The economics of minimum wage in Nigeria, by Ibrahim T Tumsah
Radical Thought
Amidst the removal of the fuel subsidy and the rising rate of inflation in Nigeria, the Trade Union Congress (TUC) are demanding that the Federal Government increase the minimum wage for workers to cope with the rising cost of living. This demand for a minimum wage increase is a cauldron of economic chaos that feeds off itself. But first we need to understand what a minimum wage is.
What is a minimum wage?
A minimum wage is the lowest amount of pay an employee is legally entitled to receive from his or her employer for a specified period of work. In Nigeria’s case, on a monthly basis.
However, the history of a minimum wage in Nigeria is a complicated issue that is often interlinked with crisis. Nigeria first declared a mandatory minimum wage of N125 per month pay for workers in 1981 after the National Labour Congress (NLC) led a major strike which put pressure on the then president Shehu Shagari, who was left with no other choice but to agree. This was the first breakthrough in the history of Nigeria for a decent minimum wage structure. In 1990, The government and the labour unions were back on the negotiation table to improve wages. This ended in an increase in the national minimum wage to N3,000, while the military government disbanded the labour unions (NLC) in the process.
Following the successful transfer of power to a civilian government led by the former Military Head of State, Olusegun Obasanjo in 1999, the NLC was subsequently revived and again demanded for an increase in national wages in 2001. The demand of N5,500 per month for civil servants was agreed to. There were then provisions made for a 15 per cent increase and 25 per cent increase in national wages across the board for the following years of 2002 and 2003. However, these promises did not materialize.
A wage of N18,000 was achieved in 2011, signifying a 227% increase from the previous minimum wage of N5,500. The minimum wage was again revised in 2018 to N30,000 per month, not without pushback from employers who felt that such an increase would hurt their profitability. To which the government argued that it was a necessary measure to alleviate the most vulnerable out of poverty. Which is noble because, according to the World Bank; Nigeria is the poverty capital of the world.
As is being touted in the media, there are considerations for the minimum wage to be set at N200,000. However, raising the minimum wage to that level is as detrimental to the economy as it is to the unemployed workers seeking jobs if this pay rise is over a 50% percent increase in the median income. The percentage of unemployed people in the Nigerian population currently sits at 33% (National Bureau of Statistics), which is amongst the highest in the world; again another unwanted statistic. Unemployment rate is generally higher in countries where minimum wage laws are imposed on employers. The workers that benefit from the increase in wages will do so at the expense of those workers that are in the market looking for a job. Not to mention those that might lose their jobs because of this increase.
The workers that keep their jobs will be made better off by the benefits they enjoy by requirement of the law, but those on the outside looking in will be deprived of jobs because the employers are providing these benefits at a higher cost. Which will deprive them of hiring new workers. The minimum wage increase will cause the cost of labour to go up; meaning the employer will see no benefit in hiring new staff that will compound his/her wage bill. At that point he will be substituting the capital he could have been using to reinvest in his business to pay for labour.
Consider, this case study for example; A local shop owner only has N10,000 to reinvest in his business every month and also to pay for the wages of his only employee, who he pays the minimum wage of N2,000, leaving N8,000 remaining to reinvest in his business. His shop is really busy with lots of customers coming in to buy their essentials. Due to this, the shop owner is considering hiring another worker to help his other staff in the day to day running of the business. Now, suppose the government increases the minimum wage to N5,000. The shop owner will only have N5,000 left to reinvest after he pays his employee the new legally binding wage. In this scenario the shop owner will opt not to hire another employee and will instead look for ways to cut costs for his business or might instead increase the prices of his goods so as to push his costs on his customers. This, in a nutshell is what employers and businesses across the board consider when the minimum wage increases. This is the trade off that the Nigerian government and labour unions have to keep in mind.
Having this example of the informal sector in mind, it seems to me that whenever we talk about minimum wage in Nigeria, the main beneficiaries of such a policy is limited only to civil servants, the scope of this discussion never has far reaching impacts on the general public. Civil servants only make up a small percentage of employed workers in Nigeria, but when we speak about fair wages and employment benefits it is never truly universal. It never stretches to the informal sector and those not considered ‘skilled’ workers. The private sector and informal sector employees such as the ‘unskilled’ staff, like bus drivers, labourers, security guards, house helps and shop keepers aren’t covered by the minimum wage laws, they don’t really benefit from such policies. Which is concerning because they are the most vulnerable. These are the people the Federal Government needs to mostly focus on with the minimum wage policy. Also, a minimum wage increase is only most likely to affect the urban area workers and not those that live in and work in the rural areas.
An increase in the minimum wage will also cause inflation across the country depending on the areas whether rural or urban with employees that benefit most from this policy. A High inflation can erode purchasing power, increase production costs, and adversely affect the standard of living for the population. Some Nigerian economists argue that a minimum wage increase will barely affect the prices of goods and that only fuel and transportation costs cause inflation. This is fairly true, but only because minimum wages are not universally applied to all Nigerian workers in both the private and informal sectors. If it were the case, we would see completely different results where food and other goods prices on the market increase. The floating of the Naira on the currency exchange market will also likely affect food prices in the coming months.
So, does the Federal Government agree to a wage increase across all 36 states in Nigeria, which will be a short term pain reliever for some Nigerians (mostly civil servants) at the moment, but will eventually be a long term headache for the government as inflation and the cost of living increases? Or will there be a progressive minimum wage for workers depending on the state one works in for all workers; formal or informal be considered instead? Can a part-time employment policy be implemented by both private and public enterprises? In this way employers would be more flexible in their hiring process and their cost of doing business wouldn’t be too high.
While this debate rages on, the implications of these effects and the policies that will be implemented for mutual benefit of both the workers and the government will need to be a delicate compromise. I would suggest that the NLC and TUC negotiate a new minimum wage of N45,000, which will be a 50% increase for every worker; most especially the vulnerable informal sector workers and private sector employees. This will keep up with the rate of inflation which can then be coupled with a diverse hiring process (part-time work). In this way both the wider population and the Federal Government achieve a win-win situation in the short, medium and long terms.
Nevertheless, a policy affects millions of lives and human beings are not chess pieces for experimentation. Some experimental policies might have their merits and might have huge economic impacts and social costs. Some policy experimenters believe that if one policy does not work, they can try another, and another until they find one that works. These policies can cause people to change their behaviours and that could have adverse effects on the economy.
Ibrahim T.M Tumsah is a businessman and writes from Abuja. He can be reached via email tumsahibrahim@gmail.com
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