ECONOMY - 30 APR 2019

Nigeria's New Minimum Wage: Very Few Winners

Nigeria's New Minimum Wage: Very Few Winners
NLC: The new minimum wage for Nigerians has been increased to N30,000. Source: BBC

President Buhari signed the new minimum wage bill into law on April 18th 2019, so from henceforth, Nigeria’s minimum wage is now ₦30,000 per month. We share our thoughts on the effect of the new minimum wage on different stakeholders in the country.

 

1. Federal Government 

Whichever way you slice it, this minimum wage increase will wreak havoc in the Federal Government’s (FG) finances. At the moment, the FG spends at least 60% of all it earns on salaries and wages, and as the last minimum wage increase from ₦7,500 to ₦18,000 saw a 19% year-on-year jump in personnel expenses from 2010 to 2011, we can expect something like a 15% rise this time around.

Unless you are one of those that think the FG will somehow double non-oil revenues in the next 18 months, or that oil prices will hit $100/bbl again, this effectively indicates that the FG needs to keep borrowing just to maintain its current spending pattern. And remember, public debt has nearly doubled from ₦12.6 trillion in 2015 to ₦24.4 trillion in 2018.  

 

2. The States 

State governments are probably going to be the worst affected by the minimum wage increase because of the variations in their financial fortunes. Looking at data from the first half of 2018, exactly half of Nigeria’s 36 states are currently able to cover their recurrent monthly expenditure with their recurrent monthly revenues (internally generated revenues and federal allocations). And of these eighteen, only 12 have monthly revenues that are 20% higher than recurrent expenditure. In essence, maybe a third of Nigerian states would be able to afford the new minimum wage.

Meanwhile, it is hard to see how states like Cross River would manage—their recurrent expenditure is already seven times larger than their monthly earnings. Furthermore, many states have substantial salary arrears and it is incredible that the Federal Government forced this new wage without any plan for how states would cover their liabilities. Federal allocations are not going to rise soon, most states raise a pittance in internally generated revenues, and some cannot even borrow in the capital markets.

The likely “solutions” are continued FG budget support—which is simply throwing good money after bad—and more salaries owed. The equation is simple here: many Nigerian states just can’t afford to pay a higher minimum wage.

 

3. Workers

It’s not quite the ₦63,000 they asked for in 2016 but Nigerian (public sector) workers will be pleased with a 67% increase in the minimum wage. In some sense, this is simply giving workers what they are owed: if you factor in inflation from 2012 to 2018, then an ₦18,000 should have been increased to ₦39,000 to keep real wages constant. If you also account for currency depreciation over that period then workers are entitled to at least ₦70,000 (This calculation assumes—incorrectly—that workers are buying the same basket of goods).

It is worth asking if even this current increase will lead to a better civil service. We can see two reasons why not. Like we explained above, this increase is simply a partial restoration of where workers were 5+ years ago. But more importantly, a pay rise without any attempted cultural reform is not going to lead to greater civil service efficiency. In fact, it could make things worse. The government’s failure to pay salaries has fostered a side-hustle culture within the civil service. If the government continues to struggle to pay this new wage, then public sector workers will only focus more on their side-hustles.

As Ebehi Iyoha explained in this article, once a culture of inefficiency is established, it becomes difficult to dislodge even when salary payments return to normal. If workers expect that they won't be paid on time, they will dedicate their efforts to their side-hustles instead. When you consider all this, the government probably missed a beat by not combining this wage increase with the introduction of clearer performance-related pay.

 

4. Everyone else (The economy)

There are two main concerns for the broader economy: inflation and unemployment. Empirical evidence is inconclusive on both. You would expect a 67% bump in salaries to trigger higher inflation (much more money chasing the same number of goods) but it’s doubtful. Inflation did not move by much after the last minimum wage increase (2010: 13.8%, 2011: 10.9%, 2012: 12.2%), and even if it would, it is hard to tell what the time lag would be. Moreover, Nigeria’s inflation has typically been driven by supply-side factors like energy prices and food security, or exchange rate movements. Notably, the Central Bank of Nigeria did not seem too concerned about the higher minimum wage when it opted to reduce interest rates in March—the opposite of what it should do to fight inflation.

The unemployment picture is even more complex as research shows that the effect of a minimum wage increase varies significantly across place and time. Nigeria’s unemployment looks like a mismatch of labour growth and job creation, i.e. too many young Nigerians entering the labour market and the economy is growing too slow to absorb them, so we are less worried about the effect of a minimum wage hike than we are of the economy refusing to grow. On the plus side there is a chance that more money in people’s pockets would be a boost to the economy, this is especially true when we consider that lowest-earners have a higher marginal propensity to consume, i.e. they spend nearly every extra naira they receive. Don’t expect this to stimulate the economy by much though: minimum wage increases are good for equity and redistribution (making sure cheap labour is paid better) and not so much for efficiency and growth.

 

Follow our Editor-in-Chief on Twitter @Mikey_Fam

Michael Famoroti

Michael Famoroti

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