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High Base Pay: The Dilemma Between Equality and Equity

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Friday, May 04, 2018  03:32 AM   / Proshare Research

 

Introduction: Hysteresis Effect  

For some time, the Nigerian Labour Congress (NLC) has harped on the need to review the present minimum wage.  Moreover, after series of monetary shocks in 2015 that has led to substantial erosion in the purchasing parity of ordinary Nigerian.  

This was evident as the minimum wage plummeted from $91 in 2015 to $50 in 2016. At this point labour became convinced that an upward review in minimum wage became inevitable, in order to restore lost purchasing parity. In practice, labour is of the opinion that, increasing the quantity of money through minimum wage will reverse earlier negative shocks that has depressed the living conditions of household 

Thus, the pressure group is advocating for a new minimum wage whereby N65, 000 should be the new floor rate for labour.

 

Fig 1: Minimum Wage among some Selected Countries

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Source: Minimum Wage Org.

 

Moreover, a large chunk of Nigerian labour force is considered to fall within the working poor why?  Presently the purchasing power parity (PPP) of 73% of the existing Nigerian labour force lives below $3.39 per day, underlining the poor condition of labour at this point. 

Currently, 55.3% of Nigerian population live below $1.90 per day depicting the poor social well-being of an ordinary Nigeria. Although that negative shock that was spurred by both low oil prices and the plunge in oil production has fizzled off.

 

Fig 2: Percentage of the Working Poor Among Selected Countries

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Source: UNDP

 

Thus, allowing growth to emerge as the recoil completely unwinds itself. However, unemployment and income growth have failed to move in tandem even though the recoil nears an end. 

Apparently, pinpointing to the on-going reality that the, economy has not fully recovered from hysteresis. Thus, growth so far has come short due to structural factors. 

 

Policy Dilemma: Equality and Equity

Evidently, there is a common consensus that achieving income growth is important to repairing the social well-being of the nation which is shared by all economic tendencies. Regardless of the condition of the cycle, utility derived from money remains insatiable. In reality who doesn’t need a pay raise? Certainly, we all do.   

After all the existing law support a review in the minimum wage after five years: The scenario further buttress labour’s demand especially   when the base pay has last been reviewed six years ago. One must admit labour does has a solid case with regard minimum wage.         

However, the wider debate hinges around weather income growth should rather be organic, more of a product of robust growth.  On the other side of the aisle, some are of the opinion that the hysteresis effect has become too pronounced on income level. 

Therefore, the existing levers cannot solely provide the needed boost to income on the short term, without government raising the minimum wage. 

Besides adjusting minimum wage periodically properly takes into account the upward tilting nature of the nation’s consumer price index (CPI)  

 

Fig 3: Nigeria Consumer price indexes (CPI) from 2000 to 2017 

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Source: CBN

 

In reality, policy makers are faced with the dilemma between adjusting fully to structural reforms, eventually allowing “equity” to boost the social well-being of the nation. Or rather take a different approach to redistributing income through equality by relying on minimum wage to do the trick    

 

How Deep Can Equality Go?

Fig 4: Pie Distribution of the Retirement Saving Accounts as at 2017

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 Source: NBS

 

The retirement saving account (RSA), provides a glimpse of labour distribution among the major employers of labour.  Thus comprising of the Federal government, state government and Private sector; the private, federal and state government account 55.5%, 29.9% and 28.5% of the labour force individually.     

Even though it’s expected that the federal government would pay the stipulated minimum wage. However, the finances of the states have been blunted and they still remain hard hit by the shock. The present   backlog of salaries owed to state workers reaffirms such position.  

The private sector is still grappling with cost efficiency, as bottom line profit has not completely recovered from the down turn.  The blurry picture of the first quarter 2018 financial statement witnessed by economic agents provide a stark reality,  that firms are not completely out of the woods. 

Certainly, in attempt to comply with the new minimum wage by firms. The fall out will slow down labour participation in the private sector, eventually bolstering unemployment 

So far   Federal government alone can shoulder the new floor price.  Thereby assuring only 29.9% of the labour force of an uptick in wages; the actual cost of such policy will be an increase in debt levels or a reduction in capital expenditure, which affect the entire population of the nation. Thus there will be no real positive impact on income inequality.   

Such policy is noble and moral due to the condition of labour at this point but the policy shoot is narrow and fall short to redistribute income, as total public debts and unemployment will still maintain an upward trajectory. 

In other climes rather than trigger an upsurge in money supply through minimum wage. Government cut the rate on direct tax in order  to bolster disposable income or cut  indirect taxes (VAT) on  selected goods which are major components of the nation’s consumer price indexes. 

Such policy tends to redistribute income better and fuel consumption due to its deep shoot. Thus, the possibility of rising public debt is limited to the government alone.

Moreover, the round taps effect is slim on price movement and does not pose any treat of rising unemployment. However, that seems largely unlikely to happen given the nature of Nigerian economy coupled with government’s on-going policy. 

Obviously minimum wage does has its limitation when the nation’s gross national income (GNI) has diminished and substantial structural contours are inherent in the economy.  A peep into Venezuela reaffirms the limitation of centrally induced high base pay in the face of structural contours. 

 

What About Equity?  

Fig 5: Stock of Infrastructure Per Person and PPP Among Selected countries

Proshare Nigeria Pvt. Ltd.

Source:   World Bank, McKinley

 

Equity harp more on taking appropriate measures that would bolster the nation’s capacity to boost GNI, especially shoring up its current stock of infrastructure to GDP.

 For instance, Nigeria infrastructure stock to GDP is 0.27, making the stock of infrastructure per person $547.3. At the same time making it the lowest compared to other emerging economies.  It is not surprising to see why our PPP is low and unemployment is high.  

Infrastructure stock to GDP captures the current social opportunity in any economy. Economies like Nigeria with relatively low infrastructure to GDP provide low degree of social opportunity. At the same time a far cry from their potential output. 

Countries with high infrastructure to GDP have been able to boost their export earning eventually lifting the incomes of the   citizenry:  The impact has been well felt in the agricultural sector and other labour intensive sector, especially   in countries like Brazil, Malaysia and China . 

Moreover, Nigeria share a similar pattern with India, a large chunk of working poor and how?  The combination of underbelly investment in infrastructure coupled with a population explosion. 

Such dynamic put pressure on the limited resource, eventually creating a top biasness in the CPI coupled with lean PPP: A perfect recipe for a poverty trap. 

Thus, it is not surprising to see why the per capital income of India stand at $1,680 with 52.9% of the nation’s labour force lying within the working poor bracket:   even though it boasts of a GDP of $2.263 trillion. We must begin to be more conscious about population growth in our developmental policy, if we want to have any shot at achieving a shared prosperity.

 

Conclusion

Evidently when people are forgotten, the nation is fractured.  Thereby a more comprehensive policy that will enhance domestic productivity, foreign direct investment, improve human capital, bolster economic freedom, monitor population growth and boost infrastructure spending can best address the poor conditions of the  labour force and provide a more rounded  high base pay, which  eventually repair’s  the existing fracture . Eliminating poverty comes with great effort, policy persistence, time and prudence of social trust, unfortunately there are no short cuts to any of them.  

 


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