EFFECTS OF MINIMUM WAGE IN PUBLIC SECTOR ON SELECTED MACROECONOMIC VARIABLES IN NIGERIA

EFFECTS OF MINIMUM WAGE IN PUBLIC SECTOR ON SELECTED MACROECONOMIC VARIABLES IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1                Background of the study

It is no longer unusual to hear that workers are agitating for increase in their wages and salaries especially in the public sector where several times workers have had to embark on strike actions just to get their wages and salaries increased, the history of income policy has longed being  in existence  as far back as the colonial rule. Many have argued that public sector workers deserve adequate compensation commensurate with their labour in order to bring about efficiency. This is because in the view of many, the Nigerian public service seems to be associated with inefficiency, negligence and mis-management (Efe 2006). Thus in view of this, labour union organizations have severally called for wage indexation to improve the well-being of the workers as it is believed that when the income of the worker is able to meet his basic needs the workers will be motivated for greater productivity in this sector.

There is a general consensus that minimum wage increase   is usually followed by increases in price, which tends to undermine its objective of raising the standard of living of the workers. In a situation where wages are  eroded by high cost of living implying that the worker though with an  increase in wage resulting from minimum wage reviews can purchase very little with the available income , it may be assumed that the wage of the worker lies below the real value of the workers income invariably this may  affect the consumption pattern of the worker who will as result of this want to  maintain a scale of preference as the most pressing needs are considered first before other needs ,this also frustrates investments and growth. Again, minimum wage increases may introduce distortions into economic activities in a number of ways. First, in a number of cases following the agreement or announcement of a minimum wage increase, it is observed that state governments do not comply. For instance, many state governments refused to implement the federal government recommended minimum wage in the year 2000. This led to the halt of economic activities in such states as workers embarked on (in many cases indefinite) industrial actions leading to loss of man-hours. Thus, in more ways than one minimum wage increases have impacted on the broad economic growth in Nigeria. Secondly, in the event that not all states are able (or willing) to pay recommended minimum wage increases, distortions are introduced into incentives underpinning economic activities in such states often in favour of the states where such increases were effected. It is expected that wage increases resulting from minimum wage legislation will have the effect of retaining and motivating workers to greater productivity and also attract quality human resources. It is for these reasons that several wages and salary commissions have been set over the years to see to the issues regarding wages and salary of workers especially in the public sector. The Adebo-led commission and the Udoji-led commission of 1970 and 1972 actually set the ball rolling for persistent wage and salary increases.

 Although several researchers have done works on minimum wage and some economic variables, however this work will still add value both in literature and in methodology. This study examines the extent of the effect minimum wage increase will have on some selected economic indicators in Nigeria. In particular, the study will examine the effect of minimum wage increases on   inflation,    private consumption, fiscal balance and productivity.

1.2   Statement of the Problem

Minimum wage legislation was formulated with so many positive intentions  which includes bridging the gap between the low and high income earners, improving productivity in the work place, the workers being able to meet to their needs  as outlined by the International Labour  Organization and providing a modest stimulus for the overall economy; despite all these many have criticized the policy while  some have expressed doubts  as regards the performance of the policy since its inception. One macroeconomic view point regarding minimum wage is that it constituted a major source of inflation. It is evident that a country might have a minimum wage backed by law while in terms of real value, it may not have much value. The value might have depreciated especially in an economy which is characterized by high inflation as is the case in Nigeria. The country has experienced historically high inflation rates. For instance between 2003 and 2011 inflation has being on annual growth rate of not less than 15 percent. This compares unfavourably with inflation rates of not more than 2 percent in most developed countries but it is not known for certain to what extent such rise in inflation rate are driven by minimum wage increases and not much has been done to study the relationship between these minimum wage increases and the rise in prices; if there be any association as such; which drives which and the magnitude of the coefficient of association where they exist. If this is the case then the purchasing power of the workers will also be automatically reduced and when the worker’s basic needs cannot be met by their incomes this may likely affect their output, thus many believe that the implementation of the policy leave the workers worse than they were before the implementation and comes with a lot of instability in macro variables

Governments at all levels seem to have been struggling to meet with the challenges of meeting rising wage bills which leads to high ratios of recurrent expenditure in the budget of all tiers of government. Often, this has been at the expense of meeting other development challenges such as improved health services, education and good roads which are vital for the growth of any economy. In some cases some state governors in order to pay these minimum wages resort to irregular practices in a bid to meet up with such increased minimum wage. Interestingly, they are the major recipients of the process as this in some cases may result to non- performance and neglect in other areas. One of such practices is the issue of multiple taxation, for instance one immediate effect of multiple taxation is to raise the unit price of goods by businessmen. Thus, the burden of these minimum wage increases seems to be eventually transferred finally to the consumers.

How then can a country like Nigeria utilize this policy instrument effectively in the achievement of sustainable economic  growth, increase in productivity especially in the public sector and raise the standard of living of workers in this sector while still maintaining macroeconomic stability in Nigeria?, and if there be any effect of minimum wage at all,  is this effect large enough to distort the macroeconomic stability of the country rather than motivate the workers for greater productivity? , Thus this work will examine the effect of minimum wage legislation in the public sector on selected macro variables: inflation, private consumptions, fiscal balance and productivity.

1.3       Objectives of the Study

Given the foregoing, the broad objective of the paper is to examine the effect of minimum wage legislation in the public sector on selected macro variables. In particular, the following specific objectives would also be pursued by the work:

i.              To evaluate the  effect of minimum wage legislation on  inflation

ii.            To evaluate  the   effect of minimum wage legislation  on private consumption

iii.          To evaluate  the  effect of minimum wage legislation on fiscal balance

iv.          To evaluate  the   effect of minimum wage  legislation on productivity

1.4       Research questions

i.              What is the effect of minimum wage legislation on inflation?

ii.            What is the   effect of minimum wage legislation on private consumption?

iii.          What is the   effect of minimum wage legislation on fiscal balance?

iv.          What is the effect of minimum wage legislation on productivity?

1.5    Hypotheses

The following Null hypotheses guided the study:

H01   :  Minimum wage legislation does not have any   significant effect on

         inflation

H02 :  Minimum wage  legislation does not have any  significant effect on

         private consumption 

H03   :   Minimum wage legislation does  not have any  significant effect on     

             Fiscal balance                  

            H04   :   Minimum wage legislation does not have any   significant effect on

                     Productivity

1.6        Significance of the Study

The study will have a direct effect on the efficiency and effectiveness of the use of policy instruments by policy makers in the stabilization of macroeconomic variables to stimulate production and investment. This can be achieved by addressing underlying structural rigidities of the economy which hamper the effective transmission of market mechanism. For instance a successful national income policy may not be achieved independent of price restrained policy. Thus, such macro variables like price, private consumption, and fiscal balance as it affects the entire economy and the effect of these increases on the productivity of the public service in particular may need to be considered in order to stimulate the overall growth and development in the country.

It would also provide a broader understanding to stakeholders such as public sector administrators, the government and the entire Nigerian citizens on the fact that minimum wage legislation if well-developed can be an effective tool for national development rather than being considered as harmful.

Finally, this study will contribute to the body of knowledge on the issue by offering an input against the dominant view of most researchers that the minimum wage increases only have effects on employment and prices, thus not considering the effect of minimum wage legislation on other macro variables. It also contributes to the understanding of the long run nature of the variables used in the study. This will also create the need for the modification of monetary policies in a way that such policies will consider the realities of the socio-economic situation in Nigeria.

1.7        Scope of the Study:

The study will examine the effect of minimum wage legislation in the public sector in Nigeria on selected macro indicators. The Nigeria economy is a large component with several indicators but the study will only focus on four major macro variables which include, inflation, private consumption, fiscal balance and productivity. Secondary data will be used in the study which will be collected from the Central Bank of Nigeria Statistical Bulletin and the Central Bank of Nigeria annual abstract.  The empirical investigation of the effect of minimum wage legislation in public sector on selected macro variables  shall be restricted to the period between 1970-2010, this period was chosen because the Adebo-led commission and the Udoji-led commission of 1970 and1972 respectively was intended to address the high inflation rate prior to the end of the civil war  and  2010  was when the last minimum of wage of eighteen thousand naira was implemented there has not been any other minimum wage review hence the reason for the choice as most minimum wage legislations were implemented within this period.

1. 8   Operational Definitions

Minimum wage is the wage payable to a worker for work performance or services rendered on a monthly basis which is guaranteed by law and which is fixed in such a way as to cover the minimum needs of  the worker and his or her family considering national economic and social conditions.

Inflation is defined as the rise in prices of goods and services on assumption of increase in money supply where there is limited supply of goods and services.

Private consumption is referred to as the value of goods and services acquired and consumed by the worker and his or her household in relation to available income.

Fiscal balance  refers to the total revenue of the government (from tax, sales of assets and so on) minus the government spending. If the balance is positive, it is referred to as fiscal surplus but where the balance is negative it is called a fiscal deficit thus the ability of the government to maintain a surplus even after implementation of a minimum wage legislation is one of the major concerns   of this study,

Productivity refers to the increase in marginal product of labour due to increase in income or  is defined as the marginal contribution of labour to the overall output as a result of increased income.





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