At a time that politics is dominating national discourse, the current agitation by organised labour for a new national minimum wage seems to, once again, draw attention to the economy.
Many state governors claim they do not have the capacity to implement a new wage floor of N30,000 for employees. But Labour leaders disagree taking the view that it is more about the willingness to implement, requiring cutting costs and prioritising spending, than the ability to pay. The fact that real wages have dropped drastically in Nigeria since the current N18,000 minimum wage came into force in 2011 is not in contention. As evidence, the average inflation rate in Nigeria was 16.5 per cent in 2017 compared to 10.8 per cent in 2011 according to the National Bureau of Statistics.
Also, the naira/dollar exchange rate which feeds into the rate of inflation, thereby impacting purchasing power, has moved from about N162 to N360 over the same period. Certainly, the current minimum wage has not kept pace with trends in the cost of living and the erosion in purchasing power has created a situation where a lot of low-paid workers live in abject poverty.
One major criticism of a minimum wage hike is that it would result in a demand-pull inflation and complicate monetary policy. On this score, the evidence is scanty. When the National Assembly amended the National Minimum Wage Act in February 2011, increasing the minimum wage from N7,500 to N18,000, average inflation rate actually dropped from 13.7 per cent in 2010 to 10.8 per cent in 2011 and further down to nine per cent in 2016. It was not until 2016 that inflation spiked to 15.7 per cent on the back of an increase in both the pump price of fuel and electricity tariff. What is clear from quarterly reports of the National Bureau of Statistics is that inflation in Nigeria is more from cost-push than demand-pull factors.
It goes without saying therefore that the cost of energy and transport are among the greatest inflation drivers in Nigeria today not least because these cost elements directly or indirectly impact the prices of commodities due to the tendency for other sectors of the economy (even with no link to petrol) to take advantage of any increase in transport costs. This fact is corroborated by various communiqués issued by the Monetary Policy Committee of the CBN which have not failed to note the “structural factors driving the sustained pressure on consumer prices, such as the high cost of power, energy and transport factors”. In this regard, the key to bringing about a low inflation environment is fixing infrastructural bottlenecks to reduce the cost of doing business in the country.
A sunny side to the new minimum wage that is often overlooked is its potential for impacting positively on the capital market and financial markets in general. This is due to the fact that not all the increase in income will be consumed. Much as consumption, a positive function of the absolute level of current income, is bound to increase, John Keynes, a famous economist, in his “General Theory” published in 1936, points out that consumption expenditure does not have a proportional relationship with income. Consumption actually increases by less than the increase in income implying that the average propensity to consume falls as income increases. It has been established in empirical literature that marginal propensity to consume varies between zero and one. The implication is that any increase in income is partly consumed and partly saved. The import of this is that a part of the increase in minimum wage is likely to be saved. A lot of workers who have borrowed from their cooperative societies will be put in a better position to liquidate such debts. Many others are bound to increase their monthly savings contribution. Such savings will likely flow into financial markets especially the capital market where uptake in government savings bonds, pension funds, mutual funds, assets of cooperative societies and all manner of collective investment schemes are expected to receive a boost.
Expectedly, Nigeria’s pension assets under the Contributory Pension Scheme which is currently in excess of N8tn will grow from increased contributions bearing in mind that a majority of low-paid workers in Nigeria are below 49 years. According to the NBS, “Pension Asset and Membership Data (Q2 2018) report, participants within the ages of 30 to 39 had the highest percentage composition closely followed by participants within the age bracket of 40-49 while those above 65 years had the least percentage composition. The new minimum wage will also support the implementation of micro-pension scheme by PenCom which is expected to accommodate more contributors. Furthermore, the new minimum wage holds a lot of promise for financial inclusion in Nigeria. The National Financial Inclusion Strategy was introduced in 2012 with the goal of reducing the number of Nigerians without access to financial services from 46.3 per cent to 20 per cent by 2020. The new minimum wage increases the chances of the financially excluded to participate in the financial system. Through financial empowerment, it presents a huge opportunity to improve access to and use of Smartphones/devices, which is a platform for improving financial services.
Just like in the United States where studies have found a strong positive correlation between rising wages and equities prices, a higher wage floor in Nigeria is bound to have a salutary effect on stock prices in Nigeria. This is because with a rise in income, households have more money to spend. This growth in consumption could increase corporate sales and corporate earnings, especially if costs remain stable, potentially leading to an increase in stock market activity.
Overall, the new minimum wage is positive for the financial markets and the capital market in particular. It does appear to be the missing piece of the post-recession growth trajectory. The growth in GDP is still weak due in part to weak aggregate demand and therefore one way to stimulate the economy should be by implementing the new minimum wage. Given the continuous decline in economic activities evidenced by sliding GDP growth rates and relatively low inflation rate, the economy can absorb the new minimum wage without any significant knock-on effect on price levels and employment.
In view of the nature of the current fiscal federalism in Nigeria which places the Federal Government at a dominant position with respect to revenue allocation, (under the current revenue allocation formula, the Federal Government receives the lion’s share of 52.68 per cent leaving the 36 states and 774 local government councils to share 26.72 per cent and 20.60 per cent respectively), the Federal Government should explore ways of assisting sub-national governments to implement the new wage floor. In return, the Federal Government should demand from state governments concrete plans aimed at improving states’ Internally Generated Revenue as well as enthroning transparency and accountability in the management of their finances.