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Minimum Wage Review - Temporary Relief With a Funding Gap

Proshare

Thursday, June 01, 2017 10:14 AM/FDC

A common thread to the introduction and increase of a minimum wage across the globe is the desire to compensate for a loss of purchasing power due to inflation. Nigeria shares this objective, fuelled by frequent requests from labor unions for an upward re-view.

The outcry, during the past two years, is a potential trigger of social unrest. It appears the lobbying is beginning to work as the Federal Executive Council (FEC) recently approved a 29- member committee to deliberate on the merits of an upward re-view in minimum wage.

Benefits of Increasing the Minimum Wage

The minimum wage presently is N18, 000 a month. At the time of its implementation in 2011 this was equivalent to $140/month. Today, the equivalent in dollars is around $45-$60. At the current rate, civil servants are living on $1.5 - $2 per day.

This is barely above the international poverty line mark of $1.90 a day.1 In-creasing the minimum wage could see an uptick in the daily rate to as high as $5; while still very low, it nevertheless is 150% higher than current levels.

Inflation and the weak value of the naira have eroded the purchasing power of the average Nigerian.  

In the last two years, a number of adjustments have been made to general price levels which have contributed to this erosion. The prices of basic necessities, such as rice, bread or a bottle of CWAY water, have in-creased significantly.

It is obvious to see that N18, 000 is barely enough to cover basic necessities. The removal of the fuel subsidy in 2016 saw the price of petrol increase by 67%. Similarly, diesel and kerosene prices also increased significantly.

The rise in the cost of power was a result of the decision to adopt a cost reflective tariff. Food prices have increased by 19.3% in the past year. These developments support a minimum wage review.

In addition to providing a higher standard of living, proponents for an increase in the minimum wage believe it will dampen recessionary pressures with a subsequent increase in consumption levels.

It could stimulate economic activity as low-wage workers spend their additional earnings, raising consumer demand and creating job growth. This was the case in the US when the government decided to introduce a federal minimum wage during the Great Depression.

It’s almost impossible to see why anyone would not support an increase in Nigeria’s minimum wage. Although on route to a recovery, the Nigerian economy is still in a recession.

Increasing the minimum wage might just be the last dose of policy prescriptions needed to experience a full recovery. But before we accept this thesis, it is important to evaluate some of its shortcomings and challenges that may arise in the long term.

Negative Impacts of a Minimum Wage Review
One of the most common unintended consequences of an increase in the minimum wage is an increase in unemployment. The majority of states in Nigeria can barely afford to pay pensions let alone bear the additional costs associated with increasing the minimum wage.  

An increase in labor costs without a proportional increase in internally generated revenue may result in staff layoffs to cover the costs. This consequence offsets the expectation of an increase in consumption levels because, while those working will receive more, those not working will continue to reduce their level of consumption. 

If the minimum wage is reviewed upward, public servants at the state level will probably go through another period of salary arrears because states will not have the resources to pay for the increase in salary levels.

According to a budget report, about half of the states were able to meet their monthly obligations between January and July 2015. In the table below, it can be observed that only 3 states were able to meet their average monthly commitments between January and July 2016.  

In recent times, a few states, such as Edo and Gombe, have supported the review of the minimum wage. The governor of Edo state increased the mini-mum wage by 39% to N25, 000.

The governor of Gombe state is pushing for a 211% upward review in the minimum wage to N56, 000 although it is conditional on approval from the Federal Government.

Based on the data below, these states do not have the capacity to fund such an expensive venture. As at 2016, Edo state had a revenue shortfall of N19mn while Gombe’s was N577mn.

Nearly two-thirds of states are still having difficulties with salary payments despite the bailout funds provided to them by the Federal Government.

Over the last 24 months, the Federal Government has injected more than N1.75trn into the states to help these entities mitigate the extensive financial upheaval.

The most recent is the N522bn Paris Club Deduction Refund which was subject to an agreement by state governments that 50% of any amount received would be earmarked for the payment of salaries and pensions.

It can be argued that increasing the minimum wage will stretch the pockets of the Federal Government as additional bailout programs may be required.  

Based on economic fundamentals and the need to support infrastructural developments, it will be a stretch on government purse to implement an upward review in the minimum wage.

Although borrowing is an option, it is not recommended for operational expenses which yield no returns to cover finance costs, and will contribute to a growth in government debt.

According to the NBS, total foreign debt of the Federal Government and 36 states rose by 6.5% to $11.41bn in 2016 from $10.71bn in 2015, while the total domestic debt rose by 36.5% to N14.02trn from N10.49trn in 2015.  

Furthermore, the ratio of debt service-to-revenue for the federation breached the country specific threshold of 28% in 2016 with 61.3%. This shows that the debt portfolio is vulnerable to shocks in revenue, which is indicative of a potential challenge in maintaining debt sustainability.

Another area of concern is the demand pull inflation associated with an increase in the minimum wage. In economic theory, an increase in income levels is usually associated with an increase in the demand of certain goods and services which could result in demand-pull inflation.

Although inflation is slowing, currently at 17.24% (April), it is still far above the 6%-9% inflation target set by the Central Bank of Nigeria.

While the inflationary impact of an upward review in the minimum wage might not materialize immediately, it is a potent risk.

If prices were to increase astronomically in the long run, the case for another wage increase will pre-sent itself.

In conclusion, an increase in the minimum wage is no doubt a policy that is required given the rising cost of living across the country.

However, the affordability of such a policy comes into question. Based on the discussion above, it appears an upward review is needed but may be delayed due to issues pertaining to funding and the unintended consequences (such as unemployment & salary arrears) that may ensue.

The implementation of this policy should be strategic with a funding plan in place to sup-port the increase in costs which Nigeria currently may not be able to afford.  

It may be more crucial for the government to consider other cost effective options (e.g. subsidized transport networks, rail and road) to improve the overall standard of living of its populace.  

The issue of a review in minimum wage should, however, not be abandoned and should be reviewed once the fiscal cycle of both the state and federal governments can absorb the additional costs that will incurred.     

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