Pyrrhic victory of any rise in minimum wage

President Muhammed Buhari inaugurated a 30-member tripartite committee on Monday, November 27, 2017, to negotiate a new National Minimum Wage. The committee comprises six serving state governors and other members from both the public and private sectors, as well as leaders of Organised Labour.

The President conceded, in his remarks on that occasion, that the current N18,000 minimum wage had since expired. He also confirmed that on completion of the committee’s assignment, an executive bill would be sent to the National Assembly for “scrutiny, before being passed into law”.

Hereafter, the impact of any significant increase in the present minimum wage, on the economy, will be examined, in an interrogative prose, to provide a clearer picture of the unfolding dilemma. Please read on:

The N18, 000 monthly minimum wage presently buys less than 50 per cent of its 2011 value; so, would N36, 000 restore the purchasing value lost to inflation and naira exchange rate since then?

Indeed, N18,000 which was well over $100 (over $3/day) in 2011 has since depreciated below $50 or US$1-50/day). Thus, although an increase to N36,000 may seemingly restore parity to the purchasing value of the 2011 minimum wage with naira rate of N360=$1, N36,000 is way below Labour’s demand for N56,000. Ultimately, however, the President’s tripartite committee might reach a consensus, although labour may reject anything below N36,000/month.

What would be the impact of N36,000 minimum wage on workers?

Initially, there would be jubilation, but such celebration may be shortlived, as the sudden increase in nominal salaries will make more money available and quickly expand consumer demand to drive higher retail prices for most goods and services. Over time, however, if naira exchange rate also remains under pressure, the N36,000 minimum wage will again depreciate. Notably, however, if naira rate falls below N360=$1, more Nigerians will fall below the poverty benchmark of $3/day.

Furthermore, if petrol price, ultimately, becomes market determined around $1/litre (i.e. N360/litre), instead of the present regulated price below $0-50/litre, which, expectedly attracts big time fuel smugglers and huge subsidies to our ECOWAS neighbours, and if OPEC manages to keep crude prices above $60/barrel with the agreement to restrain output, Nigeria’s treasury and fiscal plans may lose hundreds of billions of naira annually, to government’s covert subsidy on petrol pricing, especially when increasing budget deficits still have to be funded with very high cost loans.

Notably, also, the plight of pensioners may not significantly improve with any increase in minimum wage, as inflation ravaged-incomes will sadly further impoverish our elder citizens until death! Consequently, the fear of retirement may unfortunately encourage “self-preservation” and corruption in public service.

How would N36,000 minimum wage affect government budgets?

Indeed, with the notable exceptions of Lagos and Ogun states, recurrent expenditure which comprises mainly salaries and administrative expenses still consume over 70 per cent of states’ annual budgets. Unfortunately, federal budgets also have the same skewed expenditure ratio, which invariably leaves less than 30 per cent allocation for investments on more critical capital and social infrastructure.

Instructively, therefore, a 100 per cent wage increase across board will expectedly double and raise government’s recurrent expenditure well beyond 70 per cent of total budget for most states, and federal establishments. Consequently, the resultant ill-advised paltry capital vote will become further reduced to deepen our challenges against improved educational and health institutions with safer transport networks and adequate power infrastructure which should positively drive Nigeria’s economy towards inclusive prosperity.

Most states, presently owe several months’ arrears of salaries to their workers; so, how will such states fare with N36,000 minimum wage?

Well, the present modest internally generated revenue and statutory allocations have never been adequate to successfully run the affairs of most states. Ultimately, state governments may be compelled to borrow just simply to pay salaries and other recurrent expenses! Notably, however, it is economically suicidal to spend funds borrowed with almost 20 per cent interest, on just salaries and other such consumables, which add only minimal value to mass social welfare. Besides, the burden of a steady increase in unserviceable accumulated debts will unfortunately, invariably, cripple succeeding governments and the fate of generations of Nigerians yet unborn.

Furthermore, state governments may, unwisely, become apostles of foreign loan accumulation, because such loans optically cost less. However, if naira exchange rate suffers further depreciation, as it is bound to, ultimately, it may become very troublesome to service or repay such foreign loans. Consequently, the compelled ‘monstrous’ increase in allocations to debt service may be suggestive of irresponsible governance. Invariably, further naira devaluation will be also evitable so long as the Central Bank of Nigeria continues to substitute and auction the federation’s dollar income, in a market that is undeniably already saturated with naira.

In view of the modest incomes of states, shouldn’t they determine their own minimum wages in line with their individual capacity?

Yes, this should be the rule in truly federating states, where state governments do not depend on monthly allocations to survive.

Nonetheless, as indicated in President Buhari’s speech to the wages committee, “the subject of a national minimum wage for the federation is within the Exclusive Legislative list of the 1999 Constitution of the Federal Republic of Nigeria (as amended).

What would be the impact of N36,000 minimum wage on the private sector?

Well-organised private sector companies, probably, already pay around N30,000 minimum wage. Consequently, N36,000 will cause additional irritation to the existing burden of high cost of borrowing and the expensive self-provision of power and other services, in a market that is plagued by weak consumer demand, sustained by double-digit inflation rates for several years.

Notably, the wage structure in the informal, small and micro enterprises subsector is seemingly more flexible and may not respond positively to any law which increases minimum wage to N36,000.

The N36,000 minimum wage will definitely spike the inflation rate, and regrettably also, significantly, erode consumer spending to discourage expansion in industrial production, and fuel an already combustible unemployment rate, with unsavoury social and economic consequences nationwide.

So, if increasing the minimum wage is so fraught with danger, how do you then improve real wages and spur consumer demand?

Well, the taming of inflation below three per cent from the present over 15 per cent (as of December 2017) will achieve the same object of increasing purchasing power across all sectors. Furthermore, since inflation invariably drives interest rates, the cost of borrowing will fall below 10 per cent across board, and provide a heavy dose of economic stimulus nationwide.

How can inflation be brought down below three per cent?

The CBN does not deny that the high inflation rate is driven by persistent excess money supply in the system. Consequently, identification of the source and the elimination or reduction of surplus money supply, will ultimately tame inflation to best practice levels below three per cent so that cost of borrowing will fall, unforced, to below 10 per cent for all businesses. Instructively, the scourge of systemic excess naira supply which persistently drives inflation and interest rates will become significantly reduced when the CBN stops substituting naira allocations for dollar denominated government revenue.

Instructively, if naira rate conversely strengthens below N100=$1, then the present N18,000 minimum wage value will exceed $160 (about $5/day, thus bringing more Nigerians above the poverty baseline of $3/day), while inflation would recede well below 10 per cent!”

The above article was first published in December 2017.

Postscript October 2018: Regrettably, even with higher crude prices now approaching $90/barrel, i.e. well above the budget benchmark of $50/barrel, the resultant larger naira allocations for dollar income will weaken the naira rate and increase the economy’s liquidity challenge, to spur inflation and sustain higher cost of borrowing, which will further frustrate industrial activity and increase unemployment. Furthermore, fuel subsidy may rise well above 20 per cent of aggregate government revenue! Curiously, nonetheless, the 2018 budget contains no provision for increase in minimum wage.



Credit – Henry Boyo 08052201997