Analysis of the Challenges of Fiscal Federalism and Revenue Allocation in Nigeria.

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Macroeconomics of Minimum Wage

Draft: Do not quote

MACROECONOMIC EFFECTS OF MINIMUM WAGE IN NIGERIA: A GENERAL EQUILIBRIUM ANALYSIS

Abiodun O. Folawewo*

Abstract This paper examines the macroeconomic effects of minimum wage (MW) policy in Nigeria using a static computable general equilibrium. Data for the study is drawn from year 2005 National Account of the country. The data is used to construct a 22 x 22 social accounting matrix (SAM) for the economy. The calibration exercise shows that the model’s parameters are able to replicate the baseline data with acceptable precision. Simulation results show that a rise in MW would lead to increased productivity in all economic sectors. The impact of MW increase on employment is mixed; while it leads to marginal rise of employment in agricultural sector, there is a marginal fall in services sector’s employment, and no significant effect in manufacturing and mining and oil sectors. In terms of price effect, an increase in MW would lead to a significant rise in general price level. A rise in MW has positive effects on household income and consumption, as well as on government balances. JEL Code: C680; E640; J380

Prepared for presentation at the CSEA Conference 2007: Economic Development in Africa, Oxford, 19 - 20 March 2007

* Abiodun O. Folawewo, PhD, Lecturer, Department of Economics, The University of the West Indies, Mona, Kingston 7, Jamaica. Tel: +1 (876) 512-3011; Fax: +1 (876) 977-1483. Email: afolawewo2001@yahoo.com, abiodun.folawewo@uwimona.edu.jm.

Macroeconomics of Minimum Wage

Draft: Do not quote

Macroeconomic Effects of Minimum Wage in Nigeria: A General Equilibrium Analysis

Introduction Income policy is usually used as a principal component of welfare boosting and poverty reduction macroeconomic policy framework in Nigeria. Minimum wage (hereafter MW) legislation is a major income policy readily employed in this regard. Although MW policy has both negative and positive effects on the overall economy, policy makers, especially politicians, have used it more often for political purposes than for socio-economic reasons. MW legislations in the country have been preceded by high inflation rates that erode purchasing power and bring reduction in welfare (Adams, 1987). Consequently, the need for MW legislation, which normally leads to a rise in nominal wage, is justified as a means of adjusting wages and salaries to match with the rise in costs of living.

It is, however, notable that wage increase brought about by MW is usually counter-productive. Apart from leading to a rise in general price level, wage increases, are always followed by threat of reduction in government workforce, and in some cases, such threats have resulted into massive laidoff in the civil service (Olaleye, 1974; Owoye, 1994). Also, wage increases in Nigeria do not match up with the rate of increase in prices. As a result, there are always agitations from the labour unions for persistent wages and salaries increase. This regular call for rise in wages is at times based on the wide gap between public sector’s and private sector’s wages. The gap between public sector’s and private sector’s wages has often been given as one reason for the inefficiency and corruption in the public sector. It is argued that public sector workers deserve adequate compensation commensurate with their labour, in other to bring about efficiency (Obasanjo, 1999).

In view of the above, many stakeholders, particularly the labour union organisations, have severally called for wage indexation. However, given the problem with wage indexation, government has found a convenient mean of raising wages by setting up Wage and Salary Commissions (WSCs) 2

Macroeconomics of Minimum Wage Draft: Do not quote over the years. Although WSCs are meant to provide a wide-raging solution to civil service problems, increment in wages and salaries is normally embedded in the recommendations of such commissions.

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