. The estimation techniques are employed since the objective of
this study is to examine the long-run effect of the employment generated by
SMEs on unemployment rate in Nigeria.

3.0 Materials and Methods

3.1 Materials: Data Description and Sources

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This study sourced for annual time-series data covering the period between
1991 and 2018 from World Development Indicators (2019). The choice of this
small sample size is as a result of paucity of data for the key variables. This study
comprises one dependent variable (unemployment rate) and five
independent variables (self-employment, inflation rate, credits to private
sector, real GDP per capita and supply of labour). Whereas unemployment
rate (% of total labour force) is used to measure unemployment rate, self-
employment (% of total employment) is used to proxy employment generated
by SMEs, inflation (annual %) is used to measure inflation, GDP per capita is
used as a proxy for economic growth, and domestic credits to private sector
by financial institutions (% of GDP) is used as a proxy for credits to private sector.

3.2 Method of Analysis

This study employs the Dynamic Ordinary Least Square (DOLS), Fully-Modified
Ordinary Least Square (FMOLS) and the Canonical Cointegrating Regression
(CCR) estimation methods to evaluate the sustainability of the employment
generated by SMEs in Nigeria. These methods are preferred because they help
to achieve the main focus of this study which is to check the sustainability
(long-run impact) of the employment generated by SMEs in Nigeria. These
methods can be invoked only when the existence of a long-run relationship
among the variables has been confirmed. Whereas the DOLS method was
developed by Stock and Watson (1993), the FMOLS was developed by Phillips
and Hansen (1990) and the CCR was developed by Park (1992). These
estimation methods have areas of strength in relation to other estimators.

The DOLS method helps to construct asymptotically efficient estimators that

excludes the cointegrating system feedback. It corrects for both small sample
and simultaneity biases as well as solves the endogeneity problem by
incorporating lags, leads and contemporaneous values into the estimation
process. It also accounts for autocorrelation and residual non-normality as well
as accommodates variables that are integrated of varying orders. On the
other hand, the FMOLS utilizes semi-parametric correction to eliminate the
problems of heteroscedasticity, autocorrelation, omitted variable bias and
endogeneity (Phillips and Hansen, 1990). It generates consistent parameters
even in small sample sizes and is suitable when the variables are stationary at
first difference and cointegrated. Similarly, the CCR is an efficient single
equation regression which can be used to test cointegrating vectors in a
model where the variables are stationary at first difference. It is based on
transforming variables in the cointegrating regression and eliminates the
second-order bias of the OLS estimator. The difference between CCR and
FMOLS is that whereas CCR focuses on only data transformation, FMOLS
concentrates on the transformation of both data and parameters (Park, 1992).
These three estimation methods (DOLS, FMOLS and CCR) are adopted
simultaneously in this study to facilitate robustness checks and ensure that the
results are consistent irrespective of the method of analysis employed so as to
provide evidence-based policy recommendations.

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Following the specification of Okolie, Anidiobu and Ugwuanyi (2018) and
incorporating other important variables in the model, the general equation
depicting the relationship between the variables of interest in this study can be
specified as:

UNEM = ƛ1 + ƛ2SFEMt + ƛ3INFt + ƛ4CPSt + ƛ5GDPPCt + ƛ6LABFt + µt (1)

Equation (1) shows that unemployment (UNEM) is a function of self-

employment (SFEM), inflation rate (INF), credits to private sector (CPS), gross
domestic product per capita (GDPPC) and labour force (LABF). To ease
interpretation of the empirical results, all the variables are expressed in natural
logarithm by including “L” before the variables (GDP per capita and supply of
labour) except those already in percentage. Hence, equation (1) can be
rewritten as:

UNEM = ƛ1 + ƛ2SFEMt + ƛ3INFt + ƛ4CPSt + ƛ5LGDPPCt + ƛ6LLABFt + µt (2)

A priori Expectation: ƛ1, ƛ2, ƛ3, ƛ4, ƛ5 < 0; ƛ6 > 0

Expectedly, the coefficient of self-employment, a proxy for the employment
generated by SMEs which is the main variable of this study, should be negative
indicating an inverse relationship with between self-employment and
unemployment. Incorporating inflation rate into the model is predicated on
the Phillips Curve which postulates an inverse relationship between
unemployment and inflation hence, the expected sign for the parameter of
inflation is negative. Further, the inclusion of credits to private sector in the
equation is because financial capital is a major prerequisite to starting a
business including SMEs; a negative relationship is expected to exist between
unemployment and credits to private sector. More so, the supply of labour is
an important determinant of unemployment rate hence, its inclusion in the
model. In fact, excess supply of labour causes unemployment thus, it is
expected that the coefficient of supply of labour (labour force) has a positive
sign. Finally, Okun’s law posits that economic growth and unemployment are
inversely related hence, it is expected that the coefficient of GDP per capita
will be negative.

4.0 Empirical Analysis

4.1 Preliminary Analysis
4.1.1 Descriptive Statistics
The synopsis of the descriptive statistics of the variables of this study is presented
in Table 1. The Table depicts that the average share of self-employment in total
employment is approximately 83 percent and its standard deviation is quite
low (1.45 percent). Unemployment rate ranges between 3.4 percent and 6.2
percent with a mean and standard deviation of 4.1 percent and 0.77
respectively. This suggests that unemployment rate is still single-digit in Nigeria.
On the other hand, inflation fluctuated significantly during the period under
review as evidenced by its minimum and maximum value of 5.4 percent and
72.8 percent respectively. The mean values of labour force, GDP per capita
and the share of credit to private sector in total GDP stand at about 43 million
people, $1873.57 and 15.8 percent respectively. More so, all the variables
P a g e 81 |
except share of credits to private sector in total GDP are positively skewed.
Also, only unemployment rate and inflation rate are leptokurtic while the others
are platykurtic. Similarly, as regards normality, the Jarque-Bera probability
values show that only unemployment rate and inflation rate are not normally
distributed.

Table 1: Descriptive Statistics of Variables

UNEM SFEM INF CPS GDPPC LABF

Mean 4.14 83.05 18.86 15.80 1873.57 43416376
Median 3.95 82.63 12.55 15.85 1824.59 42275761
Maximum 6.24 85.07 72.84 26.56 2563.90 60698492
Minimum 3.42 81.15 5.38 3.02 1348.68 30040723
Std. Dev. 0.77 1.45 17.33 6.69 454.93 9177805
Skewness 1.83 0.15 1.97 -0.18 0.21 0.29
Kurtosis 5.06 1.30 5.69 1.76 1.43 1.93
Jarque-Bera 20.53 3.47 26.59 1.93 3.10 1.73
Probability 0.0000 0.1766 0.0000 0.3804 0.2128 0.4206
Observations 28 28 28 28 28 28
Where UNEM = unemployment rate (%), SFEM = Self-Employment (% of total employment) INF
= Inflation rate (%); CPS = Domestic credits provided by financial institutions (% of GDP);
GDPPC = GDP per capita; and LABF = Labour Force (Supply of Labour).
Source: Authors’ Computation from Eviews9

4.1.2 Unit Root Test

Unit root tests are conducted to ascertain the time-series properties of the
variables so as to prevent spurious regression. The Augmented Dickey Fuller
(ADF) and Phillip Perron (PP) unit root test approaches are employed in this
study and the results are presented in Table 2. These methods test the null
hypothesis of “The variable has a unit root” which is rejected when the
probability value is less than 10 percent and accepted when it is more than 10
percent. Consequently, the results accept the null hypotheses only at first
difference signifying that all the variables have a unit root and are not
stationary until after the first difference. This satisfies the condition for adopting
the Johansen cointegration test approach.

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Table 2: Unit Root Test Results

Augmented Dickey Fuller (ADF) Phillip Perron (PP)

Variables Level
Constant Constant None Constant Constant None
and Trend and
Trend
UNEM -1.30 -1.76 0.67 -0.19 -0.73 1.18
SFEM -0.96 -1.58 -1.73 -0.85 -1.22 -1.58
INF -1.92 -2.64 -1.27 -2.08 -2.94 -1.27
CPS -1.60 -1.82 -0.22 -1.78 -1.99 -0.30
LGDPPC -0.67 -2.98 0.92 -0.34 -2.04 1.66
LLABF 2.18 0.75 3.18 1.55 0.11 60.06
First Difference
Constant Constant None Constant Constant None
and Trend and
Trend
UNEM -2.88*** -3.55*** -2.76* -2.88*** -3.05 -2.76*
SFEM -3.14** -3.13 -2.53** -3.15** -3.14 -2.51**
INF -5.03* -4.93* -5.11* -5.21* -5.45* -5.19*
CPS -4.35* -4.33** -4.46* -4.35* -4.32** -4.46*
LGDPPC -2.39 -2.34 -2.21** -2.47 -2.43 -2.25**
LLABF -2.87*** -3.30*** 0.34 -2.75*** -3.22 0.70
Summary of Unit Root Test Results
Augmented Dickey Fuller (ADF) Phillip Perron (PP)
Level First Difference I(d) Level First I(d)
Difference
UNEM -1.76b -3.55***b I(1) -0.73b -2.67*c I(1)
SFEM -1.73c -3.14**a I(1) -1.58c -3.15**a I(1)
INF -2.64b -5.11*c I(1) -2.94b -5.45*b I(1)
CPS -1.82b -4.46*c I(1) -1.99b -4.46*c I(1)
LGDPPC -2.98 -2.21**c I(1) -2.04b -2.25*c I(1)
LLABF 3.18c -3.30***b I(1) 60.06c -2.75***a I(1)
Note: ‘a’ denotes model with constant, ‘b’ is for model with constant and trend and ‘c’ is the
model without constant and trend. I(0) and I(1) denote stationarity at level and first
difference respectively.
Source: Author’s Computation using Eviews9

4.1.3 Cointegration Test

Consequent upon the unit root test result which shows that all the variables are
integrated at order one [I(1)], the Johansen cointegration test is the most
appropriate cointegration test approach to determine the existence of a long-
run relationship among the variables. This approach tests the null hypothesis,
“There is no cointegration” which should be rejected when the critical value
exceeds the trace statistic or when the probability value is greater than 10
percent but should be accepted if otherwise. The Johansen cointegration test
result is presented in Table 3 and it shows that there are six cointegration
equations in the trace cointegration rank test and three cointegrating
equations in the maximum eigenvalue cointegration rank test. This suggests
that the variables are cointegrated that is, there is a long-run relationship
between employment generated by SMEs and unemployment rate, among
other variables in the model. Both employment generated by SMEs and
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unemployment rate converge in the long-run indicating that they have a long-
run relationship whose direction and magnitude will be revealed by the
estimation results. Given this result, the next line of action is to estimate the
specified model using the DOLS, FMOLS and CCR approaches.

Table 3: Johansen Cointegration Test Result

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Eigenvalue Trace Statistic 5% Critical Prob.
No. of CE(s) Value
None * 0.84 140.02 95.75 0.0000
At most 1 * 0.79 93.17 69.82 0.0002
At most 2 * 0.56 52.63 47.86 0.0166
At most 3 * 0.43 31.46 29.80 0.0319
At most 4 * 0.33 16.88 15.49 0.0308
At most 5 * 0.22 6.59 3.84 0.0102
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Eigenvalue Trace Statistic 5% Critical Prob.
No. of CE(s) Value
None * 0.84 46.85 40.08 0.0075
At most 1 * 0.79 40.53 33.88 0.0070
At most 2 0.56 21.17 27.58 0.2659
At most 3 0.43 14.58 21.13 0.3193
At most 4 0.33 10.29 14.26 0.1938
At most 5 * 0.22 6.59 3.84 0.0102
* denotes rejection of the hypothesis at the 0.05 level
Source: Author’s Computation from Eviews9

4.2 Discussion of Findings

Sequel to the Johansen cointegration test result which shows that the variables
are cointegrated, the conditions for estimating equations using DOLS, FMOLS
and CCR methods are satisfied. The estimation results are presented in Table 4.
Of utmost importance is the self-employment variable used to proxy the
employment generated by SMEs in Nigeria. Interestingly, all the estimation
methods show that employment generated by SMEs is positively related to
unemployment in Nigeria indicating that an increase in employment through
the SMEs sub-sector increases unemployment in Nigeria. Specifically,
unemployment will increase by less than one percent, on the average, if the
employment in the SMEs subsector increases by one percent. This result is
against a priori expectation and the findings of Opafunso and Adepoju (2014),
Fiseha and Oyelana (2015), Otugo, Edoko and Ezeanolue (2018) and Edoko,
Agbasi and Ezeanolue (2018).

Nevertheless, this result suggests two possibilities: the population growth rate
and supply of labour outweigh the available employment opportunities in the
country and/or the contribution of the SMEs subsector to total employment is

P a g e 84 |
negligible, the former being the most likely as evidenced by the direct
relationship between supply of labour (labour force) and unemployment rate
in Nigeria. The result shows that an increase in the supply of labour by one
percent leads, on the average, to between 9.6 percent to 13.3 percent
increase in unemployment rate which suggests that unemployment rate is
highly responsive to a change in supply of labour in the country. In sum, this
result shows that the employment generated in the SMEs subsector is not
sustainable nor is it a panacea to combating the unemployment problems in
Nigeria in the long-run. Intuitively, the preponderance of SMEs in the economy
is not sufficient to permanently solve the unemployment problem in Nigeria.
Hence, it is needful that, while the campaign for self-employment continues,
the economy be diversified to ensure that employment is generated from
other sectors of the economy especially sectors that are labour-intensive.
Succinctly, the effort to attenuate unemployment through SMEs is not enough
and the government needs to be proactive by making efforts towards
reducing the excess supply of labour.

Against the conjecture of the Phillips Curve, the coefficient of inflation has a
positive sign indicating that unemployment rate increases as inflation rates
rises. Specifically, the DOLS model shows that unemployment rate would be
aggravated by approximately 0.03 percent when inflation rises by one percent
while the FMOLS and CCR show that unemployment worsens by about 0.1
percent when inflation rate increases by one percent. However, only the DOLS
and FMOLS models show that inflation rate is a significant driver of
unemployment rate in Nigeria. This result implies that there are costs attached
to high inflation, one of which is an increase in unemployment rate thus, the
Nigerian economy should be ready to accept an increase in unemployment
rate when the CBN fails in her responsibility of price stability. This result holds true
from Nigeria because an increase in inflation rate reduces the purchasing
power and cost of production of firms which is a disincentive for investors that
leads to laying-off of workers thereby increasing the rate of unemployment in
the country. This finding negates that of Rafiu (2019) who argued that there is
a trade-off between inflation and unemployment in Nigeria such that Nigeria
must accept a considerable unemployment level to achieve some level of
price stability.

In line with the postulation of the Okun’s law, the coefficient of GDP per capita
has the right sign indicating an inverse relationship between unemployment
rate and GDP growth in Nigeria. However, only the DOLS and FMOLS models
show that GDP per capita, a proxy for economic growth, is significant in
influencing unemployment rate in Nigeria while the CCR model shows the
converse. It is noteworthy that even though the signs of the coefficients of GDP
per capita in each model are the same, their magnitudes differ. For instance,
DOLS model shows that an increase in GDP per capita by one percent will
attenuate unemployment by approximately 4.8 percent while the FMOLS and
CCR models show that unemployment will fall by about 0.9 percent and 0.6
percent respectively if GDP per capita should increase by one percent. This
suggests that increasing aggregate output (GDP) especially in labour-intensive
will generate more employment hence, it is needful to diversify the Nigerian

P a g e 85 |
economy so as to increase employment generation in all the sectors of the
economy.

Further, the FMOLS and CCR models show that credit to the private sector
(CPS) has a positive impact on unemployment such that an increase in CPS by
one percent will, on the average, worsens unemployment by 0.01 percent
while the DOLS model shows that CPS is inversely related to unemployment
such that an increase in CPS by one percent assuages unemployment by 0.01
percent in Nigeria. However, the results show that credits to private sector does
not have a significant impact on attenuating unemployment in Nigeria. This
result corroborates the findings of Okolie, Anidiobu and Ugwuanyi (2018) who
argued that the funds available to these SMEs are inadequate to improve their
performance let alone reduce unemployment rate.

In addition, the result also shows that the DOLS has the highest goodness of fit
as revealed by its Adjusted R-Squared which shows that the self-employment,
inflation rate, credits to private sector, labour force, and GDP per capita
explain about 81 percent of the variation in unemployment rate in Nigeria
whereas the FMOLS and CCR methods have an Adjusted R-Squared value of
approximately 70 percent and 68 percent respectively. Further, the S.E. of
regression and sum squared residuals are considerably low thus, certifying that
the findings are of this study are valid for policy recommendation.

Table 4: Results of the Dynamic OLS Estimation

Estimation Techniques
DOLS FMOLS CCR
Dependent Variable: UNEM
SFEM 0.545*** (2.07) 0.872* (4.40) 0.918* (4.74)
INF 0.026** (2.80) 0.011*** (1.75) 0.01 (1.41)
CPS -0.013(-0.53) 0.008 (0.51) 0.007 (0.33)
LLABF 13.284* (7.92) 9.598* (8.68) 9.624* (7.65)
LGDPPC -4.807** (-2.47) -0.870* (-0.66) -0.602 (-0.51)
C -236.19* (5.88) -230.65* (-7.30) -236.90* (-6.65)
Adj. R2 0.8133 0.6978 0.6849
S.E. 0.3013 0.4278 0.4369
S.S.R. 0.9077 3.8434 4.0077
Leads 1
Lags 0
Notes: *, ** and *** denote 1%, 5% and 10% significance level respectively; and t-statistics are
in parentheses.
Source: Author’s Computation from Eviews9

4.3 Post-Estimation Test

The DOLS, FMOLS and CCR estimation methods produce efficient and
consistent parameters which makes the result plausible for policy prescription,

P a g e 86 |
and as well circumvent the problems of serial correlation, residual non-
normality, heteroscedasticity, small sample bias as well as endogeneity bias.
However, it is needful to check for the unit root properties of the residuals of
each of the estimated model so as to certify that the model is fit for policy
recommendation. The ADF and PP unit roots test approaches are employed
again, and the results are presented in Table 5. The results of both approaches
show that the residuals of each of the models are stationary at level indicating
that the findings of this study are fit for policy recommendation.

Table 5: Unit Root Tests on Residuals of DOLS, FMOLS and CCR

ADF ADF (First Order of Phillip Phillip Perron Order of

(Level) Difference) Integration Perron (First Integration
(Level) Difference)
DOLS -6.25c* - I(0) -10.01b* - I(0)
Residuals
FMOLS -3.83c* - I(0) -2.58c* - I(0)
Residuals
CCR -3.83b** - I(0) -2.50c** - I(0)
Residuals
Notes: b and c denote model with constant and trend and a model without constant and
trend respectively; and *, ** and *** denote 1% and 5% significance level respectively.
Source: Author’s Computation from Eviews9

5.0 Conclusion and Policy Implications

Every government aims to achieve full employment. Nevertheless, this has
remained an uphill task for many developing countries including Nigeria as the
rate of unemployment soars at an alarming rate. Consequently, campaigns
for self-employment through setting up of small and medium scale enterprises
(SMEs) are common place and as such there is a great preponderance of SMEs
in every nook and cranny of the country. Despite this evolving phenomenon,
unemployment continues to rise as a result of excess supply of labour resulting
from the high population growth rate of Nigeria. Hence, this study sought to
evaluate the SMEs-unemployment nexus as well as examine the sustainability
of the employment generated by the SMEs sub-sector and to check if it is a
long-run phenomenon. To achieve the objective of this study, annual time-
series data on key variables were sourced from World Development Indicators
(2019) for the period between 1991 and 2018 and the DOLS, FMOLS and CCR
estimation methods were employed to investigate the sustainability of the
employment generated by SMEs as a panacea to the unemployment
problems in Nigeria.

Primarily, this study found that employment generated by SMEs is a long-run

phenomenon but it is not sufficient to completely solve unemployment
problems in Nigeria. This results from the direct relationship between
unemployment and labour supply as well as the excess labour supply as a result
of high population growth rate in the country. Hence, the employment
generated in the SMEs subsector is not sustainable nor is it a panacea to
combating the unemployment problems in Nigeria in the long-run. However, it
is important to note that it is not the employment generated by SMEs that

P a g e 87 |
causes unemployment, but that labour supply outweighs the contributions of
SMEs to fighting unemployment in Nigeria. Further, the result shows that the
proposition of Phillips curve does not hold in Nigeria whereas the Okun’s law
holds in Nigeria. In addition, the result shows that credits to private sector is not
a significant determinant of unemployment rates as Okolie, Anidiobu and
Ugwuanyi (2018) argued that the funds available to these SMEs are
inadequate to improve their performance let alone reduce unemployment
rate. Given the foregoing, this study concludes that the preponderance of
SMEs is not enough to reduce unemployment in the long-run in Nigeria and
that while it is necessary condition for employment generation, it is not a
sufficient condition.

These results have policy implications. First, the less-than-one-percent but

positive coefficients of SMEs employment and the positive but large
coefficients of labour supply suggest that Nigeria should not be carried away
by the preponderance of SMEs in every nooks and cranny of the country as
the high rate of labour supply, resulting from high population growth, frustrates
the efforts of this subsector in effectively combating unemployment. Hence, it
is imperative to take cues from China in a bid to effectively engage the excess
supply in the Nigerian labour. Further, while the campaign for self-employment
continues, efforts should be made to diversify the Nigerian economy so as to
generate more employment. More so, the Nigerian government should
formulate and implement policies geared towards providing a conducive
business environment where SMEs can thrive and also provide adequate
infrastructure to ensure an increase in the ease of doing business index in
Nigeria. The government needs to exponentially increase the ease of doing
business and access to finance by these SMEs, so they can also exponentially
increase jobs created.

Second, the non-significance of the credits to private sector coefficients shows

that CPS does not exert a significant influence on unemployment in Nigeria.
This is because the volume of credits to the private sector are still at a low ebb
and the lending rate is high. Hence, the monetary authorities should give
special directives to financial institutions to prioritize the SMEs subsector. This
would encourage SMEs owners and further improve their performance thereby
creating more employment in the country. Besides, policies geared towards
financial inclusion should be implemented to ensure that all and sundry,
especially intending SMEs owners, have access to credits facilities.

P a g e 88 |
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