The Impact Of Salary Increase On Inflation In Nigeria

Project and Seminar Material for Economics

The Impact Of Salary Increase On Inflation In Nigeria


No economy can escape the evils done is by inflation and unemployment because when measures to control one are being employed the other is being upset. However, we are dealing with inflation alone. In fact, this study investigates the impact of salary increase on inflation in Nigeria. In a bid to achieve the objective of the study, ordinary least square regression method was adopted using secondary data from 1984 to 2009 the results indicate that there is a negative relationship between the dependent variable (inflation) and the independent variable (salary). The result of study showed that salary increase has a negative relationship with inflation and salary does not have a significant impact on inflation in Nigeria, therefore inflation is not adequately explained by changes in salary. Hence, inflation should be track led adopting other fiscal and monetary measures and not necessarily income policies.

Chapter One


1.1 Background of the Study

The Nigerian economy is a middle income economy emerging market with well-developed financial, legal, communication, transported entertainment sectors. It is ranked 31st in the world in terms of gross domestic product (GDP)as 2009 and its emergent through currently under performing manufacturing sectors is the second largest on the continent, for the west African region scholars have characterized the Nigerian economy to be associated with a high cost of living putting it in words,(EKAN 1998)states that Nigerian economy is characterized by high cost of living which is resultant effect of the persistent increase in the general price level in the economy. In an effect to solve the problem of low standard of living, government expenditure has been on the continual increased which is partially caused by trade unions agitations and partly by continual increase in prices of goods and services in the product and factors markets in the product. Inflation is neither new in the economy system of Nigeria nor the world at large. There have been in existence, variations in magnitude or rats.

The rate of inflation in Nigeria was about 10% between 1969 and 1970. In 1970, prices rose by about 14%( immediately after the war of 1970) then fell to 3% in 1972, rose by about 16.1% in 1974 and reached a rate of about 34% increase in 1975. Inflation seemed to be the greatest task to government’s policy makers in the 1970’s history.

In 1974, inflation rose to about 13 percent before the Udoji salary award of the same year only to leap to 34 percent in 1975 mainly as a result of the award. It went down gradually until it hit 10 percent in 1080. It went crazy and leapt to about 22% the following years and come down again to 7% in 1982. However, the official inflation figures are known to substantially understate the actual inflation rate. Nevertheless they act as a rough guide of the inflationary activities in the country.

Evidence has shown that inflation persist both the developed countries and developing countries, with difference in magnitude or rates, however, making comprising with present situation.

The rates in developing countries are more than those in the developed countries. The above-mentioned rates were attained during the seventeen century and the early part of the eighteenth century (1799-1807), and the early mid-parts of the nineteenth century (1969-1975). Inflation simply means a continuous upward movement in the general price level, inflation does not mean that each and every price is rising, nor that all prices are rising at the same rate. It is a process by which paper money loosed values, this depreciation is reelected quantitatively in a rise in prices. The fast prices rises in a given country, the faster its currency losses its purchasing power on the domestic market and through certain connecting link on foreign market too.

Inflation may be defined as a continuous rise in the price of goods of services a+ result of large volume of money in circulation used in the exchange of the few available goods and services. In any establishment either private or public, the impact of salary increase and fringe benefits cannot be over-emphasized. To Nigeria public and civil servant, satisfaction of the public and standard of living has been their major concern. The main objective has been the development and utilization of local raw material (coal) and mobilization of fund for the purpose of satisfaction of the Nigerians. In the bid to actualize this, the corporation finds it difficult and almost impossible to pay its workers the exact salary and pension at the appropriate time. This as a result, leads to inefficiency since the workers are not motivated to carry out their functions effectively.

Facilities provided by the government are not being used and when it is used, they are not maintained properly, and the situation hinders development process. The whole society is affected negatively by the poor performance of the economy. A business which involves bulky goods are slowed down because of the inadequate facilities used by the corporation in their operation. This as a result may lead to scarcity of some important goods. At this junction, it worthy to note that all these issues accused accelerated increase in the aggregate demand not being match by appropriate expansion in domestic output and the import of goods and services.

In conclusion, increase in salary of workers without adequate tax system to reduce the purchasing power of the workers may bread laziness as too much money will chase few goods which will result to exorbitant increase in the price of goods and services of course the end product of that is inflation which will affect everyone in exactly the same way and degree, it would have no importance whatsoever, it’s social sign-finance arises from the fact that it always dose effect the people differently. It’s effect on personality, income and family background corporation, source of income , etc, also their locations, whether in the local places or ion the city are of relevance of the study’s. The growing interest in price stability as a major goal of monetary policy is an acknowledgement of the observed phenomenon that high inflation disrupts the smooth functioning of a market economy.

High inflation is known to have many adverse effects: it imposes welfare costs on the society; impedes efficient resource allocation by obscuring the signaling role of relative price changes; discourages savings and investment by creating uncertainty about future prices; inhibits financial development by making intermediation more costly; hits the poor excessively, because they do not hold financial assets that provide a hedge against inflation; and reduces a countrys international competitiveness by making its exports relatively more expensive, thus impacting negatively on the balance of payments, and perhaps more importantly, reduces long-term economic growth (See Ghosh and Phillips, 1998; Khan and Senhadji, 2001; Billi and Khan, 2008; Frimpong and Oteng-Abayie, 2010). Overall, businesses and households are thought to perform poorly in periods of high and unpredictable inflation, Barro (1996).

1.2 Statement of Problem

The inflationary period is a time of high price of goods and service. Onah (2005) this works the quantity and type of products (good and services) purchasable by individuals and corporate body at any point in time. The problem passed by this, is that individuals and corporate bodies in the society are unable to purchase the quantity of desired products during inflation. During inflation, income earners especially those with fixed income and very poor ones in the society find it difficult to match with the increasing prices of goods and services. This continues as long as price rises and there is fall in the purchasing power. Standard of living must be emphasized.

More values of money is being required by individuals for the purpose of desired products during an inflation period as opposed to normal economic situations. This brings about decline in the purchasing power. It is well known fact that workers attempt to increase their salaries and wages directly by negotiating through a trade union, whereby the trade union threatens their employers to go on strike if they refuse to increase their salaries and fringe benefits. This economic impact of salary increase and fringe benefits on workers effects many workers both in the public and private sectors, and it can lead to increase in the rate of unemployment and thus, inflation

1.3 Objective of the Study

It is expected for any research work to provide answer to a particular problem. In view of this, this project tends:

  1. To examine the effect of salary increase and fringe benefits among Nigerian workers.
  2. To highlight the problems that are inherent in increasing the salaries of workers who work in the public sector
  3. To evaluate the relationship between inflation and salary increase.
  4. To examine the impact of salary increase on the inflation rate on the price of goods and services.

1.4 Research Hypotheses

The researcher formulated the following research hypothesis:

  1. H0: salary increase has no effect on the on the inflation rate in Nigeria
    H1: salary increase has effect on the on the inflation rate in Nigeria
  2. H0: there is no direct relationship between salary increase and employee inflation rate.
    H2: there is a direct relationship between salary increase and employee inflation rate.

1.5 Significance of the Study

This study is of great importance in the following ways:-

By virtue of this study, it is needed most. Income and expenditure of an industrial sector would be determined, hence, the number of workers will also be accounted for. This tells whether more workers are to be employed or deployed It is believed that a study of this nature will expose the suffering of Individuals Corporation through its findings to policy makers, for formulating of most effective plans towards coping with inflation, and better living of life form every citizen.

Be of immense important for students in financial studies as a basis for further research work. Expose the ordinary men to why they face a low standard of living. Assist the planning of unit of government through the provision of more efficient feedback information on the effectiveness of their anti-inflationary policies. It will help individuals and corporations in the planning of their marketing mix for their products. It will help the IMF on how to advice the Nigerians to overcome the effects of inflation

1.6 Scope and Limitation of the Study

The scope of the study covers the impact of salary increase on inflation in Nigeria. But in the cause of the study there are some factors which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 Definition of Terms


Salary can be defined as a fixed payment at regular interval for service. It is a payment made to workers for service rendered.


Wages are payment received from becomes obvious that man has to labour himself to the point of satisfaction in order to met up with the necessities of his life either in private or public sector as the case of railway corporation is concerned

Public Sector:

Public sectors are those infrastructural organizations fundamental to the natural economy, which the government decided to control in order to ensure a proper balance between social and commercial aims.


Corporation can be defined as an institution operating the service of an economic or social character on behalf of the government.

Open And Suppressed Inflation:

Open inflation is the result of the uninterrupted operation of the market mechanism. There are no controls on the distribution of commodities by the government imposes fiscal and monetary controls to check open inflation.

Stag inflation:

This is a situation whereby recession is accompanied by a high rate of inflation also called inflationary recessing. This type of inflation is caused by the excessive demand in commodity market and decrease in the demand for labor thereby causing prices to rise and creating unemployment in the economy.

Edmand –Pulll Inflation:

This is a situation offer described as ‘too much money chasing few goods”, this arises as a result of increase in demand with a corresponding decrease/increase in the supply of goods and as a result the prices of these goods will rise.

Artificially Created Inflation:

This is a situation whereby traders sometimes create artificial scarcity by heading the commodities with the main aim of increasing the prices of their commodities.

Cost-Push Inflation:

This is a situation where money wages rises more rapidly than the productivity of labour, cost-push inflation is caused by continues rise in the prices of factors of production, land, Labour, capital and entrepreneurship.

Make-Up Inflation:

This take of inflation is closely related to the price-push problem, modern labour organization set prices and wages on the basis mark-up over cost and relative income, firm possessing monopoly power have control over the prices and so level administered price, when strong trade unions are successfully in raising the wages of worker, it contribute to inflation.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  • Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the impact of salary increase on inflation in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges salary increase and inflation rate in the country.

5.2 Summary

This study examined the impact of salary increase on inflation in Nigeria. It is noted that the ability of an organization to achieve its goals of high productivity depend to a large extent on human resources as well as how effectively they managed workers. The workers should be adequately motivated for enhanced productivity. It was highlighted that the poor performance, lack of dedication and commitment of workers have been a matter of concern and debate among government officials, private organizations and the general public. How to improve the productivity of employees has been the topic of many seminars, symposia and conferences, yet one cannot draw line between salary increase and inflation rate in Nigeria, this is because the workers will continue to clamor for salary increase while the invisible forces that control demand and supply controls the activity of the economy. yet workers satisfaction is paramount as this will definitely affect their productivity.

5.3 Conclusion

The economy of Nigeria has been shaken in recent times making life of the average household difficult and the depreciation of the Naira is viewed to be the core problem of the economy. The inflation rate of Nigeria still remains high in absolute terms and by comparison with many other countries in the sub-region and the world in general. The current account deficit in Nigeria is overwhelming as a result of our trade imbalances. The Nigerian economy is an import driven one and much change to an export driven if we want to reduce inflation and the rate at which our Naira is depreciation or better still to appreciate against other currencies. In other to motivate people to put maximum efforts, it is essential that there various needs, especially as it concerns wages/salaries and other fringe benefits; be satisfied as far as practicable. In Nigeria, the salary structure falls below the level to maintain efficiency. It is not in line with the economic realities. According to Papola (1970) “a just minimum wage to maintain not only the life but the health and the vigor of the working people is a law of necessity and knows no other law”

5.4 Recommendation

The necessity for managers and administrators to motivate their employers through wage/salary incentives and other fringe benefit cannot be over-emphasized. There is no doubt that the ability of any organized enterprise and, indeed any group, to achieve its goals depends to a large extent on the motivation if its employers. Indeed no management or government can succeed in achieving optimal productivity without knowing what the people want. Fiscal discipline is necessary in attaining single digit inflation as current resources generated are channeled towards the payment of large-scale financing deficit. Lastly, it is also recommended that government should always use the expected annual inflation for the year to determine the minimum wage level and adjust it as and when it is necessary so as to have/maintain a good standard living for Nigerians.

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