The Impact Of Minimum Wage Fluctuation On Growth Of Nigerian Economy

Project and Seminar Material for Economics

Abstract

This research work investigates the impact of minimum wage fluctuation on growth of Nigeria economy. Determinants of labour market in Nigeria arising from the economic transformation in recent years, and how public policy affects in particular labour market outcomes. The result has shown that increase in minimum wage increase by l unit (1 million), increase real gross domestic product by 0.038million. Similarly, an increase composite consumer price index in by 1 unit (1 million) reduced RGDP by -55.063 (million) Increase in per capital income by I unit (1 million) increase RGDP by 4788.060million.

Also increase in labour forces by 1 unit (1 million) reduced RGDP by 0.005million while increase in inflation rate by 1 unit (1 million) reduced RGDP by 0.035. This is in conformity with the theoretical expectation, since it believes that increase in minimum wages and per capital income supposed to increase the real gross domestic product of the country. And that, per capital income is the most significant. This would propel the economy to higher levels of productivity. There is need for government to create enabling environment which would encourage heavy investment in infrastructural foundation that can enhance labour productivity and induce growth.

Table of Content

Title Page
Certification
Dedication
Acknowledgement
Abstract
Table of Contents

Chapter One:

1.0 Introduction

1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective oft he Study
1.4 Justification for Study
1.5 Research Hypothesis
1.6 Scope of Study

Chapter Two:

2.0 Literature Review

2.0 Introduction
2.1 Concept of Minimum Wage
2.2 Effect of Minimum Wage on Economic Growth in Nigeria

Chapter Three:

3.0 Research Methodology

3.1 Introduction
3.2 Population of the Study
3.3 Source of Data
3.3.1 Model Specification and Description of Variables
3.4 Procedure for Data Collection
3.5 Data Analysis
3.6 Methods of Data Analysis
3.7 Statistical Analysis of the Model
3.7.1 Statistical Criteria

Chapter Four:

4.0 Analysis of Data and Interpretation

4.1 Introduction
4.2 Re-Specification of Hypothesis
4.2.1 Model Specification
4.4 Data Presentation
4.5 Result
4.6 Interpretation of Result

Chapter Five:

5.0 Summary Conclusion and Recommendation

5.1 Summary
5.2 Conclusion
5.3 Recommendation
Bibliography
Journal
Appendix

Chapter One

Introduction

1.1 Background of the Study

Income policy is usually used as a principal component of welfare boosting and poverty reduction macroeconomic policy framework in Nigeria. Minimum wage (hereafter MW) legislation is a major income policy readily employed in this regard. Although MW policy has both negative and positive effects on the overall economy, policy makers, especially politicians, have used it more often for political purposes than for socio-economic reasons. MW legislations in the country have been preceded by high inflation rates that erode purchasing power and bring reduction in welfare (Adams, 1987). Consequently, the need for MW legislation, which normally leads to a rise in nominal wage, is justified as a means of adjusting wages and salaries to match with the rise in costs of living.

It is, however, notable that wage increase brought about by MW is usually counter-productive. Apart from leading to a rise in general price level, wage increases, are always followed by threat of reduction in government workforce, and in some cases, such threats have resulted into massive laid-off in the civil service (Olaleye, 1974; Owoye, 1994). Also, wage increases in Nigeria do not match up with the rate of increase in prices. As a result, there are always agitations from the labour unions for persistent wages and salaries increase. This regular call for rise in wages is at times based on the wide gap between public sector‟s and private sector‟s wages. The gap between public sector‟s and private sector‟s wages has often been given as one reason for the inefficiency and corruption in the public sector. It is argued that public sector workers deserve adequate compensation commensurate with their labour, in other to bring about efficiency (Obasanjo, 1999).

In view of the above, many stakeholders, particularly the labour union organisations, have severally called for wage indexation. However, given the problem with wage indexation, government has found a convenient means of raising wages by setting up Wage and Salary Commissions (WSCs) over the years. Although WSCs are meant to provide a wide-raging solution to civil service problems, increment in wages and salaries is normally embedded in the recommendations of such commissions.

Inspite of the differing effects of MW legislation, its macroeconomic impact has found little interest in empirical study in Nigeria. Although there are sample studies that have tried to examine the impact of MW in an economy across different parts of the world, such studies have often employed a partial analysis, with focus on specific economic effects of MW in the economy. As pointed out by Adams (1987), the impact of MW could only be adequate captured within a macroeconomic model framework.

This study, therefore, analyses macroeconomic effects of MW using a computable general equilibrium (CGE) model. The static CGE model developed in the paper allows for an analysis of the impact of MW across several sectors and variables within an economy. In particular, the study examines the impact of MW policy on household income, consumption, general price level, productivity (output), employment and government balances.

1.2 Statement of the Problem

The recent warning strike embarked upon by the organised Labour to demand increase in wages has ignited widespread debate on the place of the Nigerian worker in the economic scale of the country. „Though organised labour eventually called off its three-day warning strike, many have continued to question the much-taunted democracy dividends. Emeka (2011) in this report takes an overview of the demand of the workers for N18,000 minimum wage in comparison with what political office-holders earn and its attendant effect on the economy.

According to observers, the place of the common man in Nigeria‟s governance strata has remained a question mark on successive administrations. While workers in every facet of the economy labour night and day for paltry sum to survive the prevalent harsh economic conditions in the country, the political class is perceived to squander the national resources without care. As if to give vent to this school of thought, the joint government-Labour-Employer negotiating team chaired by retired Chief Justice of Nigeria (CJN), Alfa Belgore, set up by government had drafted a new minimum wage bill. The bill reflected the agreement reached between government and Labour as agreed by both parties, but government feigned ignorance of such agreement.

The committee had, while presenting its report to the Secretary of Government of the Federation (SGF), Ahmed Yayale, in Abuja noted that the N 18,000 minimum wage would not lead to inflation as being canvassed in some quarters.

“The Tripartite Committee on National Minimum Wage has recommended a national minimum wage of N18,000 per month for all establishments in the public and private sectors employing 50 workers and above,” Belgore stated.

“The committee met severally and consulted widely. It further took cognisance of the need to ensure that the outcome of the exercise must be growth-propelled in terms of GDP growth rate. “It also considered its capability of promoting rapid socio-economic transformation of the country, which will not lead to inflation spiral. The objective is aimed at alleviating poverty in the country as well as maintaining macroeconomic stability.” Belgore (2010) also suggested that to make the recommendations effective, the extent National Minimum Wage Act 1981 and its subsequent amendments of 1990 and 2000 should, be repealed with a new wage act.

Leadership of the organised Labour had hinged their warning strike on the fact that government refused to heed agreements reached with it after widespread consultation. General Secretary of the Democratic Socialist Movement (DSM), Segun Sango, had noted, irrespective of the fact that the National Assembly had expressed its willingness to give the bill accelerated passage that government failed to submit to the legislators. Even some analysts have thrown their weight behind the Belgore committee, describing demand for wage increase by Labour as justified.

There is the need to adopt a systematic approach regarding such matters. In most progressive countries of the world, the wage increase index is linked to the rate of inflation,” Chizea (2010) advised. “The thinking is that the government must be proactive in catering for the welfare of workers. If salaries lag way behind increases in the rate of inflation, then there will be erosion in the quality of life of the generality of the workers. Therefore periodic wage increases is very much part of an effective salary administration.”

Chief executive officer, Global Analysis Derivatives Limited, Tope Fasua, while acknowledging that wage increase does not hold eternal emancipation for workers anywhere in the world, noted that it is important for government to pay living wages. “There is no way wage increases can lead to the eternal emancipation of workers anywhere in the world. The effect will at best be a temporary reprieve until prices catch up with the new wage levels,” Fasua (2011).

“That said, it is important to note that the Nigerian government and companies need to pay living wages to their workers. I think that is what Nigerian workers are demanding. It is important to note that the world over, at best only 10 percent of the population of any country can be said to really be financially emancipated.

“The situation is worse in developed countries where people merely live from one salary to another, while worrying about the huge overhang of debt that they have been pressured to acquire as a result of the wrong economic paradigm of capitalism which their countries believed in.” But there are others who argue that wage increase may have adverse effect on the economy. Therefore, the research will focus on impact of minimum wage fluctuation on growth of Nigeria economy.

1.3 Objective of the Study

The broad objective of this study is to evaluate the impact of minimum wage fluctuation on growth of Nigeria economy.

The specific objectives of the study include to:

To evaluate the effect of minimum wage fluctuation on economic growth in Nigeria
To determine their adequacy minimum wage in the light of the current economic realities and cost of living index as it affects the economic growth of Nigeria.

1.4 Justification for Study

At the intellectual levels the study examines some alternatives or contending paradigms on minimum wage fluctuation in particular, econometrical and empirical underpinning and resulting conclusions as investigated by several researchers. In this regard, the study is regarded as a cornucopia of authoritative information on the subject matter, both in term of wealth of data as well as its analytical insights.

It is hoped that the study will appear to a wide variety readers including not to current but future economic policy decisions makers and planners to enhance their decision making ability but also to student of economics, finance, business administration and cognate endeavors but also researchers who will find as a germinal contribution and stimulant of further researcher in the field.

1.5 Research Hypotheses

Ho: There is no significance relationship between minimum wage increase and economic growth in Nigeria
Hi: There is significance relationship between minimum wage increase and economic growth in Nigeria.
Ho: There is no significant relationship between minimum wage increase and fluctuation in composite consumer price index
Hi: There is significant relationship between minimum wage increase and fluctuation in composite consumer price index.

1.6 Scope of Study

This study uses data set covering a period of twenty-nine (29) years from 1980-2010. Central Bank of Nigeria (CBN)‟s Statistical Bulletin which is the main source of data used in this research. A long period of study like this will provide an insightful behavioural characterization of minimum wage fluctuation on the growth of Nigeria economy.

Chapter Five

Summary Conclusion and Recommedation

5.1 Summary

The research work has attempted to examine the impact of minimum wage fluctuation on growth of Nigeria economy. Empirical results indicate that there is, indeed a long-run relationship among labour force, per capital income proxied real gross domestic capital formation, inflation rate and economic growth in Nigeria. Most of the variables appear with the expected positive signs. The variable denoting human capital components i.e. per capital income and minimum wage fluctuation comply with the apriori expectations. The result has show that increase in minimum wage increase by l unit (1million), increase real gross domestic product by O.O38mihion. Similarly, an increase composite consumer price index by 1 unit (1 million) reduced RGDP by 55.063 (million). Increase in per capital income by I unit (1 million) increase RGDP by 4788.060 million. Also increase in labour force by 1 unit (1 million) reduced RGDP by 0.005million while increase in inflation rate by 1 unit (1 million) reduced RGDP by 0.035.

This is in conformity with the theoretical expectation, since it believe that increase in minimum wages and per capital income supposed to increase the real gross domestic product of the country. And that, per capital income is the most significant. This would propel the economy to higher levels of productivity. There is also the need for the government to create enabling environment which would encourage heavy investment in infrastructural foundation that can enhance labour productivity and induce growth.

5.2 Conclusion

The use of minimum wage policy as a welfare boosting tool has become popular especially in developing countries. Although frequent increment in wages has had both positive and negative impacts on Nigerian economy, government has found such increment as an effective income policy, both for socio-economic and political reasons. This study has examined the impact of MW policy on major macroeconomic variables in Nigeria within the framework of a CGE model. Simulation results from the study show that a rise in MW would lead to increased productivity in all economic sectors.

From policy stand point this is suggestive of improved workers‟ productivity impact of MW policy. The impact of MW increase on employment is mixed; while it leads to marginal rise of employment in agricultural sector, there is a marginal fall in services sector employment, and no significant effect in manufacturing and mining and oil sectors. The implication of this is that while increase in MW could raise employment in agricultural sector, such increase could also lead to loss of jobs in services sector. Further, the results of the study reveal that an increase in MW would lead to a significant rise in general price level, thereby, indicating that such policy could induce inflation in the economy.

5.3 Recommendations

What various governments need to do is to lay bare their revenue and expenditure portfolio to allow their work force to appraise the situation. If the workers show understanding, they can give the governor some breathing space like they did in Ondo and Edo State, for federal government to increase revenue allocation to the states. The states too need to cut down on the many frivolous expenses in the annual budgets, especially the security votes which are conducts through which tax payers money end up in private pockets.

The security votes even in some relatively peaceful states are very scandalous. So also is the bloated work force which in most cases, comprises idle workers getting paid for jobs not done.

Therefore, the work force needs to be tinkered with to make it more compact and efficient. Another related strategy is for the governors at the moment to reorder their priorities to be able to implement the new age bill. Such a step therefore would eliminate difficulty in paying the N18, 000 minimum wage. The over-bloated cabinet of the governors can be appropriately stream lined and the huge salaries and allowances of public office holders, including that of the governors, brought down to save more money for the states.

Furthermore, it is a known fact that Nigerian governments at all levels lack the discipline to control and prioritise spending and they turn a blind eye on wasteful spending and outright mismanagement: At the indecorous current level of spending on recurrent matters, paying the new minimum wage could indeed constitute an additional financial burden that may readily worsen the financial positions of governments. Governments would be better off if they seize the opportunity to figure out how top prioritise spending, and identi1r areas where they can either cut or eliminate unnecessary expenditure.

Pruning down the number of political personnel, structures and their pay would be a good starting point. In obedience to the new minimum wage law, the organized private sector will soon align its on wages to maintain existing salary differential Although public sectors contribution to job creation is vital, the private sectors decision to hire, retain or terminate, if companies are to remain profitable and competitive. Unless there is an incentive from government to keep up employment, some will retrench or freeze hiring to counter the burden imposed by the new national minimum wage. Maintaining a low unemployment rate is also a key to government objective.

Rising prices is unavoidable when minimum wage is increased. Inflation, therefore, becomes inevitable. If left untamed, the value of the national minimum wage soon begins to dwindle. As inflation exerts upward pressure on the exchange rate, imports become more expensive, so also would be life. As a hedging tool, many workers have had to find other makeshift jobs (second job), which they do on the side to supplement the diminishing value of their income. Corruption also becomes difficult to resist. This unethical practice can be minimized by ensuring that the minimum wage has value; and that inflation never gets the upper hand. Perhaps it would be fair to summarize that encouraging a system whereby an indexed to the annual rate of inflation would help to preserve the value of wages. The Central Bank of Nigeria has the responsibility to manage inflation. The extent to which it succeeds determines ultimately what value the new national minimum age has.