FINANCIAL DEVELOPMENT AND UNEMPLOYMENT RATE IN NIGERIA

Abstract

Achieving full employment remains a persistent macroeconomic challenge in Nigeria, where 
unemployment is influenced by both financial and non-financial sector dynamics. This study 
examined the impact of financial development on Nigeria’s unemployment rate using the data for 
the period 1980-2023, focusing on four key dimensions: financial access, financial depth, financial 
efficiency, and financial stability. The study is anchored on the Keynesian and Neo-Keynesian 
theories of unemployment, the McKinnon-Shaw hypothesis, and the theory of financial 
intermediation, offering a comprehensive framework for understanding the link between financial 
systems and labour market outcomes. Using the Nonlinear Autoregressive Distributed Lag 
(NARDL) model, the analysis captures both the long-run and short-run asymmetric effects of 
financial development indicators on unemployment. The results reveal that in the long run, 
negative shocks to financial access and financial efficiency exert significant effects on 
unemployment, while other indicators such as financial depth and stability remain statistically 
insignificant. In the short run, however, none of the individual financial development variables 
show a statistically significant influence on unemployment. The error correction term is negative 
and significant, confirming a stable long-run relationship and indicating a relatively fast speed of 
adjustment toward equilibrium. The findings underscore the need for well-targeted financial 
sector reforms and inclusive financial policies that support labour market recovery and sustainable 
economic development. Based on the findings, the study concludes that financial development is 
an important but indirect and delayed mechanism for reducing unemployment in Nigeria. 
Therefore, reforms aimed at enhancing financial inclusion, improving financial market depth and 
efficiency, and stabilizing the financial system must be accompanied by policies that address 
labour market frictions, skill mismatches, and economic diversification.