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Economic evidence of the impact of the Dutch disease’s predictions on key labour market outcomes in resource-rich countries: a case study of Nigeria

Student thesis: Doctoral ThesisDoctor of Philosophy

The Dutch Disease framework emerged as a key mechanism through which resource revenue impacts the economy within the larger body literature on the “natural resource curse”. On the one hand, it is a dynamic economic adjustment from one equilibrium to another with higher real consumption wages, owing to the fall in import prices from the inflow of resource revenue. However, on the other, this adjustment often results in reduced investment in productive activities and human capital development, in favour of counterproductive activities such as rent-seeking behaviour and possible corruption; thus, it is a source of concern of many policymakers. 
Building on the empirical work on Dutch Disease (DD) which presents relatively mixed evidence, this thesis aims to investigate an area of the literature that has received less attention, namely the impact of the DD framework predictions on labour market outcomes, such as the employment level and wages, within a resource-rich developing country. For the purpose of this analysis, the case of Nigeria was selected as the country showcases some of the issues related to the resource curse and DD in particular. 
This study is based on different quantitative methods, namely graphical and econometric ones, as well as dynamic modelling. This is to bring together macroeconomic and microeconomic evidence to unravel some of the underlying mechanisms through which oil revenue management affects labour market outcomes. In doing so, it is suggested that resource revenue management and the resulting policies are key factors contributing to the conversion of a “natural resource curse” into a “natural resource blessing” – in particular, in terms of the impact of the Dutch Disease prediction on labour market outcomes, such as employment levels and wages. 
This analysis contributes to the existing literature in three different ways. It shows: 1) the existence of a long- and short-run relationship between employment level, capital formation and exchange rate; 2) the influence of oil revenue on wage levels and wage inequality observed in Nigeria and 3) the impact of an oil shock on an economy with a large informal sector. 
Indeed, the existence of a long-term relationship between employment, capital formation and exchange rate, with employment levels being negatively affected by Real Effective Exchange Rate (REER) appreciation as well as being complementary to capital has been confirmed. This implies that an increase in capital will positively affect the level of employment. To further analyse this relationship, a firm-level panel survey was used to assess firm behaviour in relation to sector-specific exchange rates in the short term. The analysis of the survey also indicates that the exchange rate appreciation, which is linked to possible inflows of foreign currency, will, in the short run, negatively impact the labour market while playing a positive role in determining the level of capital through a substitution of relatively cheaper capital for relatively more expensive labour. 
In line with this evidence, the influence of oil revenue on wage levels observed in Nigeria is explored. Given that the oil is concentrated in a specific region of the country (i.e. the Niger Delta region), my analysis explores the impact of fiscal federalism and oil redistribution on wage levels and investigates if oil contributes to inequality in wage levels across the country. The revenue sharing formula of the country implies that the resource-rich region receives significant oil revenue. With limited mobility in the country, it was found that firms located in the oil-rich region pay a wage premium compared to firms in other parts of the country. It was also found that this relationship holds for assumed similar levels of productivity and across sectors with a higher wage premium found in the services compared to the manufacturing sector. This analysis also assesses other possible mechanisms, such as the ability to obtain government contracts and the local price of inputs (i.e. local inflation in the oil-rich region). 
Finally, to complete the picture, a DSGE model is built by considering the specificities of Nigeria, such as its credit constraints, wage and price stickiness, as well as its large informal sector, to assess different fiscal policy options. The analysis indicates that although the formal and informal sector benefit from the DD’s spending effect through higher wages, the resulting low private investment in capital may take the economy on a lower growth path. In addition, saving options are, in the short term, mitigating the impact of the boom, even in the presence of the informal sector. Bringing these different aspects together, it is clear that Nigeria’s oil revenue has impacted economic and labour market outcomes. This impact has cut across different aspects of the labour market, influencing both the employment level and labour prices in the country (i.e. wages). This has raised several policy-related issues, such as the role of revenue sharing rules on the country’s overall competitiveness. Further, despite the large informal sector, the saving option still has superior outcomes compared to the spend as-you-go policy option. 
This study concludes by arguing that to be able to better approach the adjustment process induced by the DD and mitigate its impact on the labour market, strong institutions are required to promote efficient and fair policies that will enable Nigeria to move away from rent-seeking behaviour. This will help resource-rich developing countries to mitigate shocks by developing appropriate policies responses. The lack of such policies could have lasting effects, preventing the private sector’s capacity to sustainably generate work and decent wages.
Original languageEnglish
Awarding Institution
Award date1 Jan 2020


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