INSTITUTIONAL QUALITY AND UNEMPLOYMENT IN NIGERIA: A DYNAMIC VAR ANALYSIS, 1996–2024
Tijjani Mamman and Abdullahi Shehu Liman
Volume 14 Issue 2
Abstract
This study examines the linkage between the quality of institutions and unemployment in Nigeria. This covers all six World Bank indicators and extends previous single indicator methods from 1996 to 2024. Worldwide Governance Indicators: control of corruption, regulatory quality, rule of law, combined government effectiveness, voice and accountability and political stability into one composite index. The Institutional Quality Index (IQI) was built using Principal Component Analysis (PCA). Sampling the Kaiser-eyer-Olkin measure (0.709) and Bartlett's test of adequacy confirm the adequacy for the PCA. The sphericity (χ² = 133.25, p < .001) and the first principal component that loads positively on all variables indicated that the initial factor is a general factor of all variables in a single organization. The indicator’s political stability accounts for 59.6% of the total variance. The unemployment rate rose. Resulting index are integrated of order one, I(1). In this study, the Johansen trace and both maximum eigenvalue tests and Engle-Granger residual-based test confirmed that the two variables were co-integrated. In this context, the long run association is estimated with the use of Dynamic Ordinary Least Squares (DOLS), and short run dynamics are examined using a bivariate vector autoregression (VAR). The results show the use of vector autoregression (VAR) in first differences, Granger causality tests, impulse responses, and error variance decomposition. A statistically significant difference is indicated by the DOLS estimates. This is in contrast to the level of institutional quality and unemployment rate, which has no negative association in the absence of an economic impact. When confirmed cointegration is found, it is interpreted as the common historical trend common to both series. By contrast, the contemporaneous short run coefficient on the capital stock-employment relationship is not necessarily a stable one. The quality of institutions is negatively correlated with the outcome, and as predicted by theory, this correlation is significant. The VAR the Granger causality test does not provide evidence of any Granger causality in either direction, while the forecast error variance share test shows an insignificant share. (less than 5%) due to institutional shocks. In short annual series, and on a point basis, long-run governance–unemployment associations are indicated in the following manner: a small, modern, logically coherent channel leading to an institutional output. The study recommends that Nigerian policymakers should pursue sustained, incremental improvements in control of corruption, regulatory quality and rule of law as a complement to (not a substitute for) direct active labour market and job creation programmes. Keywords: Institutional Quality Index; Principal Component Analysis; Unemployment; Dynamic OLS; Vector Autoregression; Johansen Cointegration
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