- Ikemesit Effiong, an analyst at SBM Intelligence, says increased minimum wage will further heighten inflationary pressures
- He noted that there may be job cuts, especially by private employers, in order to meet a new and increased wage bill
- Effiong recommended tax harmonisation, import duty reduction and food subsidisation as short-term remedies
Mr Ikemesit Effiong, Head of Research at SBM Intelligence, has said a new minimum wage will increase inflationary pressure in the country and lead to job cuts, as employees will have to increase their wage bill.
In a telephone interview with TheRadar, Effiong said the increase in the minimum wage will first push up the spending power of low-income earners who tend to spend more on food and necessities, leading to more demand for goods relative to low supply.
He said, “The first is that it would increase the spending capacity of low-income workers and what economic research has shown is that lower-income workers tend to spend a larger proportion of their earnings rather than save it. So, that would mean that obviously all of this new spending will go into the economy and aggregate demand would rise relative to supply.
“Now in an environment like Nigeria’s where supply is constrained by infrastructural challenges, by insecurity and also by regulation, which makes the cost of production, whether it is of articles or of agricultural products, a bit more expensive, that would lead to what economists call demand-pull inflation, which is that the rise in demand incentivises producers to increase the price of what little goods they are able to bring to the market.”
It will be recalled that after weeks of negotiations to decide a new minimum wage for the country, the organised labour and the Federal Government, on Thursday, July 18, agreed on N70,000.
The amount, which is 133 per cent higher than the last minimum wage of N30,000, is N545,500 lower than the initial N615,500 demanded by the organised labour.
Inflationary pressures will be exacerbated
As more money becomes available to spend, Effiong foresees a further exacerbation of inflationary pressures. Nigeria’s core inflation and food inflation rate have been surging, reaching a new 28-year high of 34.19 per cent and 40.47 per cent, respectively, in June 2024, despite the efforts of the Central Bank of Nigeria (CBN) to rein in inflation by upwardly reviewing interest rates.
Effiong noted that merely increasing the minimum wage in a high inflationary environment without plans to expand the economy to absorb excess liquidity will only lead to a surge in inflation and further push for more minimum wage increases.
He said, “Increasing the minimum wage does not necessarily, in the long term, in the short term it could, but in the long term, it generally does not increase the earning or spending capacity of employees because inflation often rises to match the new minimum wage and then you have a situation where inflation has eaten the effect of the increased salaries, and labour as well as public sector employees, begin to demand another minimum wage rise. That is why we have to review the minimum wage often.
“It shows that merely giving people more money to spend in a higher inflationary environment does not solve the problem; it just enhances the problem, makes inflation that much more capable of catching up with people’s earnings and then they want more money. And so we have this conversation every four to five years, unfortunately.”
Job cuts may be imminent
The analyst also noted that with a higher minimum wage, employers, especially in the private sector, may have to lay off some employees to shore up their wage bill.
Effiong said this will further add to the unemployment rate in the country, which already rose to five per cent in the third quarter (Q3) of 2023 from 4.2 per cent in Q2 2023. Recall that the National Bureau of Statistics (NBS), in 2023, revised the unemployment rate assessment methodology, which saw the unemployment rate drop from 33 per cent in Q4 2020.
He said while job cuts may not happen in the public sector, private sector employers, who also have larger employees, may be forced to go the job cut route to match the new minimum wage.
Effiong said, “For a vast majority of Nigerian businesses, this new minimum wage rise will generally not affect them. But for the Nigerian businesses that belong to large enterprises, which are already labouring under all of the traditional infrastructural challenges, things like power, things like roads, as well as insecurity, as well as foreign exchange challenges, the difficulty with which to import and even export goods out of Nigeria, this is going to be another additional cost pressure on them, which, in many ways, what you see is this cost pressure often incentivises employers to cut down the size of their labour pool.
“So, there will be retrenchment, there will be sacking, there will be resignations, whether voluntary or forced, in order for the people who remain to get a pay bump. So, even if salaries increase on the private sector side, it often comes at the expense of labour participation, that is the total number of people who are employed.
“In a way, one of the after-effects of increasing the minimum wage may be to somewhat bump up the unemployment rate, especially the private sector employment rate. Why you really don’t see this effect happen often in the public sector is that there are very strict and stringent rules under the civil service regulations that govern the government’s ability to fire or retrench or to compel people to resign.”
Import duty reduction, tax harmonisation and food subsidisation for low-income earners are ways forward
To forestall the economy's further decline in the face of an increased minimum wage, Effiong called for a suspension or reduction in import duty charges, harmonisation of the many taxes in the country, and subsidisation of food for low-income earners.
Recall that these were some of the recommendations of the Presidential Fiscal Policy and Tax Reforms Committee in May, which made a case for the taxes and levies collected by the three tiers of government to be streamlined and harmonised into eight headings.
Chairman of the committee, Taiwo Oyedele, said the recommendation is to make tax administration modern, simple, adaptive and enable economic growth.
He also said the Federal Government is working towards a system that will exempt 95 per cent of businesses in the informal sector that mostly earn N25 million or less yearly from paying all taxes, including withholding tax, company income tax and payroll taxes.
Recall also that the Federal Government recently announced a 150-day import duty suspension on staple food as well as dispatched 740 rice trucks to states at 20 trucks for each of the 36 states and the Federal Capital Territory, Abuja.
Effiong said, “In the short term, things that we can do would be to either reduce or temporarily suspend duties on imports and exports. It incentivises Nigerian companies and producers to produce things for the overseas market, earn in foreign exchange, repatriate it or bring it back to Nigeria and then they have more naira to invest in their business, pay salaries, pay taxes, etc.
“With respect to imports, temporary suspension or a reduction in import duties will empower importers to at least bring in food. When the food supply is increased, it is predictable and it is not subject to variations and changes, then economic actors, both on the supply-producer side and on the consumer side, can feel confident enough in their ability to get goods. It will reduce the pressure on food prices, and food prices will come down.
“Then we can directly subsidise consumption at the lower-income level. The Federal Government has a clear idea of which public sector workers earn the minimum wage within the public sector. Why not have a targeted food welfare scheme that is well designed, that is well run and targets people at that level so that you are directly giving them food or you are directly giving them the resources for them to buy food at a subsidised level so that it curtails the inflationary effect of just increasing, both directly and indirectly, everyone’s salaries.”
“70k is an insult, can’s buy bag of rice”: Nigerians lament new minimum wage
Meanwhile, TheRadar reported that following the announcement of the new minimum wage by the Federal Government, Nigerians had dissected what it means for citizens and the economy.
Many Nigerians expressed displeasure with the announcement, saying it doesn’t make a difference. Netizens also noted that the minimum wage in 2015, which was N18,000, is better than the N70,000 in 2024 because of the impact of inflation.
