Articles and Opinion

The Minimum Wage Issue: Numbers vs Value by Dakuku Peterside

We remember the infamous Udorji’s commission saga and its economic impact. Many economic historians have pointed to the significant shake-up of the salary structure by the Udorji commission as one of the major problems of Nigeria’s economy in the 1970s that upended our pricing system and created significant price inflation in the economy. We must learn from history! A situation where the monetary reward for work is increased but not based on productivity will often lead to unwarranted inflation.

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The issue of minimum wage or salary increase or by whatever nomenclature is a complicated policy issue. The wage increase is neither good nor bad, but as a policy choice, it must be tied to some ultimate objective and benchmarked on the projected cost of living and inflationary trends over a given period.

A pay rise can improve employees’ motivation while giving them more purchasing power and disposable income. It may result in businesses being shut down, hyperinflation, joblessness, and a decline in the value of the national currency. At face value, salary increases are a tool to address inequality, poverty, and welfare or an incentive to check corruption. However, the issue is more profound than this surface-level discourse.

Recently, the federal government announced a new salary raise for mainstream federal workers. This is not the new minimum wage; at least, that is what we are told. Some state governments followed suit with discordant tunes. The truth is that for the average Nigerian worker, with headline inflation at 33.2% by March 2024 and food inflation at 40.1%, the current wage is insufficient and cannot sustain any worker. This underscores the need for the government and all labour employers in Nigeria to review salaries. However, the government’s current economic realities and financial position make it challenging to create a salary increase that is not backed by increased value and productivity. While it may seem complicated, this measured approach is necessary to avoid harsh negative implications on the economy and the unintended backlash on people with low incomes and many on the fringes of our society.

Expectedly a policy to help people experiencing poverty and create some semblance of equity within our socio-economic ecosystem, salary increases for government workers, albeit less than 25% of the workforce, will have ramifications. Given these difficulties evident in the new policy, the government and labour leadership must play a balancing act to midwife a new salary structure that is fit for purpose yet germane to the multifaceted nuances of our current economic reality.

The wage increase will result in both negative and positive economic impacts. On the negative side, inflation will worsen, small and medium-scale businesses (SMEs) barely managing to survive will be hugely impacted, and the cost of doing business will skyrocket. How many SMEs can afford this increase? Most of the companies are struggling with paying the existing minimum wage, given the rise in the cost of doing business, interest in loans is over 40%, the cost of raw materials is over the roof, consumers with little income are squeezed to a pulp by the constant increase in prices. Besides, how many state governments can afford it? Most Nigerian states have failed to optimise their potential and go cap in hand every month to FAAC. Across a sizeable economic terrain like Nigeria, a uniform nationwide minimum wage may be foolhardy. Costs of living are divergent across the country. States should negotiate with labour unions for acceptable minimum wage structures in different states and geopolitical zones. There may be an urgent need to de-link the minimum wage issue from national politics.

On the positive side, wages should increase in tandem with the cost of living. It will keep workers motivated and may even help the economy rebound. A living wage is not only desirable but expedient. What Nigerian workers earn today is a “symbolic wage” and has no practical bearing on reality. The federal minimum wage, currently at N30,000, was last raised in 2019 when the inflation rate was 11-12%. The purchasing power of the naira has since been eroded by 276% (compared to the 2019 rate). Nigeria is ranked 44th in Africa for minimum wage, according to Prof. Kemi Okuwa of the Nigerian Institute of Social and Economic Research. These factors indicate the need for a wage increase to address the growing disparity between wages and the cost of living.

When implementing wage increases, the government must exercise caution to ensure that its devotion to its responsibility does not have the reverse impact. The government must develop a robust economic plan to reduce the cost of living as well as mitigate the ripple effects on low-income workers, SMEs, and the macroeconomy. We remember the infamous Udorji’s commission saga and its economic impact. Many economic historians have pointed to the significant shake-up of the salary structure by the Udorji commission as one of the major problems of Nigeria’s economy in the 1970s that upended our pricing system and created significant price inflation in the economy. We must learn from history! A situation where the monetary reward for work is increased but not based on productivity will often lead to unwarranted inflation.

Productivity and added value creation should be a significant consideration among many bases for ascribing monetary wage increases, not just policy or legislation. Can the government link the increase in public servants’ wages and salaries to measurable productivity? Any increase in the cost of production and labour at this point, with no corresponding increase in added value to production, is not sustainable and often is an aberration to the system. Therefore, a balanced approach that considers both the need for increased wages and the economic reality of our country is crucial. This will ensure that our wage policy is fair and sustainable in the long run.

The problem with government-induced increase is that only a limited number of workers, civil servants at the federal level, will get the money; many states may claim they need the means to pay that. Even if the state civil services pay that, combined with the federal civil service, they make up less than 25% of the employed workforce in Nigeria. Most of our workforce comprises low-wage workers, whom SMEs and organized private sector firms employ. These small businesses are struggling to pay the N30,000 per month minimum wage, much more than the new minimum wage. This minimum wage will make these workers poorer if they do not get it like the civil servants because they all buy from the same market.

Besides, making unenforceable laws does not make sense. In other climes, it is against the law not to pay the minimum wage. It is enforced with explicit punishment for breaking the law. In Nigeria, this is different. Nothing happens even if any tier of government fails to pay the minimum wage. Most businesses will completely ignore the new salary structure, and there will be no legal consequences. The government must put some teeth to the new minimum wage rule for equity and justice and at least make it stick across the board. It must also consult widely and make the minimum wage more realistic.

I understand the need for an increase in salary because of hyperinflation that has eroded purchasing power. However, I am preaching caution and a measured approach to dealing with this issue by considering all the ramifications and putting measures in place to cushion unintended consequences. Our recent experience has shown that a salary increase may start a merry-go-round of cyclical inflation that begins with a salary increase, and then inflation eats up the value, and then we are back to where we started. In an economy with over 40% food inflation, all stakeholders must apply caution and careful measures in implementing a new salary structure. However, governments (federal, state, and local) cannot afford to play politics with the issue of “living wage”.

The implications of creating new salary structures and increasing the minimum wage are complex and multifaceted, requiring careful consideration of various factors, including economic conditions, industry dynamics, and social equity goals. Although I advocate for workers getting a living wage and meaningful salaries, given our current economic realities, a more measured approach based on value addition, productivity, and accountability will suffice. As the new wages are implemented, a corresponding demand for increased productivity must be implemented by all stakeholders to make the system sustainable.

I understand the need for government intervention in this, especially the political benefits to the government in terms of reasonable public opinion and support, good labour relations and collective bargaining dynamics, and the corresponding public and political debates and legislative actions this generates; however, the economic exigencies – potential job losses, negative impact on SMEs, and inflationary pressures – must be paramount and considered.

A living wage is the right of every Nigerian, and we must fight for that to reduce income inequality gaps and fight multidimensional poverty. High productivity and less economic legislation are the way forward, and the current confusion in the debate over a minimum wage needs to be more holistic and better informed. All the variables must be on the table, devoid of political grandstanding.

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