Minimum wage debate reignites discourse on fiscal federalism

…As governors insist on individual state’s capacity

Nigeria’s current minimum wage debate between the federal government and state governors has reignited discussions on fiscal federalism.

The crux of the issue lies in the disagreement over the N62,000 minimum wage proposed by the federal government.

Governors argue that a blanket application disregards the economic disparities between states, pushing for a system that allows them more control over their finances.

This raises the question: could this be the beginning of a shift towards fiscal federalism in Nigeria?

Item 34 of the Second Schedule of the 1999 Constitution of the Federal Republic of Nigeria gives the National Assembly powers to “prescribe a national minimum wage for the Federation or any part thereof.” The constitution listed national minimum wage among 68 items on the federal exclusive list.

Historically, the federal government has always determined the minimum wage which must be followed by the states and private sector.

Read also: Governors can’t dictate new minimum wage — NLC

The current Minimum Wage Act was signed into law by former President Muhammadu Buhari in 2019. The Act increased the minimum wage from N18,000 to N30,000. Some states are yet to pay the minimum wage, which expired in April 2024. The Act is to be reviewed every five years.

President Bola Tinubu inaugurated the Tripartite Committee on Minimum Wage in January 2024. The committee, which comprises federal government, states, and organised private sector, has failed to reach agreement with the organised labour, which is demanding a “living wage” far above what the government is ready to pay.

While labour is demanding above N400,000, the federal government is considering a minimum wage of N62,000, but governors and the private sector are not in favor of exceeding N60,000, citing sustainability concerns.

They argue that paying more than N57,000 would limit funds available for development, as a huge portion would go towards wages.

A report titled, ‘Analysis of State FAAC inflows and state expenditure profile,’ recently released by the Nigeria Governors Forum (NGF) warned against the implementation of new minimum wage, stating that it could push states into bankruptcy due to increased recurrent expenditure.

In its recent report titled ‘The Nigerian New Minimum Wage: Implications for State Governments’ Budget Performance’, Analysts Data Services and Resources (ADSR), a research firm, identified Benue, Osun, Oyo, Kogi and Kano as states that have the least ability to pay and finance a new minimum wage.

Also recently, the Southern Governors’ Forum released the communiqué of its meeting held in Abeokuta, Ogun State, with the governors asking that each state should negotiate minimum wage with its workforce.

However, the organised labour has condemned the proposal as “unfriendly and anti-worker,” noting that allowing states to determine their minimum wages would be detrimental to workers’ welfare.

If the states successfully negotiate to set their minimum wages based on their financial capabilities, it will mark a shift towards fiscal federalism, which has been the crux of the clamor for restructuring over the years.

This decentralisation means that states will have more control over their finances and can make decisions that best suit their economic realities and it also leads to resources control.

It challenges the existing centralised approach where the federal government dictates financial policies uniformly across all states.

Fiscal federalism would give state governments greater autonomy in managing their affairs, leading to more tailored governance.

For instance, wealthier states like Lagos could afford higher wages compared to less affluent states like Benue, thereby creating a more balanced and realistic approach to wage setting.

It would also incentivise states to improve their local economies to sustain higher wages and better services. This could lead to more focused economic policies, better resource management, and enhanced accountability at the state level.

However, concerns exist. States with stronger economies might flourish, while those with weaker bases could struggle. This could exacerbate regional disparities.

Differing minimum wages could impact labour migration. Workers may move to states with higher wages, affecting regional workforce distribution.

The Canada example

In Canada, the minimum wage is primarily determined by the provinces and territories, each setting its own rate.

There is a federal minimum wage of $16.65, effective from April 1, 2023, but this applies only to employees working in federally regulated sectors, such as banks, postal services, interprovincial transportation, and federal Crown corporations.

For those working in industries not regulated by the federal government, the applicable minimum wage is set by the province or territory where they are employed. The country’s 10 provinces and three territories each establish their own minimum wage rates.

Alberta, with a booming oil industry, has a minimum wage of $15/hr. British Columbia ($15.65), Manitoba ($14.15), Quebec ($14.25), Ontario ($15.50), and others. (Source: GovDocs)

The minimum wage debate presents a unique opportunity for Nigeria to re-evaluate its fiscal structure. While challenges exist, successful examples from other federations offer valuable insights.

By fostering open dialogue and adopting a gradual approach, Nigeria can explore fiscal federalism as a path towards a more sustainable and equitable future.