• Thursday, March 28, 2024
businessday logo

BusinessDay

Minimum wage and Nigeria’s jobs crisis

Jobs

Two weeks ago, I wrote a detailed analysis of the reforms required that will help for improvements towards changing Nigeria’s minimum wage (See BusinessDay 4th of March p.30). This article is a slight modification of the arguments made in the analysis, especially in relation to Nigeria’s job crisis.

In the analysis, I argued that the manner in which we currently change the minimum wage has at least four weaknesses. First is that the change in minimum wage is often preceded by sustained agitation by the labour, showing that there is no complete established principle for which the minimum wage can be altered. Another weakness is that the process is accompanied by huge financial and opportunity costs. For instance, the 2019 planned change involves agitations by labour, planned strikes, the cost of setting up the tripartite committee etc. Also, Nigeria’s minimum wage consistently lags behind inflation, reflecting negative real wage growth, especially in the public service. Though real wage growth is slow in the private sector as well, especially for workers with minimum skills, there is a significant disparity between wages in the public sector and large sections of the private sector. Finally, the process and the shocks that follow the introduction of a new minimum wage expose vulnerabilities in the States.

In the analysis also, I showed that changes to Nigeria’s minimum wage has some interesting properties. They are usually steep, with significant increases at every point. They are also few and far in between. Between 1981, when the first minimum was introduced and now, there have only been four other changes, with an average of about 8 years for each change. It also means that the changes are significant. For instance, if the N27, 000 presented by the President is passed into law, the minimum wage will rise by 50%.

These features are what makes Nigeria’s minimum wage data movement resemble that of a staircase. Other data with similar features include that of the exchange rate, electricity and fuel prices. Mathematicians describe such movement step or staircase functions. The common feature of all these variables is that the government controls them, and the government determines when they change. By now, it is apparent that the significant adjustment to the minimum wage is followed by shocks to expenditure and debts in the States. However, frequent and smaller adjustments (described as crawling pegs by economists), especially given rising and significant levels of inflation, will minimise these shocks, economic distortions and improve budgetary planning in the States and in the central government.

While the minimum wage will always be a finite number, the damage to economic policy and budgetary planning in the States follows from the poor policy and legal environment on how the minimum wage changes. While most countries now have laws for low pay and minimum wages, they also have mechanisms in place for adjusting the minimum wage in a way that avoids shocks to the economy.

Now, does the minimum wage have implications for the broader and wider jobs market? I reckon, despite the efforts and costs of adjusting the minimum wage, the problems in the country’ labour market are bigger and intractable. The revised minimum wage is expected to have marginal implications for the over 23.1% of the labour force currently unemployed, according to data from the National Bureau of Statistics (NBS). Indeed, a greater and bigger problem of the country’s labour market is summarized, not by rising unemployment, from 6.4% in Q4 2014 to 23.8% in Q3 2018, but by the dramatic increases in the numbers entering the jobs market. Consequently, unemployment is rising, both as a result of dramatic increases in the numbers of those entering the jobs market and weak economic growth.

Given that an unpleasant divergence has emerged in the growth and unemployment data in the last three years, it is clear that we cannot make progress on jobs without dealing with weak economic growth. The weak growth is underlined by negative real wage growth and stagnant productivity, while the labour market is suffering from poor and weak skills required for the improvements in productivity and income growth.

There is no doubt that a narrow bill merely revising the minimum wage will not resolve all the weaknesses associated with the minimum wage process. To make even a dent on the labour market, will require broader and more coherent reforms. To improve the minimum wage process, and promote the growing flexibility of the labour market, the law should rather legislate hourly minimum wage, rather than a monthly minimum wage. Today’s work environment is not as rigid as it used to be; more and more people are engaged in freelance employment, contract jobs, commission based employment, and part-time employments. The Act, as it excludes these groups, creates room for labour exploitation. There are also many jobs in governments that can leverage on hourly wages legislation.

But to deal with the intractable labour market is another matter entirely. Yes, there are many things that need to be done, but I will mention two critical ones because of the impact they will have on investments and the chain reaction on employment. Those two things are power and the costs of capital. While progress has been made on power since the reform process was completed, we must recognize that the break on the fair price for power is limiting the investments required in the sector, which will in turn, reduce the costs of power in the long run. There is plenty evidence that with the right price, investors will drive the sector’s performance and the result will be visible in a matter of few years.

On costly capital, there are two critical dimensions. One is that the avenue for long-term capital is small. It is also the case that the actual costof capital is high. While this is not unusual for a developing country, government policies make the situation worse. The solution is not to compel the Central Bank of Nigeria (CBN) to lower interest rates, but the government can start by looking inwards in detail how its policies are driving interest rates up, limiting foreign investments, crowding out private investments in Nigeria, and wasting the limited capital we have in the country. If we can successfully address power and then capital issues, we can begin to drive up employment and productivity in the country.

 

I thank you.

 

Ogho Okiti