impact of minimum wage and unemployment on … · clamoured for an upward review of the national...

Sahel Analyst: ISSN 1117-4668 07

IMPACT OF MINIMUM WAGE AND UNEMPLOYMENT ON

PRODUCTIVITY IN NIGERIA

Ahmed Funmilola Fausat

[email protected]

Yusuf Adamu Baba

[email protected]

Adeshola Funmilayo Gift

[email protected]

Abstract

This study analysed the impact of minimum wage and unemployment on

productivity in Nigeria from 1994 – 2014. Ordinary Least Square (OLS) regression

model was employed in analysing the data obtained from the Central Bank of

Nigeria, Index Mundi and CIA World Fact Book. It was found that minimum wage

has a significant positive relationship with productivity while unemployment

exhibited a negative relationship though not very significant. Therefore, the study

recommended that minimum wage should be determined through collective

bargaining which will foster a good labour/employer relation thereby improving

productivity and employment in the economy. Also, a fund should be provided to

assist graduates with creative and entrepreneurial skills so that they can be self-

employed and also power, transport infrastructure, quality educational institutions,

credit facilities for SMEs, scientific and technological capabilities should be

addressed so as to create more employment opportunities.

Keywords: Minimum Wage, Productivity, Unemployment, Collective Bargaining,

Labour Force.

Introduction

Wage is the reward for labour. It is the monetary compensation given by the

employer to the employee in return for work done on an hourly, weekly or monthly

basis. It is the smallest hourly wage that an employee may be paid as mandated by

the federal law, irrespective of the employer‟s paying ability. It is based on the

concept that the wage is paid not for the bare sustenance of life but for the

preservation of the efficiency of the worker. In Nigeria, formal sector wages and

salaries are determined by the administrative decision of the government, and the

national salaries, income and wages commission. Authorities adopt the minimum

wage policy for reasons that include the protection of workers‟ rights and dignity as

well as to avert the collapse in wages resulting from the excess supply of labour over

demand. In addition, the minimum wage policy has become an important criterion for

wage determination in Nigeria in order to bridge the unfair wage gap between the

public and private sector (Alarudeen, 2008).

Productivity is defined as a ratio between the output volume and the volume

of inputs. Productivity measures how efficiently production inputs are being used in

an economy to produce a given level of output. The productivity of inputs, or more

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African Journal of Management (Vol.2, No.1, 2017), Business Admin. University of Maiduguri

Sahel Analyst: ISSN 1117-4668 Page 108

technically, total factor productivity, refers to the amount of input required to

produce a unit of output. Regardless of the society, labour coordinates all other

inputs, that is, object of labour and means of labour, as such labour is a critical input

in the production process and should be compensated accordingly. Specifically,

labour productivity refers to the quantity of labour input required to produce a unit of

output. High labour productivity can be an important signal of the improvement in

real incomes (wages of labour). It is recognised that labour productivity is not

necessarily an indicator of the effort of each worker, but it still provides a useful

measure of the rewards to labour as a factor in the production process. In many

developing economies with large endowments of labour, measuring the productivity

of labour is an important way to understand the dynamics occurring in the labour

market, and useful in providing insights to policymakers regarding trends in

unemployment, job creation, wages, and the living standard of the citizens of a

nation. There are several economic theories and empirical analyses relating workers‟

productivity to their wages which would make employers pay different wages to

workers who are of different effects. Higher wages, proponents of these theories

believe, would increase the efficiency and productivity of workers. The argument is

that paying workers a higher wage may lead to increased productivity from the

worker and thus, feel more loyal and devoted to the company. With a higher wage, he

may also fear being made unemployed and so will work harder to make sure he keeps

his job.

Nigeria is regarded as being more labour-intensive in production. With a

population of more than 150 million people and like most developing economies,

labour has ever since been and is still the driving force of productivity. Fapohunda et

al. (2012) observed that in Nigeria, issues of wage negotiation and increment date

back to the period of colonial rule and are associated with civil service reform

programs. Collective Bargaining never played any significant role in wage fixing and

labour relations, especially in the public sector in Nigeria. Actual dealings of the

government as regards labour disregarded official labour policy on collective

bargaining, rather the government, which is the largest employer of organised labour,

has always set up Ad-hoc commissions to consider bonuses or wage revisions during

periods of labour discontent. Since the first one was set up in 1934, there have been

several of such commissions and panels as indicated in Table 1.

Impact of Minimum Wage and Unemployment on Productivity in Nigeria

Sahel Analyst: ISSN 1117- 4668 Page 109

Table 1: Summary of Wage Review Commissions in Nigeria (1934 – 2010)

Commissions Year

The Hunts Commission 1934

Bridges Committee of Enquiry 1941

Harragin Commission 1945

The Tudor Davis Commission 1946

Miller Commission 1947

Phillipson-Adebo Commission 1948

The Gorsuch Commission 1954/55

Mbanefo Commission 1959/60

Morgan Commission 1963/64

Eldwood Commission 1966

The Adebo Commission 1970/1971

Udoji Commission 1972

The Cookey Commission 1981

Dotun Phillips Panel 1985

The Allison Ayida Review Panel 1994

Philip Asiodu Committee 1998/1999

Ernest Shonekan Committee 2000

Justice Alfa Belgore Committee 2009/2010

Source: National Salaries, Income and Wages Commission, (2010).

According to Aminu (2011) from 1955, successive governments have been

setting minimum wages for some specific occupations/trades especially the ones that

can be considered formal. During the civilian regime in 1981, the nation‟s minimum

wage was fixed at ₦125.00k per month by an Act of Parliament but at the onset of

the Structural Adjustment Program (SAP) in 1986, government issued the National

Minimum Wage (Amendment) Order, which abridged the 1981 Minimum Wage Act

by exempting persons or companies employing less than 50 workers and persons

employed in agricultural projects from its provisions. This Amendment was,

however, rescinded in 1987 owing to labour protests against it in major cities across

the country.

There was a redefinition of the minimum wage in 1991 to embrace total

emolument and at the same time, there was a discontinuation of universal

applicability of minimum wage to all public sector departments and government

levels. Each government department/level was advised to pay according to its ability.

However, at the beginning of 1993, an increase of 45.0 percent was made in public

sector workers‟ salaries ostensibly meant to cushion the inflationary effects of the

rapidly depreciating naira following the deregulation of the foreign exchange market

in March 1992. By September 1998, the Federal Government issued a directive to

increase the prevailing minimum wage and other levels of wages (especially in the

public sector) perhaps due to its concern for workers‟ welfare. The implementation of

the directive resulted in the increase of the nation‟s minimum monthly wage from

₦363.00k to ₦3, 000.00k and it also led to substantial increase in take-home pay of

all other categories of employees.

Following agitations for some increase in wage by the Nigeria Labour

Congress in the year 2000, the Federal Government again increased the minimum



monthly wage from ₦3, 000.00k to ₦5, 500.00k. The minimum wage Act of 2000

also made provision for a review of the minimum wage every two years. In

September 2003, the Federal Government announced a regressive wage increment

which took the form of 12.5 percent increase for lowest paid workers, while those at

the top were to get 4.0 percent. In 2010, the Nigeria Labour Congress (NLC)

clamoured for an upward review of the National Minimum Wage and had suspended

another strike which started on May 3, 2010, on the plea of the then acting President

Goodluck Jonathan. Subsequently, in August 2010 a new National Minimum Wage

Act was signed into law which mandated employers in Nigeria to pay their workers

nothing less than with effect from January 2011. Some state governors objected to it

on the ground that it would have macroeconomic effects on the economy hence,

many states of the federation are yet to fully implement it. Although, few states are

paying workers higher than the ₦18, 000.00k federal minimum wage; Abia ₦20,

100.00k, Borno ₦18, 229.00k, Edo ₦20, 100.00k, Imo ₦20, 100.00k, Ogun ₦20,

250.00k and Ondo ₦20, 100.00k ( Okafor and Aniche, 2011).

The Nigerian workers, through the Nigerian Labour Congress (NLC), is

agitating for a review of the National Minimum Wage Act of 2010 and a general

upward review of the minimum wage to ₦56, 000.00k reiterating that the ₦18,

000.00k is no longer reasonable and have submitted a proposal to the National

Assembly. The question is can Nigeria afford an increase of this magnitude of about

300.0 percent given the current unfavourable economic situation, dwindling revenue

of the country as a result of a persistent drop in commodity prices at the international

markets, with most states owing workers months in arrears in salaries and pensions.

Analysts believe that higher wages motivate workers to perform more

efficiently and thereby enhance productivity leading to economic growth. Available

data from the National Bureau of Statistics (NBS), (2006) revealed that the average

number of strikes over wage allowances and bonuses and irregular wage payments

amounted to about 47.0 percent of the total strikes within the period 1970 – 2003. Is

the question has the implementation of the recommendations of the wage review

commissions and panels improved the productivity of the Nigerian workers? And if

so, what has been its impact on Nigeria‟s economic growth? Has the resultant

economic growth led to increasing in employment in the country? What is the level

of unemployment among both the highly skilled and unskilled people in Nigeria

today? However, some economists oppose an increase in minimum wage on the basis

that such an increase will boost unemployment as many organisations would lay-off

workers. Is this view applicable to the Nigerian situation or not? In the light of this

and other developments, therefore, this paper will try to assess the effect of variations

in the national minimum wage on labour productivity, economic growth and

employment in the Nigerian economy. It is hoped that the paper will shed light on the

extent to which increases in minimum have impacted on workers‟ efficiency,

employment generation and growth in Nigeria. It will also serve as a guide to

policymakers in adopting appropriate wage determination policy thereby ending the

frequent and disruptive agitations for wage increase by labour unions.

Literature Review

Wage is the monetary compensation, remuneration, personnel expense paid

by an employer to an employee in exchange for work done which may be calculated

as a fixed amount for each task completed on an hourly or daily basis, or based on an



easily measured quantity of work done. Wage labour or labour power involves the

exchange of money for time spent at work. The wage level is the average wage paid

to employees and it is a reflection of the total wage bill of the organisation.

Determinants of wage are numerous which might be roughly classified as economic,

institutional, behavioural, and equity considerations. Wage decisions appear to be

made by comparison to labour markets so; many of the determinants appear to be

economic. There are two main kinds of wages, money or nominal wages and real

wages. The former is wage expressed in monetary terms while the latter refers to the

quantity of goods and services the money wages command. Real wages depends on

the purchasing power of money which in turn depends on the price level. Real wages

are used to estimate the standard of living of workers in a country (John, 2013).

However, depending on the structure and traditions of different economies

around the world, wage rates will be influenced by the market forces of supply and

demand, legislation, and tradition. According to Chand (2015), factors such as

Labour Unions, personal perception of wage, cost of living, government

legislation, ability to pay, supply and demand should be taken into consideration in

determining wage and salary structure of workers as these factors exercise a kind of

general influence on wage rates. The author stressed that the most important factors

which affect the individual differences in wage rates are: worker‟s capacity and age,

educational qualifications, worker‟s experience, hazards involved in work, promotion

possibilities, the prevailing wage in the community, stability of employment, demand

for the product and profits or surplus earned by the organisation.

In the formal sector, wage rates are determined and regulated by wage

commissions, prices and income policies and by the administrative decisions of the

government. In Nigeria for instance, military governments have through Decrees and

Acts of Legislation always set up Ad hoc commissions to consider bonuses or wage

revisions during periods of wage discontent (Fapohunda et al., 2015). There are

basically three methods of wage payments; the Minimum Wage Method, Fair Wage

Method and Living Wage Method. Minimum wage is the minimum amount of wage

paid to the employee irrespective of the employer‟s paying ability. It is the

lowest remuneration that employers may legally pay to workers below which workers

may not sell their labour. The committee of experts in the International Labour

Organisation (ILO) (1996) General Survey of reports relating to Convention No. 131

on minimum wage fixing explained that minimum wage may be understood to mean

the minimum sum payable to a worker for work performed or services rendered

within a given period, whether calculated on the basis of time or output, which may

not be reduced either by individual or collective agreement, which is guaranteed by

law and which may be fixed in such a way as to cover the minimum need of the

worker and his/her family, in the light of national economic and social conditions.

Thus, it must provide for education, medical requirements, and other essential

amenities.

Wage is said to be fair when its amount is similar to the rate that prevails in

the same industry or throughout the country for the similar kind of work. This implies

that a standard rate is maintained. While the living wage rate is determined on the

basis of economic condition prevailing in the country and therefore differs from

country to country. It is slightly higher than the fair wage, in which the worker not

only fulfils his basic needs of life viz food, clothing and shelter but also avail the

frugal comforts such as education of children, insurance, protection against ill-health,



essential social needs, etc. thus, the employers follow different methods of wage

payment depending on their paying capacity and the economic conditions prevailing

in the country.

Internal and external factors affect the determination of salaries and wages of

workers. As the name implies the internal factors exist within the organisation and

influences the pay structure of the business or organisation and include the ability to

pay, business strategy, and job evaluation and performance appraisal. Prosperous and

big companies can pay their employees higher wages while smaller ones can pay

even below the standard wage in the industry. Also, some businesses may pay higher

wages in order to outshine their competitors or rivals in the same industry. Improved

performance and experience as regards devotion of years in an organisation are other

factors that help an employee earn extra wages and enable satisfactory differential

pays for the same jobs. On the other hand, external factors exist outside the

organisation but influence the wages and salaries paid to the workers. These include

the labour market forces of demand for and supply of labour, prevailing industry

wage rate, efficiency and productivity of worker, cost of living, strength of labour

unions as well as labour laws passed by the government which employers must abide

by in order to prevent the exploitation of workers and to also improve their welfare.

Such laws are, among others, payment of wages Act, minimum wages Act, payment

of bonus Act, equal remuneration Act, and payment of Gratuity Act (Business

Jargons, 2017).

Krugman, (1994) in Freeman (2008) defined productivity as a ratio between

the output volume and the volume of inputs used. In other words, it measures how

efficiently production inputs, such as labour and capital, are being used in an

economy to produce a given level of output. Scholars considered a key source of

economic growth and competitiveness and an important element for modelling the

productive capacity of economies, and, as such, is basic statistical information for

many international comparisons and country performance assessments. In addition, it

also allows analysts to determine capacity utilisation, which in turn allows one to

gauge the position of economies in the business cycle and to forecast economic

growth.

Measured productivity is the ratio of a measure of total outputs to a

measure of inputs used in the production of goods and services. Productivity

measures include multi-factor productivity, capital productivity and labour

productivity. Among these productivity measures, labour productivity is particularly

important in the economic and statistical analysis of a country. Labour productivity is

equal to the ratio between a volume measure of output (gross domestic product or

gross value added) and a measure of labour input used (the total number of hours

worked or total employment). Productivity growth is estimated by subtracting the

growth in inputs from the growth in output, it is the residual (PC News, 2015).

According to Yelwa (2015), labour productivity is conventionally

measured as the ratio of real output to labour input. Although this measure, the author

added, relates output to the number of employees in a particular sector or industry, it

does not measure the specific contribution of labour as a single factor of production.

Rather, it reflects the joint effect of many influences, including new technology,

capital investment, capacity utilisation, energy use, managerial skills as well as the

efforts of the workforce. The productivity of inputs, or more technically, total factor

productivity, refers to the amount of input required to produce a unit of output. It is



typically computed as a ratio of output to the input utilised. While the total factor

productivity for an economy can be computed this way, this can often be a difficult

task, and a more specific and commonly used measure of productivity is labour

productivity.

Several studies on the impact of minimum wage on the economy have been

carried out using different methodologies. The use of minimum wage policy as a

welfare boosting tool has become popular especially in developing countries and

increment in wages over time has had both positive and negative impacts. Hinnosaar

and Rõõm (2003) carried out a study to examine the link between an increase in the

minimum wage for different income group and employment outcome in Estonian

labour market using cross-sectional micro-level data across the years 1995–2000

based on the Estonian Labour Force Survey dataset. Empirical analysis of the study,

consistent with the competitive labour market model, revealed that an increase in the

minimum wage reduces employment, and its effect was significant only for the group

of workers directly affected by its change.

In a study on the impact of minimum wage changes in Nigeria on major

macroeconomic variables such as productivity, employment, household income,

consumption and government balances using a Computable General Equilibrium

(CGE) model based on some simplifying assumptions that full employment exist in

the economy, Folawewo (2007) found that increase in minimum wage leads to

marginal rise of employment in agricultural sector, marginal fall in services sector

employment, and no significant effect in manufacturing and mining and oil sectors.

The study revealed a positive relationship between minimum wage increase and

general price level, household income and consumption, as well as on government

balances.

The result of Akpansung‟s (2014) empirical assessment of the effects of

minimum wage increases on unemployment during democratic government in

Nigeria (1999 -2012) using the Ordinary Least Square (OLS) estimating technique

and the Granger Causality test showed that minimum wage is highly positively

correlated with unemployment, money supply, real GDP, and least negatively related

to inflation. This implies that minimum wage hikes were detrimental to employment

creation policy of the Nigerian government during her 13 years of democratic

governance. These findings are similar to that of Brown et al. (1982) using time

series data analysis to find that a 10 percent increase in the minimum wage reduces

teenage employment by one to three percent, so also its effect on young adults (20 –

24 years) is negative but smaller than that of teenagers in the United States.

An empirical analysis carried out by Obeng (2015) on the relationship

between Minimum Wage, Investment and Economic Growth in Ghana for the period

1984 – 2013 using ARDL approach in an ECM framework to investigate wage-

growth linkage, and a DOLS approach for the determination of a long-run wage-

investment relationship, indicated a positive and statistically significant relationship

between minimum wage increases and economic growth both in the long- and short-

run provided that they are met by simultaneous increases in investment spending.

Theoretical Framework

In the literature, there are several wage theories that attempt to explain the

determination of the payment of labour. Some of the early theories are the

subsistence theory of wages, the standard of living theory, the wages fund theory, and

the residual claimant theory. Among the important recent or modern theories are the



marginal productivity theory of wages, the market theory of wages and the

bargaining theory of wages.

The subsistence theory of wages was first formulated by the physiocratic

school of French economists of the 18th century. David Ricardo and Thomas Malthus

also contributed to the theory and called it “Iron law Wages” or “Brazen Law

Theory”. The classical called it the neutral level of wages. Karl Marx made it the

basis of his theory of exploitation. The originators believed in the bargaining of the

workers and therefore trade unions play an important role in increasing wages. Based

on the assumptions of population increases at a faster rate and food production is

subject to the law of diminishing returns, the theory states that wages of a worker, in

the long run, are determined at the level which is just sufficient enough to meet the

necessities of life or to cover his bare needs of subsistence without either increase or

decrease. Wage payments below the subsistence level will lead to starvation and

death which will result in a shortfall in supply of labour, thus wage rate will rise back

to the earlier level of subsistence. On the other hand, a higher level of wage above the

subsistence level would encourage workers to bear more children thereby increasing

the supply of labour and in turn bring wages down to the former level. The major

defect of the theory is the assumption that an increase in wage leads to an increase in

population. Also, it only examines wage determination from the supply side without

taking the demand side into consideration. It is based on a long-run assumption and

not a particular period of time, while the theory failed to recognise differences in

labour productivity as it explained that all workers are paid equal wages which is

unrealistic.

The wage-fund theory was developed by Adam Smith and states that wages

depend upon capital and population. According to Smith, capital here is a

predetermined fixed wealth or fund set aside for wage payments. The theory is based

on the assumption that wage is paid out of the predetermined wealth or fund lying

surplus with the wealthy persons as a result of savings. This implies that the size of

the fund determines the amount of wage to be paid to workers. So, with a larger fund,

more labour would be employed and paid higher wages above the subsistence level,

and vice versa. In addition, the amount of wages workers will be given is negatively

related to the size of the population. If the supply of labour increases, wages will fall

below the subsistence level since more workers will have to be paid from the fixed

fund.

The wage-fund theory was further expounded by J. S. Mill, and according to him the

wage fund is fixed, and wages can be determined on the basis of demand for and

supply of labour. To have an increased wage the number of labour is to be reduced,

and the fund size enlarged. The assumption that if wages increase, profits will fall is

one of the limitations of this theory because during periods of economic boom both

wages and profits will rise. Equally the direct relationship between wages and

population assumed in the theory is also a limitation as there is no relationship

between them.

Francis Walker was the originator of the residual claimant theory in which he

identified four factors of production viz. land, labour, capital and entrepreneurship.

As one of the factors of production labour is paid wages out of the residue left over

after payments of rent, interest and profits to land, capital and entrepreneurship

respectively. Thus, the wage is considered as a residual claimant, and computed as:

Wage = total production – rent – interest – profit; or



Wage = total production – (rent + interest + profit)

The defect of the theory is that wage is not a residual payment but an

advance payment made first before profits are taken out or deducted at the end. The

surplus value theory was given by Karl Marx who likened labour to other articles of

trade that could be purchased at a subsistence price. The subsistence price is

determined by the amount of time spent by labour in the production process. Labour,

according to Marx, is paid a minimum amount enough to meet bare needs because

labour spends much less time on work while the surplus amount is expended on other

production expenses. Labour is human and coordinates all other factors of production

and therefore cannot be bought and sold like any other articles of commerce.

The bargaining theory of wages was propounded by John Davidson and

states that the level of wages in an industry is determined by the bargaining capacity

of the trade or labour union concerned. The power of the trade union depends upon

factors such as the size of its membership, size of its “fighting fund”, and its ability to

cause dislocation in the industry and the economy through strike actions. During

periods of full employment and economic boom, trade unions will be in a strong

position. With the closed shop policy at its disposal, a trade union may increase

wages by restricting the supply of labour and insisting that only its members should

be employed. It may threaten to embark on strike if a minimum wage is not paid.

This theory is partly applicable to the Nigerian situation and most other developing

economies where minimum wages are almost always fixed through the promulgation

of Decrees and Acts by the central governments. Factors other than labour

productivity or efficiency influence the determination of and clamour for minimum

wage increase by labour unions. Costs of living, political benefits and influence are

among the determining factors. So, labour or trade unions play important and

decisive roles in wage determination by adopting the closed shop policy and in

extreme situations resort to strike action as a last option. But if the employer is

powerful, as critics of this theory observe, the wages will tend to be lower instead.

The marginal productivity theory of wages was postulated by Thunnen and

later modified by Phillips Henry Wicksteed and John Bates Clark. It is an application

of the marginal productivity theory of distribution. The theory explains how wages

are determined under the condition of perfect competition, and states that labour is

paid according to its contribution to production. The theory is based on the

assumption that all labourers are equally efficient, there exist constant technology in

the economy, there is perfect competition in both factor and product markets, there is

full employment in the economy, labour is perfectly mobile, all products are assumed

to be homogenous, and the marginal productivity of labour is subject to the law of

diminishing returns. As a result of these assumptions, the wage rate is determined

where the marginal product of labour equals the price which the marginal product can

fetch in the market. So, as far marginal productivity is equal to the wages paid, a firm

will continue employing more labour until a point is reached where the marginal

product of labour falls because of the law of diminishing marginal returns.

Employment beyond this point will result in higher costs or fewer profits to the firm.

The assumptions of this theory have come under criticism from the classical. The

assumptions of perfect competition, full employment, constant technology, equality

of labour efficiency, the perfect mobility of labour, product homogeneity are some of

the defects of the theory and are unrealistic in the real world situation. In addition,



due to the exploitation of labour in a monopoly market, wages can be lower than the

price of the marginal product.

The efficiency wage theory (or rather "efficiency-earnings") has been

introduced by Alfred Marshall to denote the wage per efficiency unit of labour.

Marshallian efficiency wages would make employers pay different wages to workers

who are of different efficiency, such that the employer would be indifferent to more

efficient workers and less efficient workers. The modern use of the term is quite

different and refers to the idea that higher wages may increase the efficiency of the

workers through various channels, and make it worthwhile for the employers to offer

wages that exceed a market-clearing level (Pettinger, 2012). This study rests on the

basic efficiency wage hypothesis which states that workers' productivities depend

positively on their wages, and if this is the case, firms may find it profitable to pay

wages in excess of market clearing. This is possible because the wage that minimises

a firm's labour costs per efficiency unit of labour may not be the wage that clears the

labour market. According to Katz (1986), employers may be quite reluctant to cut

wages, even in the presence of an excess supply of labour, since reducing wages may

actually lower productivity more than proportionately and increase labour costs.

The simple efficiency wage model can easily be extended to provide

potential rationales for wage differentials among workers with identical

characteristics and the existence of dual labour markets. If the linkages between

wages and effort differ across firms, then the optimal wage will differ across firms

and a distribution of wages for workers with identical characteristics can arise in

equilibrium. These wage differentials are not compensating differences for no

pecuniary aspects of work that directly affect workers' welfare. Therefore, although

the firm pays more, they get more productivity from their workers. In practice, many

factors determine worker morale and productivity; wages are just one of them. Often

other factors are more important such as work conditions, management, etc.

(Pettinger, 2012).

However, some of the primary implications of efficiency wage models can

be viewed with respect to a worker's physical health where productivity is assumed to

depend positively on the real wage paid. Leibenstein (1957) highlighted the linkages

between wages and health in less-developed countries. In this context, firms prefer to

get healthier and more productive workers if they pay higher wages. Solow (1979)

formulated a formally similar model for developed economies in which increased

wages improve morale and thus directly affect productivity through an increase in

worker effort. The efficiency wage theory may not be a real tool in determining the

productivity of workers in the Nigerian situation where we have too many people

chasing too few jobs.

Profile of Productivity and Unemployment in Nigeria

In Nigeria, although economic growth has been high and stable in recent

years, constraints on productivity of labour and other factor inputs is a considerable

threat to realising its full growth potential, coupled with the high unemployment rate

the Nigerian economy is facing due to productivity challenges notably power and

transport infrastructure, access to finance, as well as science and technological

capabilities. Other possible reasons for low productivity are the quality of educational

institutions, investment climate and favourable policy support to businesses

especially small and medium scale enterprises which dominate the Nigerian economy

as well as the excess supply of labour (NBS, 2015). According to Golubski (2016),

https://en.wikipedia.org/wiki/Alfred_Marshall


Sahel Analyst: ISSN 1117- 4668 7

the country‟s growth has been sustained largely by factor reallocation rather than

productivity enhancement and that employment elasticity of growth has been positive

and quite low, reflecting the country‟s poor overall employment generation record,

especially in manufacturing. In short, jobs are not moving to manufacturing and, in

general, are not being created fast enough.

Table 2 shows the trend in total GDP, hours worked for the period 2010 –

2014 as well as the derived labour productivity which rose only marginally from

about ₦420.00k to ₦639.00k during the 5 year period, translating to about $1

increase.

Table 2: Gross Domestic Product, Labour Force and Labour Productivity (2010 ‐

2014)

Year Labour

Force

GDP at Current

Prices

(₦”Billion)

Total Hours

Worked per

Year (Million)

Labour

Productivity

per hour

(₦)

Labour

Productivity

per hour (US

$)

Exchange

Rate

(₦/USD)

2010 65,170,629 54,612.26 130.12 419.70 2.79 150

2011 67,256,090 62,980.40 133.45 471.94 2.98 158

2012 69,105,775 71,713.94 129.99 551.70 3.51 157

2013 71,105,800 80,092.56 134,65 594.83 3.78 157

2014 72,931,608 89,043.62 139.27 639.34 3.77 170

Source: NBS, 2015.

While the total labour force expanded by about 12.0 percent between 2010

and 2014, the size of the unemployed (i.e. those working less than 20 hours a week)

rose by over 40.0 percent during the same period, and those fully‐employed rose by

only 7.0 percent. This represents a major drag on growth in wages, as well as

providing a ready supply of cheap labour.

In another survey, Golubski (2016) observed that from 2010 – 2014 the

labour force (the total number of employed and unemployed persons actively looking

for jobs aged 15 – 64 years) increased by 2.9 percent on average. However, the total

employment increased at an average rate of 2.0 percent over the period compared to

6.1 percent for the unemployed (those available for work but did not work for at least

39 hours in the week) and 16.48 percent for the unemployed. Most salient, then, is

the rising overall unemployment rate, at 25.1 percent as of 2014.

Studies have shown that the rate of expansion among fully employed workers

is much lower compared to the rate of growth in unemployed/underemployed

persons. For example in 2012, the number of unemployed rose by 82.0 percent while

the underemployed and fully employed workers declined in size. This reversed in

2014, with a small expansion in a number of fully‐employed and underemployed

individuals and a decline in unemployed individuals. During this period, however,

labour productivity growth slowed, from 16.9 percent in 2012 to 7.5 percent in 2014.

It is possible that the high rate of unemployment presents a ready pool of low-skilled

workers who contribute to output but more slowly over time (NBS, 2015).

Table 3 (Appendix) shows the trend in productivity (GDP) of the Nigeria

economy in US billion dollars from 1970 to 2014, the growth rate of the economy in

terms of GDP, per capita GDP and the country‟s contribution to Africa, West Africa

and the world GDP. The country has highest growth rate of 21.3 percent in 2002 and



has witnessed a negative growth of -2.9, -2.8, -0.9, -1.7, -1.4 and -0.69 percent in

1978, 1979, 1981, 1982, 1984 and 1987 respectively, the lowest growth rate being -6.6

percent in 1983. The decline in GDP growth rate over these periods according to

Adenikinju (2005) may be attributed to technical inefficiency. Technical efficiency

declined by -1.29 percent per annum (or 56.0 percent of the decline in productivity

growth) between 1962 and 2000, while technical change declined by -1.01 percent per

annum (or 44.0 percent of the decline in total productivity growth) over the same

period.

Table 4: Gross Domestic Product (GDP) at Current Prices (USD Billion)

1970 - 2014

Year Nigeria Cameroon Chad Benin Niger

1970 23.9 1.2 0.36 0.32 0.43

1980 198.5 8.9 0.79 1.5 2.7

1990 68.3 11.8 1.8 2 2.6

2000 74.6 9.3 1.6 2.6 1.7

2010 369.1 23.6 9.8 7 5.7

2014 568.5 32.1 12.8 9.6 8.2

Source: Macroeconomics, Nigeria (2015).

Table 4 shows the GDP of Nigeria alongside that of other developing

economies from 1970 to 2014. The figures indicate increases in the GDP of Nigeria

over the decades far above that of other neighbouring countries. However, when

compared with other developed countries, as shown in Table 5, Nigeria‟s GDP is

lagging far behind. Adenikinju (2005) further observed that Nigeria‟s productivity

performance in relation to the US has weakened over the years. Labour productivity

in Nigeria decreased from 5.85 percent of the U.S. level in 1961 to 2.2 percent of the

U.S. level in 2000, stressing that the widening productivity gap between the two

countries is a clear indication of the absence of convergence.

According to Golubski (2016), cited in Newsweek, (2016), unlike the

structural transformation trend is seen in Asia where labour moves to high

productivity manufacturing sector, Nigeria‟s labour force like many sub-Saharan

African countries, is leaving the low-productivity agricultural sector for the services

sector instead. The services sector‟s share of the labour force rose dramatically from

24.0 percent in 2000 to 44.0 percent in 2014. At the same time, both agriculture and

manufacturing share of the labour force dropped from 51.0 and 11.0 percent to 44.0

and 6.0 percent respectively. The move to industry, a staple of structural

transformation, is not happening. Nigeria‟s industrial sector, according to recent

studies, is in a deplorable situation, its contribution to GDP has dropped as well as its

industrial capacity which has declined. To buttress this statement, the World Bank

(2010) report indicated that the agricultural, industrial and services sectors of the

economy contributed 20.86 percent, 20.38 percent and 58.76 percent to the GDP

respectively while the manufacturing sector contributed 9.53 percent. The

manufacturing sector is reported separately because it plays a critical role in many

economies. Golubski (2016) concluded that Nigeria‟s trade composition and pattern

are based on primary production, with the very little role played in the global value

chain.



Table 5: Gross Domestic Product (GDP) at Current Prices (USD Billion) (1970-2014)

Year USA China Japan Germany UK Nigeria

1970 1075.9 89.6 209.1 215 130.7 23.9

1980 2862.5 302.9 1087 946.7 565 198.5

1990 5979.6 396.6 3103.7 1764.9 1093.2 68.3

2000 10284.8 1208.9 4731.2 1950 1554.7 74.6

2010 14964.4 6005.4 5498.7 3417.1 2403.6 369.1

2014 17348.1 10430.6 4602.4 3868.3 2988.9 568.5


Unemployment problem is one of the developmental problems that face

every developing economy in the 21st century, and Nigeria is not exempted. In the

last two decades of the independence of Nigeria as a sovereign nation (the 1960s &

1970s), unemployment and its attendant consequence, poverty, were not of national

concern. According to Uduak and Christiana (2016), the origin of unemployment in

Nigeria can be traced back to the oil boom era of the 1970s. The nation‟s agricultural,

industrial and public sectors were able to effectively absorb most of the labour force.

An increase in the economic status of the country was as a result of diversified

activities bordering on agricultural products such as cocoa, groundnut, palm kernel,

palm oil, cassava, in addition to other craft practices.

The National Bureau of Statistics (NBS) estimated the national

unemployment rate at 4.3 percent of the labour force in 1985, which increased to 5.3

percent in 1986 and 7.0 percent in 1987, before falling to 5.1 percent in 1988 as a

result of measures taken under SAP. Most of the unemployed were city dwellers, as

indicated by urban jobless rates of 8.7 percent in 1985, 9.1 percent in 1986, 9.8

percent in 1987, and 7.3 percent in 1988. Rural unemployment figures were less

accurate than those for urban unemployment. The largest proportions of the

unemployed (consistently 35.0 to 50.0 percent) were secondary-school graduates.

There was also a 40.0 percent unemployment rate among urban youth aged twenty to

twenty-four, and a 31.0 percent rate among those aged fifteen to nineteen. Two-thirds

of the urban unemployed were fifteen to twenty-four years old. Moreover, the

educated unemployed tended to be young males with few dependents (CIA World

Factbook, 2015).

The Nigeria Economic Report released by the World Bank in 2011 stated

that unemployment rate worsened from 12.0 percent of the working population in

2006 to 24.0 percent in 2011. The Nigerian unemployment report prepared by the

NBS (2011) showed that the majority of the country‟s population falls within the

working age group as persons aged 0 – 14 years constituted 39.6 percent, those aged

between 15 – 64 years (the economically active population) constituted 56.3 percent

while those aged 65 years and above constituted 4.2 percent. According to NBS

(2009 – 2011) Report the national unemployment rates for Nigeria showed that the

number of unemployed persons constituted 31.1 percent in 2000; 13.6 percent in

2001; 12.6 percent in 2002; 14.8 percent in 2003; 13.4 percent in 2004; 11.9 percent

in 2005; 13.7 percent in 2006; and 14.6 percent in 2007. In 2008, 2009, 2010, and

2011 the rates were 14.9, 19.7, 21.1, and 23.9 percent respectively while it reached

24.0 percent in 2012 before declining to 13.9 percent in 2015.



Table 6: Nigeria and United States Unemployment Rate (1990 – 2011)

Year Nigeria USA

1990 3.5 5.6

1991 3.1 6.8

1992 3.5 7.5

1993 3.4 6.9

1994 3.2 6.1

1995 1.9 5.6

1996 2.8 5.4

1997 3.4 4.9

1998 3.5 4.5

1999 17.5 4.2

2000 13.1 4.0

2001 13.6 4.7

2002 12.6 5.8

2003 14.8 6.0

2004 13.4 5.5

2005 11.9 5.1

2006 12.3 4.6

2007 12.7 4.6

2008 14.9 5.8

2009 19.7 9.3

2010 21.1 9.6

2011 23.9 8.9

Sources: IMF World Economic Outlook (2014); NBS, 2010; and CBN 2005, 2006

and 2009.

As indicated in Table 6, from 1990 to 1998 unemployment rate in the United

States was higher than that of Nigeria. However, the Nigerian economy began

witnessing a two-digit unemployment rate right from 1999 and over the last two

decades records show the rate in Nigeria has been on an increase when compared to

that of the U.S as well as other developed nations.

Methodology

Data were obtained from secondary sources mainly the annual reports,

statistical bulletins, and other publications of the Central Bank of Nigeria; the

National Bureau of Statistics (NBS); the Nigerian Labour Congress (NLC) and the

internet such as Index Mundi and CIA Factbook. Time series data spanning a period

of 20 years from 1994 – 2014 were collected from these sources and analysed to

determine the effect of minimum wage and unemployment on productivity in

Nigeria. This research used the econometric procedure in estimating the relationship

between GDP, minimum and unemployment. The Ordinary Least Square (OLS)

technique was employed to obtain the numerical estimates of the coefficients of the

equation and to test the validity of the null hypotheses;



Ho: Minimum wage and unemployment rates do not have a significant positive effect

on productivity in Nigeria.

A simple regression equation was specified for this study. The dependent

variable in the equation is productivity and the independent variables are minimum

wage and unemployment rates. The econometric model showing the relationship

between minimum wage rate, unemployment rate, and real GDP is explicitly

specified thus;

RGDP = α0 + α1MWRt + α2UMPt + µt

Where;

RGDP = Real Gross Domestic Product of Nigeria (proxy for productivity)

MWR = Federal Minimum Wage Rate.

UMP = Unemployment rate.

µ = random error term with zero mean and constant variance.

α0 = the constant intercept.

α1 and α2 = are the slope of the graph which measures the change in productivity

(dependent variable) as a result of a unit change in the independent variables

( ) MWR is expected to exhibit a positive relationship with the dependent variable

RGDP which implies that an increase in MWR will result in an increase in RGDP.

UMP is expected to be negatively related to RGDP.

Results Analysis and Discussion

Augmented Dickey-Fuller (ADF) test was applied to obtain the integrated

properties of the data series and to test the null hypothesis of nonstationarity. The

results are presented in Table 7. The ADF test was applied for both first and second

differences with the trend, the ADF statistics are higher than the respective critical

values in absolute terms, and therefore, the first difference variables (UMP and

MWR) and their second difference are stationary.

Table 7: Unit Root Test –ADF

Variable

ADF

(absolute

value)

ADF

(critical

value)

Level Trend Intercept Order of

Integration

UMP -4.874375 -3.831511 1st diff Yes No 1(1)

MWR -4.679963 -3.831511 1st diff Yes No 1(1)

RGDP -6.210461 -3.856386 2nd

diff Yes No 1(2)

Source: Author’s Computation, 2012

The results show that real GDP is a positive function of minimum wage

increases. The coefficient of the minimum wage (0.033912) implies that a unit

increase in minimum wage brings about 0.033912 increases in the real GDP and vice

versa. This result is consistent with the efficiency wage model, which states that

workers‟ productivity depends positively on their wages implying that higher wages

increase the efficiency of workers as shown in Table 8. The empirical analysis

carried out by Obeng (2015) on the relationship between Minimum Wage,

Investment and Economic Growth in Ghana for the period 1984 – 2013 using ARDL

approach in an ECM framework which indicated a statistically significant positive



relationship between minimum wage increases and economic growth both in the

long- and short-run supports this result.

Table 8: Summary of Regression Result for the Impact of Minimum Wage

Increases and Unemployment on the Productivity (RGDP) of Nigeria

Dependent Variable: RGDP

Method: Least Squares

Date: 05/24/16 Time: 17:48

Sample: 1994 2014

Included observations: 21

Variable Coefficient Std. Error t-Statistic Prob.

C 349.1075 36.67239 9.519628 0.0000

MWR 0.033912 0.003265 10.38494 0.0000

UMP -7.574181 3.473325 -2.180672 0.0427

R-squared 0.882491 Mean dependent var 580.2652

Adjusted R-squared 0.869435 S.D. dependent var 211.2816

S.E. of regression 76.34414 Akaike info criterion 11.63994

Sum squared resid 104911.7 Schwarz criterion 11.78916

Log-likelihood -119.2194 Hannan-Quinn criter. 11.67233

F-statistic 67.58997 Durbin-Watson stat 1.509020

Prob(F-statistic) 0.000000

In Table 8, it can be observed that real GDP is a negative function of

unemployment meaning that if there is a unit rise in unemployment, real GDP will

fall by 7.574181, while a unit fall in unemployment will bring about 7.574181 rises

in Real GDP. This result is similar to Folawewo‟s (2015) research titled Institutions

Regulatory Framework and Labour Market Outcomes in Nigeria Minimum wage,

using regression analysis on the aggregate employment in Nigeria to determine that

productivity growth has a negative relationship with unemployment.

The R-squared for the real GDP model at 0.882491 (88.0 percent) represents

a strong and statistically significant relationship between the dependent variable

(RGDP) and the independent variables (UMP and MWR). The 12.0 percent of the

total variations which remained unexplained could be attributed to random

fluctuations in the economy.

The value of the adjusted R-squared for productivity is 0.869435 that is 87.0 percent

variation in productivity (RGDP) is attributed to minimum wage rate and

unemployment. The difference of 13.0 percent may be due to other external factors

that cause variation in the level of productivity in Nigeria.

From the DW Table, with 5 percent level of significance, n = 21 observations

and k = 2 Independent variables, the significant points of du and dl are;

du = 1.54, dl = 1.13 and d* = 1.509020

Decision rule: Reject null hypothesis (H0 : p = 0) if d* < du or d* > (4 - du)

Accept null hypothesis (H0 : p ≠ 0) if d* > du or d* < (4 - du) 4 - du = 4 – 1.54 = 2.46

Therefore, the null hypothesis is accepted and it is concluded that there is no

autocorrelation in the variables under study, that is, the residuals of the variables are



temporarily independent. To test the reliability of the estimate whether minimum

wage rate and employment are jointly related to real GDP through the F-statistic;

The null and the alternative hypotheses are;

H0: β0 = β1 = β2 = β3 = 0 (i.e. MWR and UMP are not jointly related to RGDP)

H1: β1 ≠ 0 for at least one i (i.e. MWR and UMP are jointly related to RGDP)

The decision rule is to: Reject H0 if Fcal ≥ Ftab and accept H1

Accept H0 if Fcal < Ftab and reject H1

To get the theoretical F value (i.e. F-tabulated):

v1 = k – 1 = 3 – 1 = 2

v2 = N – k = 21 – 3 = 18 degrees of freedom at 95 percent level of significance.

From the F-table, F0.05 = 3.55 while from Table 9, Fcal = 67.58997. This means Fcal =

67.58997 > Ftab = 3.55, therefore, this study rejects the null hypothesis (H0) and

accepts the alternative hypothesis which states that both MWR and UMP jointly

determine productivity in the Nigerian economy.

T-statistic helps to measure or test the degree of significance of the

parameters of each estimate with the assumption that the population is normally

distributed; which states that:

If tcal > ttab reject H0 and accept H1

And if tcal < ttab reject H1 and accept H0

For the Real GDP Model

( ) ( ) ( ) Where;

are the standard errors of the coefficients for minimum wage rate and unemployment

respectively, given the stochastic assumption that the values of the standard error (e)

are normally distributed.

The calculated t-values for RGDP with respect to MWR is more than the

tabulated values at all three level of significance, so we reject the null hypothesis

( ) and accept the alternative hypothesis ( ) that minimum

wage rate has a positive significant impact on productivity (RGDP) in Nigeria. This

result can be explained in this light that when the income of workers are increased,

they consume more because of the high propensity to consume leading to an increase

in aggregate demand and thus, increased gross domestic product through the

multiplier effect.

From the result indicated in Table 8, the extent to which unemployment

affects productivity in Nigeria is deduced by testing the null hypothesis against the

alternative using the t-statistic at 10 percent, 5 percent and 1 percent levels of

significance. The null hypothesis is rejected at 10 percent and 5 percent levels of

significance but accepted at 1 percent level of significance. This implies that the

impact of unemployment on productivity is less significant.

Following the results derived from the regression analysis, this study concludes that

there is a functional relationship between the dependent variable (RGDP) and the

independent variables (MWR and UMP). The autonomous component of the

regression result for the model is 349.1075. So, without any factor determining Real



GDP, there will still be some level of productivity (determined by the coefficient

349.1075) because of the informal sector of the economy of Nigeria.

Conclusion The study examined the impact of minimum wage and unemployment on

productivity in the Nigerian economy for the period 1994 – 2014, and this has been

empirically verified. It was discovered that minimum wage increment had a positive

impact on productivity in Nigeria. This implies that minimum wage increase is a

channel through which workers can be motivated and encouraged to put their best in

the production process and earn extra on the basis of their performance.

Unemployment had a negative effect on productivity within the period under review

which, like the minimum wage rate, is consistent with the apriori expectations of the

study. The implication is that unemployment decreases growth as workers remain

idle and unproductive which has various social-economic and political disadvantages.

Economic growth is a pathway to increased domestic and foreign investments,

greater employment opportunities; improvement in the living standard of the citizens

as well as creating more sources of government revenue. As is evident from the

foregoing, therefore, minimum wage increment that is above the subsistence level

and based on the efficiency of labour enables satisfactory differential pays for

different jobs and is a necessary ingredient for sustainable growth and development

of an economy.

Recommendations Based on the findings of this research, the following sets of policy

recommendations were proffered;

i. Factors beyond the control of workers which affect their efficiency and

productivities such as new technology, new methods, better management

techniques, conducive working environment such be given attention and

provided.

ii. A more realistic minimum wage should be determined, one that would put the

vast majority of people above subsistence level so as to increase the

productivity level.

iii. Workers should be provided with non-wage benefits apart from the wage and

salaries as this will more than anything else lead to higher productivity of

workers.

iv. Adequate fund should be provided to assist graduates with creative and

entrepreneurial skills so that they can be self-employed. This also comes with

the possibility of these self-employed graduates becoming employers of labour

in the long run.

v. Constraints to productivity enhancement and also threats to realising full

growth potential (e.g. power, transport infrastructure, quality educational

institutions, access to finance for SMEs, science and technological capabilities)

should be addressed so as to create more employment in the manufacturing

sector, a staple for structural transformation but in a deplorable situation.

vi. The government should impose barriers on the importation of goods that can be

produced locally thereby increasing the demand for labour which will

eventually lead to an increase in productivity, export of locally produced goods

and subsequently the Gross Domestic Product (GDP) of Nigeria.



vii. Laws that would safeguard the workers from employer exploitation and

improve their welfare should be passed and enforced by the relevant

authorities.

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Appendix

Table 3: Nigeria’s GDP at 1970 Constant Basic Prices (1970 – 2014)

Year RGDP

(₦’Billion)

RGDP Growth

Rate (%)

Percentage Share of Nigeria’s GDP

Western Africa Africa World

1970 23.9 _ 71 22.3 0.7

1971 27.3 14.2 72.5 23.3 0.74

1972 29.3 7.2 75.1 24.7 0.78

1973 31.1 6.1 75.5 23.3 0.74

1974 34.4 10.8 81.1 28.2 1.1

1975 34.7 0.7 82.4 31.4 1.2

1976 37.1 7.1 84.2 34.4 1.4

1977 40.2 8.3 84.3 34.6 1.4

1978 39 -2.9 83.3 33.6 1.3

1979 38 -2.8 83.7 35 1.4

1980 38.8 2.2 85.5 35.7 1.6

1981 38.5 -0.9 85.5 34.9 1.5

1982 37.8 -1.7 85.9 34.9 1.5

1983 35.3 -6.6 86.7 34.5 1.4

1984 34.8 -1.4 86.6 35.1 1.4

1985 38.8 11.3 86 35.2 1.3

1986 39.5 1.9 72.2 20.2 0.58

1987 39.2 -0.69 58.9 12.5 0.32

1988 42.2 7.6 61.5 14 0.34

1989 45.2 7.1 59.1 12.4 0.29

1990 50.3 11.4 59 12.5 0.3

1991 50.4 0.012 56.9 11.7 0.27

1992 51.7 2.6 53.5 10.3 0.23

1993 52.5 1.6 54.9 10.3 0.22

1994 52.9 0.78 55.9 8.9 0.17

1995 54 2.1 51.7 8.6 0.16

1996 56.3 4.1 51.6 8.7 0.16

1997 57.9 2.9 53.6 8.8 0.17

1998 59.5 2.8 53.3 9.2 0.18

1999 59.8 0.47 53.4 9.3 0.18

2000 63 5.3 64.2 11.5 0.22

2001 65.8 4.4 61.8 11.3 0.21

2002 79.8 21.3 66.3 14.7 0.28

2003 88 10.2 64.6 14.1 0.28

2004 97.2 10.5 67.7 15 0.32

2005 103.5 6.5 71 16.2 0.38

2006 109.7 6 74.1 18.2 0.46

2007 116.8 6.4 73.5 18 0.46

2008 124.2 6.3 74.5 19 0.53

2009 132.8 6.9 71 16.6 0.45

2010 143.2 7.8 75.4 19.1 0.56

2011 150.2 4.9 74.9 19.1 0.57

2012 156.6 4.3 76.3 19.9 0.62

2013 165 5.4 76.2 21.6 0.68

2014 175.5 6.3 78.4 23 0.73


http://www.kushnirs.org/macroeconomics_/en/western_africa__gdp.html

http://www.kushnirs.org/macroeconomics_/en/africa__gdp.html

http://www.kushnirs.org/macroeconomics_/en/world__gdp.html

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