• Tuesday, July 23, 2024
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BusinessDay

Debunking Economic Myths: New minimum wage doesn’t always translate to poverty reduction

The increase in Nigeria’s minimum wage from N18,000 in 2018 to N30,000 in 2022 coincided with a rise in the Multidimensional Poverty Index (MPI) from 40.1 percent to 63 percent. This trend suggests that higher wages alone are insufficient to combat poverty, underscoring the need for comprehensive policies addressing systemic issues beyond income.

Critics contend that minimum wage laws, while well-intentioned, fail to unravel poverty’s intricate roots. In Nigeria, where a significant majority toil without formal wages, these laws struggle to provide the broad-based economic stability needed to lift millions out of poverty.

Read also: Navigating the stalemate in new minimum wage negotiations

They argue that poverty is a multifaceted issue influenced by factors such as education, healthcare, economic opportunities, and social mobility, which wage policies alone cannot fully address.

Moreover, informal sector workers, who constitute a significant portion of the workforce in many countries, often do not benefit from minimum wage protections, further limiting the impact of such policies on overall poverty reduction.

According to Analysts Data Services Resources (ADSR), in Nigeria, for instance, out of a total population of 229 million, 76 million Nigerians are workers. 82.9 percent of these workers, amounting to 63 million individuals, are employed in the informal sector without wages, either self-employed or working in family businesses.

3.6 million workers, or 4.8 percent, are employed in the informal sector and receive wages. Additionally, 3.8 million Nigerians are unemployed, making up 5 percent of the workforce.

Meanwhile, a mere 0.3 million workers, or 0.4 percent, are employed in the formal sector without wages, and only 5.3 million workers, or 6.9 percent, are employed in the formal sector and receive wages.

However, of the 5.3 million employed in the formal sector collecting wages, 1.8 million work in private organisations, 1.2 million work with the federal government and are paid from the Consolidated Revenue Fund (CRF), 0.3 million work with federal government-owned enterprises (GOEs) and non-CRF, 1.3 million work with state governments and agencies, and 0.7 million work with local government areas (LGAs) and local council development areas (LCDAs).

“In Nigeria, where a significant majority toil without formal wages, these laws struggle to provide the broad-based economic stability needed to lift millions out of poverty.”

Thus, the remaining 71.7 percent, or 3.8 million workers, are subject to the financial capacity of the companies they work for or the state governments and agencies—a harsh reality.

Beyond this, it is evident that new minimum wages do not directly impact the 153 million non-workers, the 3.8 million unemployed, the 63 million working in the informal sector without wages, the 0.3 million employed in the formal sector without wages, and the 3.6 million working in the informal sector who do receive wages. This underscores the stark reality that the poverty level might continue to rise.

In contrast, proponents of minimum wage laws argue that, while these policies may not eradicate poverty entirely, they play a crucial role in a broader strategy to enhance living standards.

Minimum wage laws aim to ensure fair compensation for labour, promote economic stability, and enhance the well-being of low-income families. By establishing a baseline income level, these laws help mitigate exploitation and provide workers with a measure of financial security.

While wage policies alone cannot eliminate poverty, they are an essential tool in a broader strategy to improve living standards. Studies by the World Bank and the International Monetary Fund (IMF) have shown that minimum wage laws can significantly reduce poverty and inequality when combined with other social policies, such as social safety nets and education programmes.

Data from the National Bureau of Statistics shows that in 2019, when the minimum wage was increased from N18,000 to N30,000, 40.1 percent of Nigeria’s population was classified as poor.

In other words, on average, 4 out of 10 Nigerians had real per capita expenditures below N137,430 per year. By 2023, despite a 66 percent wage increase for Nigeria’s over 75 million labour force, the poverty rate had risen, with 133 million people becoming multidimensionally poor.

Additionally, when the minimum wage increased from N5,500 ($36.6) in 2010 to N18,000 ($117) in 2011, about 112 million Nigerians (67.1 percent of the country’s total population of 167 million) were living below the poverty level. In 2015, the minimum wage was N18,000, which stood at $100.

By 2024, the minimum wage will be N30,000, which currently stands at $19. This indicates that the average Nigerian has been 80 percent poorer in nine years, even as minimum wages increased—a sobering reality.

Charles Soludo, Anambra state governor and former Central Bank of Nigeria chief, highlighted a critical point. He argued that the issue is not really about increasing minimum wages but the value of the wages themselves.

Soludo stressed that the minimum wages received in the early 2000s had more purchasing power than what’s currently obtained. This observation points to the core problem: inflation and the devaluation of the naira have eroded the real value of wage increases, rendering them ineffective in improving living standards.

More than 87 million people in Nigeria, Africa’s most populous country, live below the poverty line—the world’s second-largest poor population after India, a country seven times its size.

And punishing inflation means poverty rates are expected to rise still further this year and next, according to the World Bank. This underscores the complex nature of poverty, which cannot be addressed solely through wage increases.

Labour unions have responded by shutting down hospitals, courts, schools, airports, and even the country’s Parliament, striking in an attempt to force the government to increase the monthly salary of about $20 it pays its lowest workers.

But over 92 percent of working-age Nigerians are in the informal sector, where there are no wages and no unions to fight for them.

“The issue with minimum wages is that increasing them without a parallel rise in productivity due to infrastructural challenges like power shortages could effectively be tantamount to printing money,” Bismarck Rewane, managing director of Financial Derivatives Company, explained.

He warned that without a corresponding boost in productivity, the proposed increase in the minimum wage could spell economic disaster for the country.

The leading economist emphasised the urgency of addressing productivity alongside wage hikes to maintain economic stability.

“It’s not just a matter of agreeing on numbers; it’s about balancing wages against national productivity and welfare,” Rewane said.

The stark reality of the economy becomes clear when comparing the minimum wage over time. In 2015, Nigeria’s minimum wage was N18,000, equivalent to $100. Fast forward to 2024, and although the minimum wage has increased to N30,000, its value has plummeted to an average of $19. This dramatic decline illustrates the severe erosion of purchasing power, revealing the harsh economic conditions that have worsened over the years.

Without comprehensive policies addressing the systemic issues at the root of poverty, the impact of minimum wage laws remains constrained, particularly for the vulnerable populations in the informal sector.

The Multidimensional Poverty Index (MPI) in Nigeria rose from 40.1 percent in 2018 to 63 percent in 2022. This significant increase indicates that poverty levels have worsened despite any efforts to improve economic conditions, highlighting the need for more comprehensive and effective poverty alleviation strategies.

Thus, while minimum wage increases may offer immediate relief, they often fall short of fostering the sustained economic empowerment needed to break the cycle of poverty.

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