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THE IMPACT OF MINIMUM WAGE ON EMPLOYMENT LEVEL AND PRODUCTIVITY IN NIGERIA
This research work has been carried out to analyze the critical impact of minimum wage of employment level and productivity in Nigeria. A brief literature on wage and its determination was highlighted. Models on minimum wage effect are being look into. This includes research work done by different economist analyzing it (Minimum wage). Data on minimum wage (Independent variables), employment and productivity (dependent variables) were got from the Federal Bureau of Statistics. For better computation of data, the data got was run through the computer using the coefficient of determinants, the student’s t-test and the standard variable, wi-minimum wage variable. This was undertaken to analyze the effect of minimum wage had on employment and productivity. Also, in order to compare data ranging from 1980, 1982 . 1983 and 1984 were used.
Against the background, it is appropriate to mention here that wages and salaries have included the idea of a national minimum wage in their recommendation. Some of such commission include, among others, the Udoji Commission (1972 - 74). The Morgan Commission (1964), and the Adebo Commission (1970 -71). Due to the increase in inflationary rate, trade that are striving for an increase in the minimum wage.
From the forgoing, it becomes clear that the imposition of a minimum wage as regards this research work is being analyzed with the assumption that it would have an adverse effect in the employment level and a positive effect on productivity in the manufacturing sector.
A Review of Wage Theories
He concludes by stressing that “…an understanding of the wage discussions of the past must seek to recreate these features of the context.”
Nigeria has had her own share of the universal argument regarding the ability of trade union to raise wages. Fashioyin, (1980). Generally the argument is a reflection of the fact that wages are consequence of a tangle network of causal factors, isolating and evaluating the contribution of individual causal element in such decision is implicitly hazardous. However, with the restructuring of the Nigerian trade unions movement in 1978 along industrial line thus strengthening them compared to their previous state, one can discern some impact of these union on the wage levels and other employment conditions.
The situation now is that with the limits of productivity, prices and income boards guidelines and the natural minimum wage, the respective industrial union should bargain with the employers to reach collective agreements which must be deposited with the federal ministry of labour. The concessions won for the member by these union within the limits of the above policies then represented the union.
Post 1978 incidence which goes to demonstrate the power of the present industrial unions could wield especially in relations of wages was the 1981 general strike from which workers in the country among other concession won the current 125 Naira minimum wage.
As regards minimum wage legislation effects, literature on this is quite rich with respect to developing countries and relatively nothing for Nigeria. One thing needed to point out from the onset, is that most of the studies on the subject have tended to evaluate the effect of minimum wage laws on terms of employment.
One of such studies is that Olufemi Fajana, (1973). His study was not specifically on minimum wage as such but on “Employment and wage change in the Nigerian manufacturing sector”. The relevance of this comes on mind since it is the robustness of the data sources use for the study. Besides, minimum wage laws in Nigeria context essentially involved upward revision of wages as is in many other countries where this legislation has been enforced and therefore, the study stands as a good proxy of minimum wage effects.
In his study, he postulated, a prior, that relationship between employment and wage change is negative and relied on a model of the sort.
E1 = a1 + d2 wi . . . . . . . . . . . . . . . . . . 1
E2 = X3 + X4 wi + X5 vi . . . . . . . . . . . 2
Where E, wi and vi are respectively, and average wages and value added. The source of data for the study’s estimation of the equation is from the federal office of statistics. “Industrial surveys for 1963 - 1970” for the measures of growth in employment wages and value added average annual percentage increase were calculated, for the relevant period of 25 manufacturing industries. These industries were representatives of the Nigerian economy.
His empirical result shows that there was strong and negative relationship between employment and wages change in the Nigerian industrial sector. Specifically, the result showed that a 100 percent increase in average wages will lead to 23% fall in employment. Thus, the wage elasticity of employment was found to be more than 2. However, the R2 showed a less than 19% of variation in employment explained by the change in average wages. When value added as a measure of out put was included in the equation, it was found to have a very significant effect on employment. His findings were that wages have had some influence in the Nigeria industrial employment growth and that on increasing substitutability of capital for labour in manufacturing sector was explained by relative cheeping for factor price of capital; about by government’s industrial policy. This policy consideration was that in order to increase the absorptive capacity of labours, a policy of labour subsidy would be more appropriate.
Marving Kosters and Finis Welch (1972) have also attempted to study the effect of minimum wage on the distribution of changes in aggregate compliment. Their main concern was to see how minimum wage have differentially affected employment opportunities for demographic groups after getting out cyclical movement and taking long, term trends into accounts. They went about it by developing a model to characterize employment patterns of different demographic groups though time. In their framework, they estimated the effects of minimum wage legislation on the distribution of employment between whites and whites, between males and females, and between teenagers and adults.
On the methodology, their model relied on distribution between employment trends and deviation from trends,. It is of the form:-
Eit = 0Ept + bert + uit . . . . . . . . . . . . . . . . . . . . . . 1
Where Eit is the number of workers in the 1st age, colour, sex class employed in period tjept and Ert are aggregate employment measurement. The co-efficient O and B are respectively, the share of the group in assumed to the transitional employment 1r and B were also assumed to be dependent. On the minimum wage level and extent of coverage. The residual, Unit is introduced into the model as follows:
Log Yit = Log Yoi + zpi Log (1 + ri)……………………………..2
Log Bit = Log Boi + zri Log M + t Log (1 + ri)…………………..3
The trend factor, ri is the long-term growth rate of the employment share for the ith class. The variable M”t is the effective of minimum wage and zpi and zri are the elasticity’s of employment shares with respect to the minimum wage. The data used to estimate the model were quarterly average of seasonally adjusted employment for eight age, colour and sex classes.
From the model, they were able to show that employment share (tit and bit) varied over time because of the trend and because of changes in the effective minimum wage. The overwhelming feature of their estimate was relative vulnerability of teenagers to employment change. Specifically, the 0 per-cent decline in aggregate employment compared to 0.8 per-cent decline for adults. The estimate means that during contraction, teenagers are found at times as likely to loose their jobs as adults. Even within the teenage group itself, non-white were found to be more vulnerable to changes in aggregate employment, the estimate being that at a 1 per-cent decline in aggregate employment by 5 percent.
The model considered a non-linear demand for labour function as:
D = a 1b Xc …. …………………………………………………… 1
Where D is the demand for labour expressed in number of workers. 1 is an index of industrial production for labour; a,b and c are parameters and X is the real minimum wage.
S = dX1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Therefore, is a non-linear supply of labour function where S is the number of workers offering their services and d and f are parameters. Thus, from equation 1 and 2.
(S D) s 1 (a/d 1bXc – 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Since the unemployment rate, U is represented in percentage terms
U = (S - D)/s X 100 and 3 becomes
U = 100 – 100 (a/d) 1aX1 . . . . . . . . . . . . . . . . . . . . . .4
For downward sloping and upward sloping supply functions, C is less than 0 and f greater than 0, so that C – F is less than 0 du/dx is less than 0 using new parameters, 4 can be approximated by the following expression in log from
Invit = Bim + YinX . . . . . . . . . . . . . . . . . . .. . . .5
To estimate the extend of unemployment effect, unemployment elasticity for both race-sex groups, it was found that unemployment elasticity was high.
For teens at 5% significant level was high. This high elasticity was most profound for non-white teenagers. Unemployment effects were also determined after 8, 16 and 24 months by lagging the minimum wage variable in equation 5. All the elasticities were found to be significant at 5% level. The most remarkable feature the lagged estimate was that after 2 years the unemployment effects of a change in the federal minimum wage were quite substantial and in most cases greater than immediate effect. It was concluded that increase in federal minimum wage causes unemployment among teenagers. The effect tended persist for considerable period of time and the effects seemed to be increasing through time.
Hypotheses and Model Specification
(Null) H0 Minimum wage increase does not have a significant positive effect on productivity in the manufacturing sector.
It would be appropriate to point out deficiencies in the data before discussing empirical results. The industrial survey from which the basic data are derived cover only establishments with ten (10) or more employees, the exclusion of smaller ones from the analysis makes it difficulty to generalized the findings.
The data used are aggregate so much that there would be no difficulties in distinguishing which of the establishment is actually complying with the minimum wages legislation and which is not. Also the nature of the data does not allow for the industries, which are labour or capital intensive in their bias.
where E1 = Employment variable
P1 = Productivity variable
Tc = (12.89947 R2 0.878561
Log P1 = 0.826637 + 0.061457 Log W ……………………..6
S.E. = (0.358772) (0.140080) F – Statistic = 0.013802
Tc = (0.117485) R2 = 0.0000599
Log P1 = 423.281 + 0324799 Log W ………………………7
S.E. = (2225.50) (0.022467) F – Statistic – 208.9903
Tc = (14.45649) R2 = 0.900857
Long P1 = 10.8577 + 0.000007 Long W ……………………… 8
S.E. = (10.36434) (0.000104 F – Statistic = 0.004718
Tc = (0.068692.000205)
Log E1 = 0.3756 + 0.96801 Log W …………………………9
S.E. = (0.1714175) (0.077988) F – Statistic = 1540726
Tc = (12.41260) R2 = 0.870109
Log = 0.116089 + 0.187396 Log W ……………………10
S.E. = (0.403596) (0.180714) F – Statistic = 158972
Tc = (1.596160) R2 = 0.015217
log P1 = 0.082007 + 0.611901 Log W ………………….12
S.E. = (0.288435) (0.103032) F – Statistic = 35.27060
Tc = (5.938906) R2 = 0.602895
Log P1 = 1.2990667 + 0119016 Log W …………………….. 13
S.E. = (0.899805) (0.378146) F – Statistic = 0.003441
Tc = (0.05866) R2 = 0.000149
Log E1 = 458.5148 + 0.265274 Log W ………………………..14
S.E. = (36907.89) (0.396860) F – Statistic = 0.499042
Tc = (0.70614) R2 = 0.021235
Interpretation of Result
In 1982, minimum wage had a positive impact on employment. This result is not as expected theoretically, increases in minimum wage should have a negative impact on employment level. The result is similar to that obtained in 1980 where a similar positive relationship was observed between minimum wage and level of productivity as seen in equation 6. In equation 7, the coefficient for minimum wage does not beer the apriori sign, the coefficient is positive signifying that as minimum wage increases the level of employment increases. This contradicts the theoretical expectations.
In equation 8, a positive relationship is observed between minimum wage and productivity. The implication is that an increase in minimum wage leads to an increase in the level of productivity. From the result of 1982, it can be observed that equation 5 and 7 have characteristically high coefficients of determination (87% and 90% respectively). The implication is that the 2 equations can be relied upon for predictive purposes since the goodness of fit are satisfactory. The opposite in the case for equation 5 and 8, where the coefficients of determination are approximately 0 (zero)
Coming from the year 1983, the results are similar in equation 9 and 11 for example the same positive relationship is observed between minimum wage and the level of employment meaning that in this year, increase in minimum wage still has same effect of increasing in employment. This result does not conform to/with expectations for reasons previously stated.
Considering equation 10 and 12, a positive relationship is observed between minimum wage and productivity. This result supports the theoretical expectation. With respect to equation 10 and 12, the coefficient of determination (12% and 1%) respectively. The implication is that the equations are not very useful purpose of prediction. The opposite is the case in equation 9 and 11, where coefficients of determination are above 80% in both equations, meaning that both equations are reliable for prediction purpose.
In the case of 1984, with respect to equation 13 and 15 a positive relationships is observed between employment and minimum wage, meaning that increases in minimum wage leads to increases in employment level, the result is not theory is that there should be negative relationship between minimum wage increases and level of employment.
The result of equation 14 and 16 contradicts the actual productivity decreases. This result in different from earlier results obtained in 1980, 1982 and 1983 the coefficients of determination for equation 13 and 15 are quite high. In equation 13 for example the coefficient of determination 60%. This means that 60% variation in employment is explained by changed in minimum wage. The result is reliable and useful for prediction. In the case of equation 15, the coefficient of determination 82%, meaning that the equation 14 and 16 where the coefficient of determination are 0 and 2% respectively. The goodness of fit is low meaning that the equations cannot be reliable for prediction purposes.
The student t-test was also carried out in order to determine if the independent variable (minimum wage) is statistically significant. The result shows that except for equation 2,6,8,12,14 and 16 the minimum wage variable are statistically significant. The F-Statistic test is being used to test the over-all significance of the regression, in this case, if the calculated F is greater than the F tabulated at the given degree of freedom, then the effect of the independent variable (minimum wage) is significant and can be relied on for policy recommendation. This has already been achieved by the use of the student T – test.
Conclusion and Recommendations
One of the aims of this study is to make recommendation based on the findings. In the light of the above the following are recommended.
As regards employment it is obvious that the importance of a policy if industrial wage restraint as an instrument for stimulating industrial employment in Nigeria is low. A policy of subsidy (such as tax holidays and tax allowances for pioneer industries) rather than wage restraint, it appears to be more relevant for attaining the objective (employment stimulation).
The government should embark on and stick to policies that will make the Nigerian manufacturers take the issue of increased productivity more seriously and ensure that apart from the wage and salaries of workers they should be provided with no-wage benefits. This will more than anything else lead to higher productivity of workers,.
Evidence has shown that a number of employers are not conforming with the government legislation on minimum wage. Because of the inability to pay and the staff or worker as well are willing to be underpaid instead of being without jobs. In this case, it would be better of if minimum wage is determined through collective bargaining instead of the government unilateral fiat.
A more realistic minimum wage should be determined, one that would put a verse majority of people above subsistence level so as to increase the productivity level.
Based on the finding of this research, no basis exist to suppose that the minimum wage is the sole factor accounting for high rate of unemployment being experience in Nigeria. Although, it was expected to be so, while it support that is has led to a lower employment growth it still does not have enough basis for its abrogation (minimum wage).
Koster M and Welch F. (1972), The Effect of Minimum Wage on the Distributional Changes in Aggregate Employment. American Economics Review, Page 323- 432).