04/06/2024
*The Real Cost of Minimum Wage in Nigeria*
*By Karl, Founder and IT Consultant at Transingenium*
*June 4, 2024*
*What is minimum wage?*
According to Oxford dictionary, "it is the lowest wage permitted by law or by a special agreement."
In other words, — the price floor below which employees may not sell their labour.
*What is inflation?*
In simple economics, inflation is a general increase in the prices of goods and services in an economy
*Let us put it all in context.*
Tayo is a secondary school dropout. He has no WAEC, no educational certificates, probably just his birth certificate and local government. He applies to work at Shoprite as a cleaner or a staff who stocks the shelves. Now, that job does not require Tayo to be educated to complete. Any adult who is sane can do the job. The thing is, if I need to clarify the employer, Tayo cannot be paid less than the minimum wage.
Let's take the current situation of Nigeria into consideration. Say a minimum wage for Tayo is ₦65,000 per month. This is from the previous ₦30,000 per month that was paid to Tayo. So we can say Tayo had a salary increment, or even a promotion. You and I know that promotions and salary increments happen when a business has performed well and they want to say 'Thank You' to the employees that made this possible.
In this case, the business was 'forced' to increase Tayo's salary. We will revisit the impact of this later in this article.
But first, let us rewind to the genesis of what may be a much bigger problem down the line, Inflation.
Back in 2023, specifically on the 29th of May, the president announced an immediate end to fuel subsidy. Given the statistics and reasons put forward, it clearly was the right thing to do. So removal of fuel subsidy, Check ✅.
But then, as a result, petrol immediately skipped from between ₦100 and ₦200 to between ₦600 and ₦700. That's almost a 400% increment. Now that touched the core of many, if not all businesses. One way or the other, every business depends on fuel. Whether it is to put in the generator, or fuel the car of the boss, or fuel the bike and taxi that will transport the employee to work. So there was a general increase in expenses.
Businesses need to stay profitable. As a result, prices of goods and services went up to support the extra expenses as a result of fuel price increment (Right - Remember this? Inflation).
Keep in mind that we are still at ₦30,000 minimum wage at this point. Businesses had to make more money to pay this minimum wage and offset expenses resulting from fuel subsidy removal.
It is already becoming clear that the end consumer or the 'employee' is taking the hit. No one is talking about offsetting their extra transportation cost, a.k.a salary increment.
Remember that prices are going up NOT because employees went on strike to demand wage increment. Stay with me.
As if that was not enough, the government went on to devalue the naira. A dollar which sold between ₦400 to ₦500, started selling between ₦1,400 and ₦1,500. The Nigerian economy depends heavily on importation of raw materials and finished products, some really very essential.
As if the strain due to fuel subsidy removal was not enough, businesses were now faced with a higher cost of restocking. Initial profit margins diminished. Instead of ploughing back profit to grow and expand, businesses were faced with the challenge of pumping extra capital into their business to stay afloat. Unfortunately, smaller businesses that lack access to capital or funding could not make it. Meanwhile those that made it had to find a way to balance cost. That's right, you guessed it -- hike prices of goods and services just to break even. You guessed it right again -- more inflation.
Keep in mind that at the time of writing this article, the inflation rate was already at 33.69%. That's high.
And we are still at a ₦30,000 minimum wage at this point. Despite the tough conditions, Nigerians developed resilience amidst promises of a better economy. They devised strategies to cope and most of the time, turned down smaller paying jobs. This was seen by the high rate of employee turn over in many businesses.
Fast forward to today, there is another increase in electricity tariff. That too is worthy of our cat and mouse game which always adds drops to our inflation pool. But it does not stop there. The Labour union is asking for a raise in the minimum wage. They want ₦494,0 per month and the government is counter offering ₦60,000. You think the ask is unreasonable?
Whatever amount is arrived at is not my interest in this article. I am more focused on that fact that as long as the same underlying problem persists, any increment in the minimum wage would only lead to more inflation. Read my words - "as long as the same underlying problem persists".
What is that underlying problem? The fact that beautiful policies and decisions were made around fuel subsidy without taking into consideration measures to absorb the shock. There could be a progressive removal of the fuel subsidy over a period of 3 to 4 years, OR a full removal accompanied by a head on approach in developing the transport infrastructure.
Nigerians devised strategies to cope, but what they could not take is having to earn ₦50,000 a month and use up ₦36,000 on transportation. As much as we import a lot of products, it is safe to say that there are a lot more products and farm produce whose supply chain has only been affected by the hike in fuel price. Their prices increased significantly due to logistics costs. It's a ripple effect.
Remember Tayo and his employer? Let's revisit. His employer is not motivated by business growth and affluence to increase his salary by more than double. It's a 'coerced' action. Keep in mind that Tayo is down the line as far as the hierarchy of employees go. So there's expected to be a proportionate increment in the salaries of other employees as you climb up the rungs. Of course, the accountant will tell you they cannot earn the salary of a cleaner. See where this is going? That's right - the business has to take this one. History has shown us repeatedly that businesses stand by the mantra that they have to be profitable. So never think for a second that any business would absorb this one and take one for the team. No way! They'll do what they do best. One of two things;
- Cut down on the employee pool (So we can expect more layoffs), Or
- Transfer the cost to the end consumer.
Why am I not surprised that they will go with the latter? Hike their prices again (I hear more inflation comrades knocking at the door) so that they can increase revenue and be able to pay their employees.
Now we are back in the same cycle, only this time with triple the inflation. Soon, Tayo's salary increment would be met by a proportionate increment in prices of goods and services and Tayo would be right back where he started, or probably worse. Without addressing the underlying issues, wage increments would just be going down a rabbit hole and the economy would keep making rounds until a bottle of water sells for ₦10,000. Then we will have arrived. Remember Zimbabwe? Alright.
I am no political expert, neither am I an economists. I am just a mere IT business consultant and software engineer. But it does not take brains to realize that adding two numbers always gives you a number higher than either. That said, I am in no way an adviser of the government, but I'll tell you to focus on the transport infrastructure to caution the fuel subsidy removal, putting in as much as you have to make it easy and extremely convenient to move from point A to point B anywhere in Nigeria. Achieve that and sit back and watch how Nigerians would turn things around for the economy, all by themselves.
This is not all it takes, but there has to be a starting point.
If not, any negotiations would be a sweet tooth at the moment, but the effects and consequences would catch on faster than you know and with more devastating consequences.
My Two Cents.
