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The impact of minimum wage increase on labour cost

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With the unemployment rate at over 18 per cent jobs should be at the centre of any policy discussion. The high unemployment rate looks even worse if you consider the underemployment rate, that is, workers who are in jobs that are not up to their requisite qualifications. The joint unemployment and underemployment rate is above 40 per cent and reducing this should therefore be central to policy.

Reducing unemployment, from the perspective of the businesses who employ people, is all about the costs and quality of labour. Wage levels are still considered the most important factor internationally, in terms of where to locate business, especially in sectors that have high labour absorption capacity. So how costly is labour in Nigeria relative to other countries?

Although studies doing such international comparisons are few and far between, some do exist. Giuseppe Iarossi, an economist at the World Bank (I know but please don’t shoot the messenger) tried to come up with comparable measures of labour costs across countries. From his research, labour costs in Africa were about ten per cent higher than they were in East Asia and up to 40 per cent higher than South Asia. Labour costs in Nigeria were significantly higher than in India, Vietnam, and Thailand, and this was before you included, “invisible costs.”

Of course, a big part of this is the cost of living. If the cost of living is high, then wages will on average be high. If you have to employ labour in an environment where cheaper food imports are heavily taxed, or where transportation of goods has an illegal police tax mark-up, or where housing is difficult due to land transaction problems, then the associated labour costs in that place will probably be high too.

From a quality of labour perspective, we are not particularly great either. You don’t need to look too far if you are in the construction industry in Nigeria to see that workers from our neighbouring countries typically bring an added quality component. Nigeria’s labour productivity statistics on average don’t stand out in comparison to our peers.Many other things count in terms of creating jobs and reducing unemployment, but the cost of labour is perhaps one of the most important.

Learning from past mistakes
Speaking of labour costs. In hindsight, one of the things that hamstrung the Goodluck Jonathan administration was the decision to hike up wages prior to the elections in 2011. The action was cloaked as a hike in the minimum wage from N7,500 to N18,000. In reality though, it was a wage increase for everyone with those at the top getting an even larger increase in salaries in percentage terms.

The action was politically expedient as it boosted his popularity, especially within the labour union segment. Unfortunately, the consequence was that, by the time the elections had come and gone, we were borrowing to pay salaries. Before he put in a cabinet or crafted economic policy, he had already hamstrung his government with a wage bill that the Federal Government is still struggling to live with.

Fast forward to 2018 and the scenario is back again. With elections around the corner, there are rumours of another wage increase. Again, it is touted as an increase to the minimum wage but in reality, it is an increase to all wages. I have not seen the breakdown, but I would bet money that the increase for those that are the top of the ladder will be just as large in percentage terms.

Of course, this time we are already in a scenario where we are effectively borrowing to pay salaries, and where the federal government is spending a significant fraction of its revenue on debt servicing. Will we learn from our past mistakes and carefully consider the effect of the suggested wage increases before we pull the trigger? Or will we dance on the altar of political expediency again and hope to deal with the problems after elections. Your guess is as good as mine.

From an unemployment perspective though, wage increases are likely to feed in to the rest of the economy and make us marginally less competitive. And if we are in the businesses of attracting labour intensive businesses that can help dig us out of our unemployment challenge, then we need to start to think seriously about labour costs. Maybe we should direct our efforts on improving the standard of living of workers towards the cost of living instead.

Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa. The opinions expressed in this article are the author’s and do not reflect the views of his employers.


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