Pyrrhic victory of any rise in minimum wage -By Henry Boyo

Filed under: National Issues |

Henry Boyo

 

President Muhammadu Buhari on Monday, November 27, 2017 inaugurated a 30-member tripartite National Minimum Wage Committee to negotiate a new minimum wage for the country. 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 at the occasion, that the current N18,000 minimum wage has since expired. He also confirmed that on completion of the work of the committee, an executive bill would be sent to the National Assembly, for “scrutiny, before being passed into law”.

Although the committee has no time limit to conclude negotiations, nonetheless, the defined object of the exercise is clearly to determine, by how much the present N18,000 minimum wage should be raised.

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

The present N18,000 minimum wage presently buys less than 50 per cent of its 2011 value; so, would N36, 000 minimum wage restore the purchasing power 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 to $50 or $1-50/day); so although an increase to N36,000 may seemingly restore parity to the purchasing power of the 2011 minimum wage, nonetheless, N36,000 is still short of labour’s demand of N56,000. Ultimately, the tripartite committee may reach a consensus that is just above N36,000/month, if labour refuses to accept anything below this amount.

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

Initially, there will be jubilation, but such celebration may be short-lived, 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, the N36, 000 minimum wage will inevitably depreciate if the naira rate remains under pressure, particularly if the petrol price becomes market determined (around $1/litre instead of the present below $0-50/litre). Indeed, if OPEC manages to keep crude prices above $60/barrel with the present restrictions to country output, Nigeria’s treasury and fiscal plans may lose hundreds of billions of naira annually, to government’s covert provision of subsidy in petrol pricing, even when budgets are still funded with very high cost loans.

Regrettably, the plight of retired civil servants and pensioners may not also be accommodated by any increase in minimum wage, since there is presently, no arrangement to augment pensioners’ incomes, which have clearly been savagely ravaged by inflation over time. Ultimately, increasingly more pensioners will sadly, become economically challenged elder citizens until death! Consequently, the fear of retirement, may unfortunately encourage self-enrichment and corruption in public service.

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

Apart from the notable exceptions of Lagos and Ogun states, the recurrent expenditure which comprises mainly salaries and administrative expenses still consume about 70 per cent of annual state budgets. Regrettably, federal budgets also have the same skewed ratio of allocations, which invariably leave less than 30 per cent for socially rewarding investments on more critical capital and social infrastructure.

Instructively, a graduated percentage increase in wages across board will expectedly double and raise recurrent expenditure well beyond 70 per cent of total spending in most states, including the budgets of federal establishments. Consequently, the presently decried paltry capital votes for infrastructure may become further reduced to deepen our plight for better educational and health institutions, with safer transportation networks, and adequate power infrastructure, which will more successfully drive Nigeria’s economy towards inclusive prosperity.

It is no secret that most states owe several months’ arrears of salaries to their workers; so, how will such states fare if N36, 000 is adopted as minimum wage?

Well, statutory allocations and the presently modest internally generated revenues have never been adequate to run the affairs of most states. Ultimately, state governments may be compelled to increase their debt burden, in order to supply fund salaries and other recurrent expenses. Clearly, it is socially suicidal to spend funds borrowed with almost 20 per cent interest, on just salaries and other such consumables, which add little value to mass social welfare. Besides, the burden of a steady increase in accumulated unserviceable debts will unfortunately, invariably, cripple succeeding governments and generations of Nigerians yet unborn.

Ultimately, state governments may also unwisely become apostles of foreign loan accumulation, because such loans optically cost less. However, in the long term, it may become very troublesome to service or repay such foreign loans, if naira exchange rate suffers further depreciation. In such an event, the inevitable ‘monstrous’ allocations to debt service may become suggestive of irresponsible governance of people and resources. Besides, further naira devaluation is in evitable, so long as the Central Bank of Nigeria continues to auction dollars in a market that is undeniably saturated with naira.

In view of the modest incomes of states, isn’t it more realistic for states to determine their own minimum wage in line with their individual capacity?

Yes, this should be the rule in truly federating states, where state administrations do not depend on a federally controlled central purse for 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 (amended).

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

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

Notably, however, the wage structure in the informal, small and micro-scale enterprises subsector is seemingly more flexible and may not respond positively to any law which increases minimum wage to N36,000. Indeed, the labour force employed even by road sweeping government contractors in some favoured states still receive well below the present N18,000 minimum wage.

Ultimately, the net effect of N36, 000 minimum wage will spike the inflation rate, which will, regrettably, significantly reduce consumer spending, and discourage domestic production and ultimately fuel an already combustible unemployment rate, with unsavoury and horrendous social and economic consequences.

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 rate will achieve the same object of an increase in purchasing power across all sectors, and also reduce the cost of borrowing to below 10 per cent, across board for all sectors to 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, the identification of the source and elimination or reduction of surplus money supply will ultimately tame inflation to best practice levels below three per cent so that the cost of borrowing will fall, unforced, to below 10 per cent. Instructively, the scourge of systemic excess naira supply will also become significantly reduced when the CBN stops substituting naira allocations for dollar denominated revenue.

Invariably, if naira rate strengthens below N100=$1, then the present N18,000 minimum wage will exceed $160 in value and yet inflation would recede well below 10 per cent!

 

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