President Buhari, Increasing the Minimum Wage is a Bad Idea

The issue of minimum wage increase has been a persistent one in Nigeria — as a matter of fact, it seems to be one of two cardinal goals of the Nigeria Labour Congress, the other being ensuring that there are no retrenchments, especially from the public service.

No prizes for guessing what they are demanding here.

It also goes without saying that it is a popular demand and not without fault too. Nigeria is quite a difficult country to live in where more often than not, citizens are their own government and this costs money in the absence of a robust credit system. It is in response to this that President Muhammadu Buhari inaugurated a committee to examine the minimum wage and make recommendations, and it is widely expected that a minimum wage increase will be the result.

However, if that happens, President Buhari will be making the same mistake his predecessor made in 2011 — it will only be a widely populist move made seemingly for political benefits as they were passed on the eve of elections, but whose economics does not make sense.

Let me explain:

· If the minimum wage is increased, we are going to see the wage bill of not just the Federal Government but of all governments in the country increase. As it is currently, this bill is a huge burden on many of these governments with the Federal Government borrowing heavily from the Central Bank and selling government-backed securities just to keep itself afloat. Contrary to popular belief, it is not the salaries and maintenance costs of politicians that create such a high recurrent expenditure (69% of the last federal budget); rather, it is maintaining an almost 90,000-strong workforce. This is a civil service that the government itself admits needs trimming; yet, it has lacked the political will so far to implement the Oronsanye report regarding reducing the service because of the likely backlash that will ensure.

This problem is not exclusive to the FG — it is replicated at the state levels with numerous states consistently receiving bailouts just to pay salaries and pensions, and still owing for many months. Like the federal civil service, they also deal with bloated civil services and lack the political will to take the necessary actions. Any increase will further push them into debt and leave them unable to meet this most basic obligation of an employer. It is important to keep in mind that minimum wage increases result in not just increase at the bottom, but everyone across ranks.

· Because the recurrent expenditure will increase from its already horrendous proportion of the budget, there is even less money for government to invest in infrastructure and social services such as education and health — stuff that will actually help to grow the economy and better the quality of life in the country.

Now why can’t the government then just borrow money for these things? This is because it is also borrowing money heavily just to keep itself running — and this leads to another problem: the government is crowding out the private sector in borrowing. Because the risk of the Nigerian government defaulting on its local borrowing is very low (it can always just print naira, albeit with likely increase in inflation), financial institutions and investors will rather lend to it than lend to the private sector. As a result, the private sector is unable to grow, create jobs and increase the tax revenue of the government. A minimum wage increase will only worsen such a situation.

· A minimum wage increase is not the solution to alleviating the harsh living conditions in Nigeria. It is a short-term solution that in the end, does not really solve anything. This is because the value of say, N20,000 today is worth less than it was two years ago largely due to inflation. The real solution is cracking the causes of this inflation and how to make incomes here count for more. This means solving the whole gamut of our economic problems: from monetary policy and infrastructure to improving quality of manpower and ease of doing business — and everything else in between.

This is the road less willing to be traveled, and the destination will not be achieved in the short-term. It will also come with hard, unpopular but necessary decisions. However, the end result will be better for everyone in the long-term.

A minimum wage increase will not give us such a result. It is like mistaking the foam-head of a drink for the actual content. Without solving the underlying issues, the cost of living in Nigeria will inevitably catch up to the new wage increase

Don’t let the froth deceive you about the size of the content.

· A high minimum wage is a barrier to private sector employment, especially for a low-income country such as Nigeria where there is a high unemployment rate. It is not in doubt that job creation is a must in Nigeria in the immediate short-term, not long-term. A lot of the jobs that are needed are low to medium-skilled jobs created especially by small and medium-sized companies. If these SMEs have to pay a higher minimum wage or even the current minimum wage, it will limit the number of people they can employ without it impacting their bottom line.

This is a fact that is lost on a lot of people as the debate around minimum wage focuses solely on the ability of the government to pay without taking into cognizance the private sector.

Case in point: Germany has the third lowest unemployment rate in Euro Area and one of the reasons is due to the absence of a minimum wage until 2015 when the first federal minimum wage was approved. Yet, working conditions and average salary in Germany is better than many European countries and the country has one of the highest average wage year-on-year growths.

This is food for thought for our labor unions and policymakers.

· Lastly, it is an anomaly that in a supposedly federal country as Nigeria is, the minimum wage is negotiated for the federal, state and local governments by just the Federal Government. This flies in the face of federalism.

Not just does the financial ability of governments across the country differ, the cost of living in different states vary as well. For example, the Lagos State government and its economy will be able to support a higher minimum wage than Jigawa’s can; also, the cost of living in Jigawa is vastly lower than in Lagos.

Thus, the Federal Government setting a minimum wage for everyone to follow does not take these into consideration and saddles governments of sub-national units and their economies with a burden beyond their ability.

It is important that policymakers think through this issue thoroughly before arriving at a conclusion. It is also important that we as citizens not get carried away with shows of populism that in reality, have no positive impact on us.

I am always up for a debate on this and looking forward to comments.

Please, if you must insult me over my views, insult me gently. :D