Informal Sector and Employment Generation in Nigeria: An Error Correction Model Approach

Abstract

Small and Medium Enterprises (SMEs) occupy a central place in the economic growth of nations. SMEs have a fundamental role to play in the development of an economy and this cannot be over emphasized. SMEs serve as training arena for local skills and entrepreneurs, and could become channels for mobilizing local savings, ensuring a more equitable distribution of income and reducing the migration of manpower from the rural to urban areas. On this note, ggovernment has identified the need for the development of SMEs. One of such Sectoral strategies is the introduction and pursuit of policies such as concessionary financing to encourage and strengthen the growth of SMEs in Nigeria. However, a well-functioning and regulated informal economy will be a critical prerequisite to sustainable growth. This is because the link between, informality and employment in Nigeria is not fully understood. This study seeks to employ an Error Correction Mechanism using data from the Central Bank of Nigeria having Unemployment, Financial sector output, Informal sector output and Human capital as variables. The finding revealed a significant relationship between Informal Financial Sector and employment generation in Nigeria. The study therefore recommended that there is the need for the government to utilize Informal Financial Institutions in its poverty reduction programmes, since significant percentage of the Small and Medium scale Enterprises (SMEs) could assess credit for investment through them. This will go a long way in creating employment and promoting inclusive growth in the country.