AN EMPIRICAL INVESTIGATION OF THE DETERMINANTS OF WAGE DIFFERENTIALS IN NIGERIA

AN EMPIRICAL INVESTIGATION OF THE DETERMINANTS OF WAGE DIFFERENTIALS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Inequality is a phenomenon that many people are concerned with. It is probably a major factor in producing or aggravating a wide range of social ills such as educational disadvantage, health inequalities, intergenerational immobility, and crime, and may undermine social cohesion, (Oyekale et al., 2007). As Nolan (2009) puts it, it relates with economic performance but in a much more complex fashion than a simple trade-off between growth and inequality.

Persistent inequality constraints a society’s productivity and ultimately slows its rate of economic growth and the economy pays for this in reduced productivity today and diminished national output tomorrow, (Awoyemi, 2004). Since the early 1980s, rising inequality in earnings and household income has been a focal policy issue (Scholtz, 2010, Bluestone and Harrison, 1982). In Nigeria, the inequality level is said to have worsened and many studies using household survey income and consumption concept attested to it, Canagarajah, et al., (1997), (Ajani, 2008) even the NBS report show that

The above table presents inequality trends in Nigeria for 2004 and 2010. The national Gini coefficients seem to be driven primarily by inequality in the urban areas. Inequality levels were persistently higher in urban areas than in rural ones in 2010. According to the available NBS report, income inequality by area of residence reveals higher inequality within urban populace at 0.4328 in 2010 than within the rural populace at 0.4334 in 2009, indicating a turnaround from a higher income inequality within the rural to urban populace. It also highlights rising inequality within both the rural and urban population to 0.4334 and 0.4328 respectively in 2010 from 0.4239 and 0.4154 in 2004.

Inequality could originate from various socio economic factors and are of various forms. This study concentrates on the wage differentials that also contribute significantly to overall inequality. Wage differential addresses the differences of individual’s earnings in a particular society and it is worth noting that the closer the gap gets the lower the inequality in that society becomes. Nigeria’s human development index value for 2011 is 0.459 positioning the country at 156 out of 187 countries and territories. Between 2005 and 2011, Nigeria’s HDI value increased from 0.429 to 0.459, an increase of 7.0 per cent or average annual increase of about 1.1 per cent, (UNDP 2011). Although the human development index (HDI) for Nigeria rose, poverty in the country is still widespread and acute. Five decades after independence, Nigeria remains one of the world’s poorest economies, ranking 156 out of 187 countries base

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on the HDI score (UNDP 2011). The above scenario has implication for policies which aim at reducing inequality in the country.

The Nigerian economy is characterized by a large rural agricultural-based traditional sector that encompasses about two-third of the population in the low-income class. Most of these people at the bottom of the income distribution chart are living in abject poverty (Canagarajah et al., 1997). There is a widespread disparity in income distribution between the rural and urban settings, (Ajani 2008). The low income earned by the rural dwellers is readily attributable to the fact that majority of them are primary producers whereas the urban dwellers are made up mainly of salary/wage earners, working in either private or public organizations, or business men/contractors. Urban centres are recognized to be made up people with relatively more buoyant economies and steadily rising incomes and employment opportunities while the rural dwellers depend more on relatively stagnant agricultural economies.

The Nigerians economy could be structured into the existence of formal and informal economy. The formal economy comprises wage employment in both the private and public sector and in which wage levels are institutionally determined. Governments at the federal, state and local government levels are seen as the major employers of labour in this economy with differences in salary scale between some federal and state workers. The informal economy comprises rural and urban informal activities and in which wages are dictated to a very large extent by the phenomena of market forces, (Aminu, 2010). This structure for sure gives rise to differences in the income earned by these workers.

Nnanna et al opines that the Nigeria labour market is characterised of; a high rate of unemployment and under employment, at a large public sector and a low wage and poor working conditions. The differences in wages tend to be a high stimulant to income inequality in Nigeria. Some efforts have been made by the Nigerian government to reduce wage differentials; the most recent is that of the increase in minimum wage. The increase in minimum wage is a policy that was made to upgrade the lowest echelon of salary earners in the country. This is believed to stimulate both the formal and informal sector hence reducing overall inequality in the economy.

There equally exist an unbalanced analysis of women’s roles, responsibilities, constraints and opportunities in different activities in relation to those of men, (Ajani, 2008). Nevertheless, discrimination has its origins not only in the ethnical segregation, but also in the social

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culture, which narrows opportunities for women. Evidence leads us to consider gender discrimination as an important determinant of wage differentials, (Ajani, 2008).

Also, the participation of women is less with respect to being employers within informal employment. The gender dimension for 2004 and 2005 also reveals that unemployment rate was higher for the female group at 11.2 per cent and 14.1 per cent in 2004 and 2005 respectively. Thus, income inequality may be considered in relation to a number of interrelated factors such as education, occupation, regional, ethnical, rural expenditure pattern and even political differences. Among these factors, education appears to play a major role, (Gregorio and Lee, 1999).

This is supported by Mustapha (2004) who linked the historical foundation of inequalities in Nigeria to differences in education. Women generally have less education than men, particularly so among some social groups, mainly in the northern regions. The education of husbands and wives is highly correlated, with husbands generally having rather more education than their wives. He finds that gender inequalities, especially the significantly lower educational levels of females in many parts of Nigeria, especially among some ethnic groups, are associated with income inequality. Hence, in a country like Nigeria with great disparities in educational attainment among its social groups, it seems reasonable to expect that education is a major determinant of income inequality.

Apart from the general education, scholars have also asserted that some other type of profession and occupations also have some influence on income inequality, (Awe and Rufus, 2012). From their analysis, a medical doctor will earn more than a graduate of Economics. A medical doctor in the army will more than one in the civil service, and a senior medical officer will earn more than a newly recruited one. In the Nigerian university system, a graduate entering the academic profession is place two steps ahead his counterparts in the non-academic cadre. In general, it has also been observed that workers in the petroleum sector are the highest paid workers in Nigeria. They are followed by those in the communication and banking sector in that order.

Other NBS reviews show that people working in the agricultural sector are more likely to live in poverty. This is consistent across all years. The reasons why agriculture in Africa is often associated with poverty are many and varied, but for Nigeria low wages, the poor productivity of land and labour, and depressed commodity prices are often cited, combined with shortages of land, labour and capital (World Bank, 2008).

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Most statistics on inequality as illustrated above focus on the general inequality of the country and decompose it into sub groups; this study however concentrates on the determinants of inequality in wages or earnings. Wherein, the theoretical and empirical literature postulates that earnings are basically determined by mainly experience and education.

1.2 STATEMENT OF PROBLEM

The Nigerian problem in the 20th century has been the inability to get the best from her human resources, (Olaniyan and Awoyemi 2005). The problem goes beyond low income, savings and growth. It includes high inequality, which includes among others, unequal access to basic infrastructure and unequal capabilities (education and health status). According to (Bakare 2012), in recent years, especially since the mid 1990s, there have been debates and commentaries exploring the concept, types, sizes and economic implications of wage differential especially in Nigeria. Some other authors have their studies focused on the question of growth versus income distribution. But the basic issue, which is poverty and inequality, continue to worsen despite the emphasis placed on the economic growth.

According to the available data from the NBS, income equality in Nigeria has worsened as illustrated by the Gini Coefficient of 0.447 in 2010 as against 0.4296 in 2004 and this is in contrast with higher economic growth achieved during the period under review. In the other wage differential can generate internal conflict, although some contemporary work on economic theories of conflict shows that feasibility rather than motivation has driven recent social instability in Africa, (Collier et al 2006), there is a general consensus that high levels of inequality can, if unchecked, ferment internal conflict (Cramer, 2005)

Thus, the determinants of inequality in Nigeria cannot be ignored because income inequality is now becoming a source of political and social unrest in many developing countries including Africa, And wage differential that forms the integral part of inequality is very sensitive in political stability; trying to analyse the gap between the rich administrative/political class and the lowest cadre of wage earners. Therefore the contribution that each determinant has in the distribution of income will be examined, so that more importance can be given to those factors which have a greater effect on it. This will assist in making policy directed towards the reduction of income inequality in order to increase the efficiency of such policy. This is particularly important for the country, in which resources to implement these types of policies are misallocated. Moreover, it is also important to determine what the impact of social policies may be for different socio-economic groups in the society.

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In addition, what is more appealing is that every government in Nigeria embarks on one form of income inequality reduction strategy or the other, (World Bank 2011). However, what has remained unanswered is whether these policies or programmes are rooted in the factors that caused the income inequality in the society. This is because, despite the colossal amount of resources committed to the eradication or reduction of these problems, income inequality aggravates and more people fall into the poverty region instead of escaping.

However, the striking issue is the wage differential that contributes significantly to overall income inequality. This is critical, based on the fact that wages or earnings stimulate the general trend of income in the formal sectors. This attests to the recently upgraded minimum wage as an effort to reduce the gap between the rich and the poor. Wage differences are basically due to education, experience, sex, trade unionism, state of origin as well as other socio economic characteristics. If the determinants of wage differentials are not known then the problem of income inequality remains blur and will be difficult to completely resolve. Estimating the determinants of wage differentials is a way of tackling the problem from the roots. Many studies have made attempts to determine or decompose sources of wage differentials in Nigeria include; Awe and Rufus (2012 the contribution to education and returns to education. However), Idowu et al (2011), Osahon and Osarobo (2011), Oyelere (2009), Oluwatayo (2008), Awoyemi (2005), Oyekale et al (2005) Okuwa (2004), Alayande

(2003), Ogwumike et al (2003), Adebayo (2002), Ipinnaiye (2001) and Oyakale (1997) studied wage differential only with respect to none of them according to my view, investigated wage differential especially as opined by the theoretical function of Mincer.


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