EMPIRICAL ANALYSIS OF WAGE DIFFERENTIALS AMONG PUBLIC SERVANTS IN NIGERIA

EMPIRICAL ANALYSIS OF WAGE DIFFERENTIALS AMONG PUBLIC SERVANTS IN NIGERIA

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CHAPTER ONE

BACKGROUND OF THE STUDY

1.1        INTRODUCTION

One of the most intriguing issues in labour economics has been the pattern of inter-industry wage differentials. Economists have found a remarkable regularity in wage dispersion within and between countries, even after wages have been controlled for differences in human capital, occupation, and other variables. These findings suggest that wage differentials are compatible with the functioning of capitalist economies, and thus cast doubt on the appropriateness of competitive theories. Besides competitive arguments, segmentation arising from efficiency wage models has occupied a central role in the explanation of wage differentials in developed countries, (Garino & Martin, 2007). The level of wage earning varies due to diversities of human capital, individual innate abilities, job nature and conditions, nonwage benefits from employers, location, etc. Unexplained wage gaps occur when two people with equal abilities and skills are doing similar jobs but are treated differently by the employer. Although this difference in treatment may take many forms (wages, job assignments, promotions, or any other type of retribution), in this study we deal exclusively with wage gaps. These wage gaps in the labour market have various consequences.

The investigation of wage determination and wage differentials in developing countries has concentrated on the effects of human capital and different sources of segmentation associated with institutional arrangements and structural characteristics on earnings. The level of wage disparity in Nigeria started as far back as 1951, the introduction of federal principle in administration of the country by the Macpherson constitution, regional governments and their employee dealt with wage issues with wage review commissions, and wage level differs from region to region reflecting the budgetary disparities among the various governments, (Otobo (1992), in Emmanuel, 2002).

Wage differential in Nigeria basically is determined by the degree to which institution forces limit the influence of market forces generally. Workers in different states of the federation; federal, state, and local governments have variation in what they receive as salary and other fringe benefits. This is in line with 1997 federal government budget pronouncement by late Gen. Abacha that “each state should pay its workers according to its ability (resources)” (Nick, 2001). Wage varies more from place to place than the price of provisions. That wage


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did not fluctuate in line with the cost of provision (cost of living), the current wages were enough to provide the subsistence at high prices also. Wages were higher in those areas where the provisions were cheaper such as in England as compare to the situation in Scotland (Adam Smith, 1776). This implies that wage increment does not depend solely on the prices of goods and services. Thus it is only true to a certain degree, because today union negotiation base in the variation of prices (inflation targeting).

Individuals are particularly attached to a feeling of equity which reinforced work psychologically is indispensible. Employee expects that his or her effort will be rewarded by remuneration regarded as fair. On the other hand employer takes for granted that in exchange for the wage paid, his or her employee will also supply an effort regarded as fair. According to Akerlof (1982) cited in Pierre and Andre (2004) the employees gift consist of exceeding prevailing work standard, in exchange for which the employer pays him or her a wage exceeding the so called “reference” wage. Consideration of fairness makes employers to offers relatively higher wages in order to take advantage of the process of gift exchange. Most individual take more satisfaction from their effort with higher relative wage. The problem of each worker consists of selecting a value of effort that maximizes his or her satisfaction.

The degree to which workers are able and willing to move between jobs in different occupations and areas is known as labour mobility. According to Graham et al (1998), lack of labour mobility may manifest itself in high frictional or structural unemployment, and it has been an object of policy to encourage workers to move to areas where jobs are available and to take on jobs in new occupations requiring skills different from those in which they were first trained. In practice, it has been found that, for a multitude of social and economic reasons, labour may be geographically and occupationally immobile. Graham et al further explain that, it is recognized that social costs could be incurred by an itinerant population, from regional overcrowding or depopulation. In Nigeria, the mobility of labour (geographical and occupational) in the public sector is well pronounced today. Every day, the number of applicant keeps on increasing, due to non satisfaction in job and other reasons accompanied labour turnover. Labour turnover which implies the number of employees who leave a firm in a year as a result of the firm’s total employment. In the public service this can be refer to switching from state to federal or reverse, based on some peculiar reasons which form part of the literature review.


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Labour turnover affects both workers and firms. Workers experience disruption, the need to learn new job-specific skills and find different career prospects. Firms, on the other hand, lose job-specific skills, suffer disruption in production and incur the costs of hiring and training new workers. Incoming workers, however, may be better educated, more skilled and have greater initiative and enthusiasm than those who leave. The focus of the economics literature on labour turnover has been on the impact of turnover on workers rather than on firms, (Brown et al, 2004).The theory used to explain the impact of turnover on firms is mostly based on the well known efficiency wage model of Salop (1979), in which firms choose wages so as to minimize the marginal cost of labour, balancing the marginal effect of higher wages against the marginal reduction in training costs induced by higher wages.

Becker (1957) cited in Pierre and Andre (2004) pointed out that the preferences of employers and workers may constitute a source of discrimination. Discrimination is a situation in which identical individuals in regards to their productive abilities are treated differently because of certain features of their non productive characteristics. Joan (1933) cited in Erling and Harold (2009), developed the idea of monopsonistic discrimination in the labour market. The idea is simple: a single buyer, a monopsonist, sets wages below marginal revenue product. The more inelastic the labour supply, the lower are wages relative to productivity. By differentiating wages between groups with different elasticity’s of labour supply, the monopsonist may obtain higher profits. Robinson suggests gender as one of the dimensions along which the employer may discriminate. If female labour supply is more inelastic than male labour supply, women will earn less than men relative to their productivity, and thus face a higher level of exploitation in the labour market. Although, this is not that pronounced in some sector of the public service, but in state like in Enugu, Bayelsa, Benue, and Taraba, women highly experience some level of discrimination in both primary and secondary schools boards, in terms of remuneration. Hence discrimination is necessarily linked to imperfect competition. This creating inequality, for the belief of employers and their capacity to make evaluations influences the behaviour of workers. Wage differences occur in the private sector due to the level of productivity between firms or industries in developed and underdeveloped economies. The productivity adjusted wage gap is smaller in the public than the private sectors, and smaller in the private sector the more competitive the product market, (Derek, 1998).

More recent theoretical developments have revitalized the concept of monopsony in the labour market. Among the theoretical works, the analyses of job-to-job flows within a search


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theoretic framework of Burdett and Mortensen (1998), and Martin (2003), as cited in Erling and Harold (2009); established the idea that each single firm or establishment faces its own individual labour supply curve. The point is that workers quit endogenously, and have to be replaced by new hires. The higher the wage, the fewer the quits and also the easier it is to attract replacement hires. Scholars argued that even in the absence of pure wage discrimination unequal wages for equal work – employers may distinguish between jobs with uneven gender composition. Lucifora and Reilly (1990), show that female-dominated occupations pay less than male-dominated occupations. Meyerson et al. (2001) conclude that there are very small wage differences between men and women within finely defined job-cells in the same establishment. Gender differences arise across jobs or occupations and establishments. But wage differences by gender reduce, the more collective bargaining employees are in their wages determination.

Government is seen as a major or even the sole employer of specific types of workers in different labour markets, for instance military personnel, antitrust prosecutors, postal workers, fire fighters, etc. The demand for these employees is derived from society’s demand for the public sector goods and services that these workers provide. When government employs workers, it exhausts or absorbs economic resources (Campbell et al, 1999). This implies that the issue of how much to pay workers in a given society lies in the hands of the government of the said society. Government pays wages from their generated revenue, either through taxation, borrowing, and grants/aids. This does not necessarily depend on workers’ productivity, but most on welfare enhancement purposes. Wages will vary among government employees, on the basis of fund (resource) availability. But one should know that irrespective of government resources, wages which are backed by law must be paid. The source of revenue determines how much it pays it workers. How much a particular state in Nigeria pays depends on how much it has at its disposal? Adam (1776) observed that “wage difference arises due to fund variation”.

Adam opined that wages were dependent and determined by a contract between the employer and employees. He went further to explain that workers are always at disadvantage though employers do not apparently cooperate among themselves while workers do, in reality the combination between employers is always there, and employers work in concert to push wages down to the extent of taking advantage of the weak bargaining power of the workers. Adam noted that at the outset, those workers with the same level of competence should be


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paid with different wages if their working conditions are different. Wage differences are limited to individual competence as explained by the theory of human capital, which rest on the idea that education makes an individual more competent in ways that have value in the labour market, (Pierre & Andre, 2004). But individual decisions about investing in human capital are affected by the ease and speed with which they learn their aspirations and expectations about the future, and their access to financial resources.

The Hedonic theory of wages, proposed by Rosen in 1974 accounted, for wage heterogeneity arising from these compensating differentials. It shows that the mechanism of perfect competition provides reimbursement for the worker who does the most tedious job. This also allows workers whose preferences by nature are heterogeneous, to chose how tedious a job they are willing to take in view of the wage differences created by competition. It also ensures allocation of workers over a range of job, socially efficient, (Pierre & Andre, 2004). To gauge the magnitude of wage differential or discrimination an initial strategy consist of explaining wage differential on basis of variables set linked on the one hand to the characteristics of an individual (educational attainment, experience, sex, age, dependants, union status etc.) and the job they hold (risk involve, nature of the environment, location, etc.) on the other, to their membership in a particular group. This leads to what we refer to as statistical discrimination; which implies a situation of individuals with identical abilities but belonging to different groups do not have equivalent career paths because of the average quality, real or imagined of the group to which they belong, (Pierre & Andre, 2004).

Musgrave and Musgrave (2005) opined that “the distribution of labour and capital endowments linked by investment in education which in turn affects the wage rate a person command. But many instances however, returns are determined under imperfect market where institutional factors, such as conventional salary structures, family connections, social status, sex, race and so forth, play a significant role. As a result various jobs may differ in line with status considerations rather than marginal product, and who gets the job may depend upon connections rather than superior productivity”.

The distribution of income as generated by the above forces, shows a substantial degree of inequality, which may be seen by comparing the percentages of household as ranked by the income. The distribution of capital income is less than that of wage and salary income. So is the distribution of wealth. Hitherto, recent decades have shown a tendency for distributional inequality to increase.


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The idea of how much to pay government employees without risking a drop in the Public Service Motivation (PSM) levels is a complex one. It is argued that government employees are generally less motivated by wages than their private counter parts. Wages satisfies both low and high order needs, which indicates achievement and recognition for effort (Taylor, 2009). Domerio and Giordano (2010) observed that union will exploit the relatively inelastic demand for labour in the public sector workers. But the extent to which this will be possible based on how tight the budget constraint will be. Hereto, the public sector differs from the private sector in an important way: Governments provide monopoly services in their particular jurisdiction. As such the demand for public goods and services in a particular locale is quite inelastic. This allegedly gives public sector union extraordinary bargaining power.


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