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Economic Considerations For Minimum Wage Determination 



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Nigerians are presently experiencing  the most challenging episode of  historic and alarming general increase in prices of goods and services.

The general increase in prices started in 2022 following global supply chain bottlenecks, impact of the Russia war in Ukraine and widespread insecurity in Nigeria.

The resulting inflationary trend was worsened by the   fuel subsidy removal on May 29, 2023, which  resulted in a 223%  increase in petrol price. In addition was the Naira devaluation to N1,500/$ owing to forex market reforms introduced by the Central Bank of Nigeria, CBN.

As a result of these developments, prices of basic food items and transportation have more that doubled in one year, between May 2023 and May 2024, according to data from the National Bureau of Statistics, NBS.

Reflecting this trend, the annual inflation rate rose to 33.95% per cent in May 2024, the highest in 28 years. Following the same trend, Food inflation rose to 40.66% in May 2024 from 23.65% in May 2023.

As a result, the purchasing power of the nation’s currency, the naira, has been reduced by more than half.

For example, according to the NBS Food price watch report, in May 2023, the quantity of Yam tubers that N5000 could purchase  reduced to four (4)  in May 2024 from 11 in May 2023.  Similarly, the quantity of imported rice (1kg) that N5,000 can buy reduced to 2.5 in May 2024 from 6.3 in May 2023.

This trend, which  recurs in the goods and services, indicates falling standard of living for most Nigerians especially those depending on one source of income, namely monthly wage.

Owing to this development, and to minimise the impact of crushing inflation on the living standard of Nigerian workers, the labour unions, led by the Nigerian Labour Congress and the Trade Union Congress, TUC, have demanded  for an upward review of  the minimum wage from N30,000.

Stressing the need for upward review of the minimum wage, NLC President, Comrade Joe Ajaero, at the 8th Vanguard Economic Discourse said: “The cost of living index determines the wages. I want you to benchmark it with probably a bag of rice which is about 84,000 naira today.

I would equally want you to ask people that refill their cylinder maybe at the price of N16,000 or N17,000 in a week or twice in a month which is like 30 something thousand  naira. I would equally want you to benchmark it to a plate of mama put at N500 without meat and when you do that, with a family of six, you are going to get N270,000 in a month without meat.”

While the demand by the labour union is justified given the sharp increase in inflation and declining purchasing power, the  National Minimum Wage Act of 2019, also mandates  periodic reviews of the minimum wage every five years. Thus the time is ripe for upward review of the minimum wage.

Experts are however calling for caution and need to ensure that the new minimum wage does not worsen current macroeconomic challenges namely inflation and unemployment.

Their position hinged on historical lessons from the 1975-76 Udoji Panel salary increase.

Citing the impact of the Udoji Panel Salary increase of 1975 to 1976, Dele Sobowale, a Vanguard columnist, said: “I worked for Leventis Stores then as a Merchandiser and prices of television sets and freezers went up by 250 per cent in the first month after the Udoji awards; inflation exceeded 50 per cent and remained over 40 for several years. By 1983, almost all the gains of Udoji had been neutralised by hyper-inflation. By 1984-5, Nigeria was in its first recession.”

Furthermore, experts also cited the need to consider the negative impact of the inflationary trend on businesses reflected N266 billion  losses recorded by 15 top manufacturing firms in the 2023 operating year, representing 183% decline from N320 billion profit in the previous year, occasioned by  declining sales, increase in unsold goods and 25.5%  rise in cost of raw materials triggered by naira devaluation and rise in inflation.

Eminent economist and Chief Executive Officer, Financial Derivatives Company, Bismarck Rewane, also urged that due consideration must be given to the ability of employers, especially in the private sector, to pay.

Speaking at the 8th edition of the Vanguard Economic Discourse, Rewane said:  “They can only pay the minimum wage from the revenue they generate and you know the situation in this country. And they don’t want a situation which would lead to a recession.

So, what I’m saying is that you negotiate the minimum wage bearing in mind that it is not government and government workers.”

“The private sector is also in. Look at the losses they have been declaring and these companies that are going to borrow money at a higher interest rate are still going to pay a higher minimum wage.”

The financial capability of the states and local governments is another issue, vis-a-vis the impact of inflation on their revenue.

While the removal of fuel  subsidies and  Naira depreciation  led to an increase in nominal Federation Accounts Allocation Committee, FAAC revenues to the three tiers of government, the impact of the increase was however moderated by a surge in the  inflation rate.

Hence the real value of FAAC net deductions increased marginally, rising from N1.39 trillion in the first half of the year to N1.52 trillion in the second half of 2023. This indicates that the additional revenues, in real terms, have shrunk with the increase in monthly inflation that followed both policies.

Moreover, the subsidy removal and exchange rate float only led to the States earning an additional nominal revenue of N231.7 billion from FAAC in the second half of 2023 compared to the first half.

This excludes foregone revenue through a debt swap agreement with the Federal government and monthly savings directed to the Infrastructure Fund45 set up in June 2023.

Furthermore, the financial statements of the state governments reveal a notable average recurrent revenue growth rate of 9% and a relatively lower average personnel growth rate of 6%. While the revenue growth surpasses the increase in personnel-related costs, it’s crucial to note that many states have not implemented the 2019 minimum wage.

A 3% difference between the average revenue growth rate and average personnel cost growth rate means that any significant revenue shock or notable rise in personnel costs could pose financial challenges for State governments.

These point to potential difficulties in contemplating further wage increases given the current revenue levels, necessitating careful consideration of fiscal constraints and their impact on future wage policies.

Wage increases result in higher salaries, wages, allowances, social contributions, and benefits, contributing to the total personnel costs. Personnel costs steadily increased over the five years from 2018 to 2022, rising from approximately 1.4 trillion in 2018 to about 1.8 trillion in 2022. Meanwhile, the total recurrent revenue (FAAC + IGR) averaged around N4.6 trillion within the same period, reaching N6 trillion in 2022.

In 2019, most 36 state’s faced constrained fiscal space, preventing the implementation of the current minimum wage. Amid the COVID-19 pandemic in 2020, personnel expenditure substantially increased as a percentage of total recurrent revenue. Averaging around 34%, it peaked at 41% in 2020. This surge correlated with the introduction of government palliative measures to alleviate the effects of the COVID-19 pandemic.

Similarly, state’s fiscal space shrink even further as they continue to implement policies to ameliorate the cost-of-living crisis by extending the period and scope of various transport subsidies, supporting investments in CNG infrastructure to diversify the energy mix with more affordable options, investments in food security, and tax incentives to ease the cost of doing business among others.

The above shows that   analysis of wage policies and economic dynamics in the Nigerian state illuminates critical challenges and complexities.

The broader economic context, marked by fluctuating Gross Domestic Product, GDP growth rates and the unintended consequences of federal policies on inflation and poverty levels, emphasises the interconnectedness of fiscal decisions.

The real value of additional revenues has shrunk due to the surge in inflation, restricting the response options for states to the current socio-economic crisis and emphasising the delicate balance states’ must maintain.

Hence it is crucial to recognize state governments’ limitations in addressing today’s socio-economic situation.

While the state governments  can influence fiscal policy, it requires complementarity of fiscal and monetary policies at the federal level to achieve the much-desired results. Any wage increase approach should align minimum wage adjustments with economic realities at the state governments’ level, and this means prioritizing the fiscal sustainability of the states.

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