The Federal Government (FG) recently engaged a committee to look into a new national minimum wage. Labour unions have been angling for this since 2015, and are now demanding ₦56,000 a month, up from the current ₦18,000 minimum wage implemented in 2011. Don’t be fooled into thinking its an ambitious jump, though; considering the impact of currency devaluation and inflation since 2011, ₦18,000 in 2011 may have gone even further than ₦56,000 today.
In addition, when you consider that the misery index which measures citizen well-being by adding unemployment and inflation rates, hit 34.2% at the end of 2017 (the lower, the better), you can see that the average Nigerian has become poorer.
But is this a political move?
Despite calling for a hike in the minimum wage for many years, Labour Unions have been smart to intensify agitations for better pay as the 2019 elections approach. There is evidence that pay reforms in the civil service could heavily influence the outcome of an election, and many politicians have warmed to this in Sub-Saharan Africa. Unsurprisingly, the government has suggested an implementation date of end-2018 – close enough to elections.
Who will pay for it?
The fiscal health of governments in Nigeria is as poor as its citizens. Between 2011 and 2016, the Federal Government’s gross revenues halved from ₦10.7 trillion to ₦5.1 trillion. Though a recovery in oil prices and production have pushed revenues back above ₦7 trillion, the government remains in dismal fiscal health – hence all the borrowing. Unfettered access to debt markets has been the saving grace for the FG, allowing it room to fully fund recurrent expenditure.
States are in an even worse position, with many requiring Federal Government support to meet recurrent expenditure and debt payments. Only select states have been able to borrow, as most suffer from a debt overhang. Hence, we have a situation where it’s not just difficult for states to meet personnel costs, it’s impossible to finance it with debt. Given the likelihood that a sharp adjustment in the minimum wage will lead to an overall change in government’s payroll structure, with a substantial increase in personnel costs, this will worsen the current fiscal challenges faced by governments.
A bleak fate for workers
Workers will get the short end of the stick at the state level because many states cannot independently finance their recurrent expenditure without resorting to borrowing or grants. Perhaps, the reasonable thing to do should be for the states to determine their own minimum wage based on the ability to pay, but labour unions have kicked against this. The United States operates a similar federal structure, and states are allowed to determine the minimum wage applicable within their territory. This brings about a flexibility that allows for quick adjustments in wages. Workers in those states could earn higher than the federal minimum wage, and it promotes a better understanding of the impact of minimum wage changes on living standards due to a smaller coverage area and the opportunity for comparison across states. In the absence of this in Nigeria, many states would likely delay implementation.
It is also important to think of how this could evolve in the rest of the economy. In the private sector where over 80% of working Nigerians are employed, the implementation of the new minimum wage may suffer. This is because the economy is yet to fully recover from the 2016 economic recession, and this could mean slower wage growth. Besides, a large informal sector like Nigeria's would make minimum wage increases very difficult to implement and enforce due to a lack of regulation. Theoretically, in countries with a large informal economy, increased minimum wage in the formal sector could further boost informal sector employment.
Unfolding options for the FG
The options are limited and require bold calls. Perhaps the most the FG can hope for is to negotiate something significantly lower than the ₦56,000 being demanded. Unions will not stop asking. If the FG fails, it could hurt their numbers at the polls.
On the flipside, increasing the minimum wage could be used as a balm to allow the FG implement some unpopular but necessary reforms, such as flexible petrol pricing and a cost-reflective power tariff. In effect, a higher minimum wage would act as a cash transfer in compensation for subsidy removals. And higher public sector wages can be funded by monies usually used to subsidise energy.
Even if it is hard to tell whether workers would really be better or worse off than they were pre-reforms, the money illusion would allow the government to make these changes with minimal resistance.
Meanwhile, the suggested reforms are necessary in the long run. Getting the pricing right is crucial, and this would attract the much-needed investment required to boost capacity and confidence in the petroleum and energy sectors. In addition, flexible pricing would prevent sharp price adjustments that negatively impact consumers when the subsidy becomes temporarily unsustainable – just look at the Lekki Toll, or the 2016 electricity tariff and petrol price hikes as examples. We need only look to Ghana to see the benefits of incremental price increases.
The issues around a new minimum wage are as diverse and complex as the parties involved, as such, a lot will go into its consideration across the country. With elections approaching, the biggest concern is that politicians simply delay the tough decisions till later.