What Happens If The Newly Inaugurated

President Buhari’s Government Decides To Reduce The Minimum Wage From

N18,500.00 To N9,250.00?

(Seminar on Macro-economic Issues) By

Ogwuike Philomena C.

20th August, 2015

Introduction What is a minimum wage? Wage and salary are income derived from

human labour which cover all compensation to employees for physical or mental work.

Compensations include paid vacations, holidays, sick leave, fringe benefits and pensions or health insurance sponsored by the employer and may include stock options, many of which are linked to individual or group performance.

ILO denotes minimum wage as legally

enforceable lower limits to wages fixed by a process involving the authority of the state.

Abudu (1987) opines that the national minimum wage is the lowest wage legally payable in an economy.

Minimum wage must have the backing of the law and cannot be set aside by individual contract or collective agreement. Minimum wage, however, differ in nationality and application (ILO 1986)

Rationale for Minimum wage

Fixed worldwide so that workers earn "decent" wages at a particular time and place.

To eliminate exploitation, reduce poverty, remove unfair competition, ensure equal pay for equal work; preserve purchasing power to the worker, prevent industrial unrest, and also to promote economic growth and stability

Fixing and implementation Wage should be adequate to maintain a

reasonable standard of life ILO Legal consideration at fixing minimum

wage: Needs of workers comparable wages and incomes, relative capacity to pay requirements of economic development Government order (Akinwale, 2000) cost of living collective bargaining impact of fluctuating demand and supply of

labor.

In Nigeria, modern sector wages are determined and regulated by administrative decisions of government, wage commissions, and prices and income policies (Fapohunda , 1979).

In addition, the traditional (mainly rural and informal) and intermediate sector wages are influenced to a large extent by market forces and to a lesser extent by wage levels in government establishments.

Colonial government encouraged collective bargaining with minimal government intervention and official recognition of trade unions as legal institutions. The government ruled out employers bargaining collectively with unions (Fapohunda, 1979).

A total of 13 legal commissions have been established to date:- (1) Bridges Committee of Inquiry 1941

(2) Tudor Davis Commission 1945 (3) Harragin Commission 1946 (4) Miller Committee 1947 (5) Gorsuch Commission 1955 (6) Mbanefo Commission 1959/60 (7) Morgan Commission 1963/64 (8) Adebo Commission 1970/71 (9) Udoji Commission 1972/74 (10) Damachi Tripartite Committee 1990 (11) 19-Man Presidential Committee 2000 (12) Wages, Salaries and Emolument Relativity

Panel 2004/2005 (13) Consolidation of Public Sector Emolument

Panel 2005/2006

First eleven commissions used changes in the cost of living indexes rather than productivity changes for granting wage increases in response to the prevailing inflationary pressures which often reduced workers’ real income below requirement for basic necessities of life.

Legal recognition of Minimum wage in Nigeria Nigeria as ILO member country is bound by

minimum wage fixing machinery conventions of 1970 which ensures workers’ minimum wage protection regardless of the sector of industry.

Methods of Fixing minimum wage. Acts of the legislation , delegated and

designated boards with power of effective recommendation and final decision making authority (Kester, 2002) with the sole discretion regarding wage interpretation and application.

The authorities should provide all the interest parties with the opportunity to express their views on social problem and possible economic repercussions (AJLS, 2002).

The decision-making should take the form of bargaining to accommodate the position of the different interest groups represented ILO (1986)

Should be a frequent adjustment to the

minimum wages, in line with labour market trends, (AJLS, 2002).

Ensure that timely adjustment are actually made in line with consumer price and income indexation.

Challenges in smooth running of minimum wage in Nigeria

There is unorganized traditional sector, fairly ownership of enterprises, small-scale undertakings, labour intensive, adapted technologies, and unregulated labour market.

Wage determination policies in Nigeria

Udoji Commission made about 12-30% increase in wages and salaries to boost purchasing power of government workers in the 1970s which later led to inflationary.

In 1977, an Agency was set to resolve wage and salary problems.

1981, an Act of parliament increased minimum wage by 50- 100%.

In 1985 deductions ranging from 2% to 15% was made from all incomes to Central Bank over 15-months

Deductions were from rents, dividends , wages and salaries in both private and public sectors.

These deductions were intended to reduce domestic absorption to ameliorate macroeconomic imbalance in the economy. The junior workers were however refunded at the end of the 15-month economic emergency period.

In 1986 government amended 1981 Minimum Wage Act by exempting persons or companies employing fewer than 500 workers and persons employed in agricultural projects from its provisions.

In 1987 the amendment was rescinded owing to labour protests in major cities across the country.

In 1991 there was amendment. Each government department was advised to pay according to its ability.

In 1993 an increase of 45% was effected in public sector workers’ salaries meant to cushion the inflationary effects of the rapidly depreciating naira.

Theories Underpinning Wage determination

Subsistence theories wages paid to workers should suffice for their

family support. Smith The “natural price” of labour is the price necessary

to enable the laborers to subsist and to perpetuate the race. Ricardo

But endogenous influences like pressure group action, inflation, demand force affect wage. Thus, the subsistence theory concludes that wages would always be driven down.

Neoclassical economic theory of wage determination

No single economic force governs wages, wages are determined by workers, employers, and unions, who negotiate to determine these conditions. The bargaining theory

of wages

This defines the endogeinity of forces of labour which is highly responsive to the irrationality trait of humans

Price theory of wage determination under competitive market

Supply and demand law of price determination in a market concludes that in a competitive market, the unit price of labor will vary until it settles at a point where the quantity demanded will equal the quantity supplied, resulting in an economic equilibrium for price and quantity

Response of supply and demand

forces to changes in the minimum wage

Where P= price of labor (Minimum Wage) Q= labor force; SS= Supply curve, DD=Demand curve

P

PE

P2

P1 S

D

QS1 QD2 QE QD1 Qs2

S2

E

D1

S1

D2

O

S

D

Q

At equilibrium price (PE) the market clears at equilibrium labor level, 0QE.

Suppose the government increases the minimum wage to P1. Existing wage fund only suffices for 0QD1 causing excess supply,

D1ES1 or unemployment.

Suppose the government decides to reduce the minimum wage from PE to P2 instead. Employers would be capable to pay for more labour but less people will be willing to work.

There will be excess demand defined by the area of the triangle S2 S2ED2 leading to unemployment

Distribution theory of income

The theory of distribution established that the top 10% of income receivers get between 25 and 35% of the national income; and the lowest 20% get about 5%.

The inequality shows to be greatest in poor countries and diminishes somewhat in the course of economic development.

Implications of reducing minimum wage by half

The non agitation of labor over N18,500 minimum wage over time is evidence that it subsisted. Consistent with literature, the internationally reduced purchasing power of Naira instead demands reviewed policy in favor of an increased minimum wage.

Should the government decide to reduce the wage rate from N18, 500 to N9, 250 (i.e. 50%) then the rationale for minimum wage according to ILO will be defeated.

Since the government order is not the only legal actor in fixing minimum wage, there is going to be a spontaneous agitation by the other parties e.g. labor union, pressure groups, and at the extreme end the international agencies e.g ILO until perhaps the deduction is rescinded

Most importantly, because such wage level will be below subsistence, a hungry pressure group will certainly rise in demonstration to instigate internal unrest in the country.

Moreover such a reduction cannot make any

significance change in the national economy since minimum wage constitutes only about 5% of the national income. It can only impose negative welfare and social effects directly on the victims.

The induced increased unemployment rate will promote increased unskilled labor which will be a threat to the long run national economy.

At the wider political level the internal unrest instigated could draw the sympathy of the international agencies which may take some unfavorable policy actions against the country e.g ILO.

This will have negative effect on the capital market especially in the rural areas where farmers supplement their livelihood with income from unskilled labor.

Effect on the money market: since the

purchasing power of Naira is already low against foreign currency, reducing minimum wage would temporarily lead to deflation where there will be shortage of money especially among the poorer populace. This will impede other business transactions leading to hardship, hunger, strife and unanticipated health and life hazards.

However since Nigerian Agro-industry is characterized by informal setting this may not affect Agric labor directly but may induce multi-faceted social ills that may affect labor productivity.

Conclusion

Government has the statutory right to reduce minimum wage but with demonstrated due process.

Moreover Government single handedly reducing MW to N9,250 will lead to disequilibrium point for labour and so induce unemployment. So natural forces (or unseen hand according to Adam Smith) will eventually force the MW back to initial equilibrium (N18,500) or point above it but never below.

50% reduction is unethical and will practically increase poverty, rub purchasing power of workers, instigate industrial unrest, and deter economic growth and stability

Study Recommendation Since 25% of labor (within maximum

wage) earn 35% of national income, it would rather be of more significant economic relevance if the Nigerian government should reduce maximum wage or salary instead.

Thank You for Listening