Finance & Investment

Will A New Minimum Wage Increase the Living Standard of Nigerians?        

The Nigerian Government has reportedly agreed to increase the national minimum wage by more than 60% to 30,000 naira ($83)1, following immense pressure from labor unions in the country as they threatened to hold a strike action nationwide. Initially, Nigerian labor unions asked for an upward revision ranging from 50,000 – 65,000 naira ($136 – $178). Sharp currency depreciation following the 2014 plunge in oil-prices and the attendant high inflation in the country has meant a pronounced decline in living standards for many Nigerians, particularly those at the bottom of the pyramid. This was the argument put forth by the unions as they rallied to exert their influence on the government just 3 months before elections.

Minimum wage is generally a highly contentious issue. Proponents point to the need to guarantee a decent pay for the lowest-income earners, stimulate consumer spending in the economy and guard against unfair exploitation of labor. On the opposing side, one of the key arguments is that an increased minimum wage would force businesses to reduce demand for workers, leading to higher unemployment in the economy. Both sides of the debate have valid points. Looking into research on the effects of minimum wage, the evidence hardly rules out claims in their entirety on either side of the debate. For example, while in theory, an increase in the minimum wage is expected to translate into higher unemployment as businesses try to minimize costs by hiring less, the data doesn’t exactly show this straightforward, linear relationship. A 2017 study on Sub Saharan Africa by the World Bank found that the introduction (or increase) in minimum wage has had very minimal or no negative effect on employment2. A lot depends on factors that are context-specific such as compliance levels, the sectors in question, and the nature of the economy etc.

In the context of Nigeria, an increase in the minimum wage at this point would have its immediate effect on public finance. A higher wage bill will add to recurrent expenditures, which is already at unsustainable high levels. Accommodating this would mean either a decline in capital expenditure (i.e. investments in infrastructure) or an increase in the budget deficit. The result would be to undermine the growth prospects of the economy as the infrastructure challenge becomes even more acute, and public debt piles up.

A higher minimum wage would also add to the pressure on prices in the economy. Considering that Nigerians are set to go to the polls in February, the effect on inflation, currently at 11.28%, could be substantial. Increased inflationary pressures is likely to trigger a rate hike by the Nigerian Central Bank (CBN), squeezing the little life out of growth.

It is difficult to see how the government will be able to afford the new minimum wage if it eventually gets enacted, considering that delayed salary payments (at current wage levels) is no longer news. In any case, the issue is likely going to force the government to rethink its stance on fuel subsidies.

Add up slow growth, increased government borrowing and high inflation, and voila, you have the perfect recipe for further currency depreciation! And then back to square one.

Overcoming Nigeria’s economic challenges and improving living standards in the country will not come through palliative measures or easy fixes. The solution depends on the country’s ability to sustain progress in addressing supply-side issues such as the very well-known infrastructure gap. That will attract much needed investment into the country and unleash the productive capacity of the country’s most valuable resource – its people.

Former CBN Governor Charles Soludo reminds us “the composition of government spending must alter fundamentally for us to get to anywhere.”3 If that is the case, the minimum wage hike is probably not a step in the right direction.

 

Sources

  1. 1USD=365NGN
  2. Haroon Bhorat, Ravi Kanbur, Benjamin Stanwix; Minimum Wages in Sub-Saharan Africa: A Primer, The World Bank Research Observer, Volume 32, Issue 1, 1 February 2017, Pages 21–74, https://doi.org/10.1093/wbro/lkw007 (last accessed November 10, 2018).
  3. https://www.vanguardngr.com/2017/05/stop-playing-politics-forex-monetary-policy-soludo-tells-cbn/ (last accessed November 10, 2018).
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