CHAPTER ONE

INTRODUCTION:

1.1 BACKGROUND OF THE STUDY.

The Nigerian economy is a middle income economy emerging market with

well developed financial legal communication transported entertainment

sectors. It is ranked 31st in the world in terms of gross domestic product

(GDP)as 2009 and its emergent through currently under performing

manufacturing sectors is the second largest on the continent for the west

African region scholars have characterized the Nigerian economy to be

associated with a high cost of living putting it in words(EKAN 1998)states

that Nigerian economy is characterized by high cost of living which is

resultant effect of the persistent increase in the general price level in the

economy. In an effect to solve the problem of low standard of living

government expenditure has been on the continual increased which is partially

caused by trade unions agitations and partly by continual increase in prices of

goods and services in the product and factors markets in the product.

Since the independence the country’s recurrent expenditure has been on the

increase in 1970 total recurrent expenditure stood at two thousand seven

hundred and thirty four naira ninety kobo in 1980 when the economy was on a

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persistent growth our recurrent expenditure stood at four thousand eight

hundred and twenty kobo in 1986 when SAP (structural adjustment

programme) was introduced it.

Stood at seven thousand six hundred and ninety nine kobo. The increase in the

country’s recurrent expenditure was necessitated by the need to create

employment and increase money supply to match the output level. (NBS

2009).

However the purchasing power of the average Nigerian has been reducing

because of the increase in price level in the economy. In an attempt to solve

this problem various perspective and annual plans have been formulated and

implemented. Examples are the vision 2020 vision 2010 and Yaradua’s 7

points agenda Millennium goals and 2013 budget by Goodluck Jonathan.

The problem of inflation is a national nightmare to economic growth and

development. It should be noted that it cannot be eliminated absolutely. In an

actual sense inflation rate can only be reduced to bearable limit. It should also

be noted that inflation is not faced by less developed countries alone but the

Western countries are also facing the problem.

For Nigeria as the general price level is on the increase so is the recurrent

expenditure which has created the inflationary gap in the economy (WAHAB

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2004).This research is investigating the impact of salary increase on inflation in

Nigeria.

1.2 STATEMENT OF THE PROBLEM.

The problems that occur when salaries are increased are raising labour costs

which in turn lead to cost push inflation. As workers demand wage increases

companies usually choose to pass on those costs to their customers through

price increases thus causing inflation that is where prices are forced upwards

because when people have much money with them. It increases aggregate

demand.

Also wages increase leads to retrenchment of workers thus causing inflation

has tremendous impact on the output and employment decision by firms

because inflation distorts the price mechanism by making it difficult to

distinguish changes in the general prices level it creates uncertainty making

the investors less willing to take risks and invest especially in long term

project inflation push up real interest rates as lender demand a bigger risk

premium on their money.

This work therefore aims at investigating the impact of salary increase on

inflation in the Nigeria economy. For the purpose of this study the salary

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increase as represented with federal government recurrent expenditure

excluding social service economic service transfers. If government wants to

solve the problems of inflation it will end up creating unemployment .As a

result of this various economics theorists have theorized about the relationship

between salary increase and inflation thus giving rise to the theories causes

and effects of inflation.

1.3 OBJECTIVES OF THE STUDY.

This research is solely aimed at finding out the impact of salary increases on

inflation in Nigeria. The specific objectives of the study are as follows;

1. To investigate the impact of salary increase on inflation in Nigeria.

2. To examine the trend of inflation in Nigeria over the years.

1.4 STATEMENT OF HYPOTHESIS.

Based on our study of the impact of salary increase on inflation in Nigeria the

research question has been used to formulate the following hypothesis;

Ho: Salary increase does not lead to inflation in Nigerian.

Hi: Salary increase has caused inflation in Nigeria.

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1.5 SIGNIFCANCE OF THE STUDY.

This study will be useful to policy makers in the economy to aid them

formulate sound economic policy that will keep inflation at the barest

minimum in the economy. The study is also important to other researchers in

this field as a reference materials to aid them in their own research that are yet

to be conducted.

1.6 SCOPE AND LIMITATION OF THE WORK

The Nigerian economy with a labour force of 47.33million persons who

produced a national income of $353.2billion (CBN 2009) is dominated by the

public sector because 65% of the labour force are employed in the public

sector 20% in commercial activities 10% in agricultural activities and 5% in

the services (NBS 2009). The above data imply that the study will cover

government employees alone because they dominate the labor force in the

country. Data collected from a secondary source ranged between 1984 to 2009.

The year 1986 was chosen because that era was characterized by the SAP

(Structural Adjustment Program me).

However this study has its limitations which include;

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1. There are very limited materials for the research. This is because few

authors have thought on this issue.

2. The unfriendly attitude of staff of various ministries and companies

where I went to collect materials because of secrecy and other reason

like money.

3. Difficulties in collecting data relating to my project. Due to not enough

information was available. After all the difficulties I still got few

materials that will help enrich my project.

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