FDC Whispers – May 24, 2024

Dear Subscriber,

Smoke and Mirrors – Is the minimum wage review a silver bullet?

The minimum wage dialogue currently taking place in Nigeria has become an acrimonious negotiation. While some advocate for inflation-wage indexing, where wages and prices are adjusted to align with inflation rates, others are firmly against it. There is no evidence that countries that have employed the indexation model, ranging from Brazil to Argentina and Israel, have ever succeeded. Nevertheless, there remains a wide gap between the federal government’s offer of N57,000 ($38.40) and organized labour’s demand of N500,000 ($336.70).

A general misconception is that the labour market consists solely of the government on one side and employees on the other. Meanwhile, the minimum wage law also applies to the organized private sector, the government, and even the informal sector. Therefore, the implications of the minimum wage extend far beyond government expenditure. A stalled negotiation means that the indexing parameters will continue to change to the detriment of the workers. Thus, it is crucial to reach a reasonable and swift resolution. Justice delayed is justice denied.

Structural inflation requires a productivity boost

Nigeria’s inflationary pressures are multifaceted, requiring more than interest rate hikes to effectively curb inflation. One way to mitigate the inflationary impact of minimum wage increases is by ensuring a subsequent rise in output. In India, regular minimum wage reviews by federal and state governments have had a modest inflationary impact, ranging from 0.1% to 0.4% for a 10% wage hike. This has been achieved through productivity gains and technological advancements that offset higher labor costs. To ensure similar results in Nigeria, increased collaboration between the government and private sector is needed for empowerment programs that provide skill development and employment opportunities. Additionally, collateral-free credit support can shield businesses from the impact of a wage increase. These policies must be a focus, alongside the minimum wage review, to avoid a wage-price spiral in the economy.

In this latest edition of Whispers, the FDC Think Tank takes a deep dive into recent economic developments and their impact on your business and corporate strategy.

Enjoy your read!