Introduction
Nigeria, Africa's most populous nation, has a diverse population that enhances its cultural and economic potential. As one of the continent's largest economies, Nigeria plays a vital role in regional and global markets, driven by natural oil and gas resources, a budding agricultural sector, and a rapidly expanding technology landscape. However, the country faces significant socioeconomic challenges that impede its development.
One of these challenges is the ongoing minimum wage dispute which reflects the struggles of many Nigerians who are also faced with the challenges of income inequality, which fuels social tensions and highlights the yawning gap between the elite and the masses. The inadequacy of the previous minimum wage sparked widespread discontent and demands for an increase, as many workers were unable to meet their basic needs. On the other hand, some state governments and businesses contended that the increase was unaffordable and that workers had voluntarily given up their rights to the previous ₦30,000 wage to avoid layoffs.
Understanding the impact of the minimum wage increase and navigating its obvious complexities is crucial for the livelihoods of millions and the overall stability of Nigeria's economy, since the informal sector, which employs many Nigerians, often lacks worker protection. Therefore, this article examines the diverse economic implications of the minimum wage increase while exploring its potential benefits and challenges for employers, employees, businesses, and the overall economy. Furthermore, the article will make policy recommendations aimed at ensuring fairness, equitable taxation, and protecting those who might be negatively impacted by the wage increase.
The minimum wage is the lowest compensation that an employer is statutorily required to pay the lowest-paid worker in its establishment within a specific period, to ensure a reasonable standard of living. Since 1981, Nigeria has introduced five national minimum wage acts, with the most recent being the Minimum Wage Amendment Bill 2024. This amendment has increased the minimum wage for workers from ₦30,000 to ₦70,000, marking an increase of approximately 133 per cent. The implementation of this recent legislation is anticipated to have various macroeconomic impacts on wages, employment, the supply chain and cost of goods, employee welfare, and the overall well-being of the populace.
The minimum wage serves as an economic policy tool designed to enhance the income of low-income households, ultimately aiming to enhance the living standards of this group of workers allowing them to meet their essential needs.
Historical Background and Legal Basis of Minimum Wage in Nigeria
The origins of minimum wage legislation in Nigeria can be traced to the colonial period. Since then, the minimum wage has undergone several adjustments to account for fluctuations in the cost of living, inflation, and overall economic conditions. These modifications have frequently emerged from discussions among the government, labour unions, and employers, aiming to achieve a balance between safeguarding workers' rights and ensuring economic stability.
Historically, the most notable change in Nigeria's minimum wage occurred in year 2000, when it was set at ₦5,500. In 2011, it rose to ₦18,000 under President Goodluck Jonathan, and in 2019, President Muhammadu Buhari increased it to ₦30,000. Most recently, on 29 July 2024, President Bola Ahmed Tinubu raised the minimum wage to ₦70,000 through the National Minimum Wage (Amendment) Act 2024 ('the Amendment Act' or 'the Act'). This was a response to escalating costs of living and poverty levels.
According to Section 3(1) of the Amendment Act, every employer must compensate their employee with a minimum monthly wage of ₦70,000. Section 3(4) also stipulates that the national minimum wage must be reviewed and increased every three years, thereby shortening the review period from the five years established in the previous National Minimum Wage Act of 2019 to three years. In addition, Section 3(3) asserts that any contract or agreement that stipulates wages below the national minimum wage is considered null and void.
Economic Impacts of the Minimum Wage Increase in Nigeria
Increasing the minimum wage has significant economic implications that can be viewed through various lenses, including employment, business operations, consumer spending, and overall economic growth. Some of these areas are examined below:
- Societal Impacts
- Improved Standard of Living: The recent wage increase is expected to provide affected employees with more disposable income to meet basic needs and generally enhance their conditions of living, potentially boosting consumer spending and economic growth.
- Lower Staff Attrition: Businesses that offer higher wages create a more attractive work environment that encourages employees to stay with the organization for a longer period. Therefore, a decline in employee turnover and the ensuing stability could enhance employee loyalty and significant cost savings for employers.
- Increased Consumer Spending: The minimum wage increase is expected to boost consumer spending, as higher earnings enable workers to spend more on goods and services. This increase in consumption could drive economic growth, particularly in retail and services. Additionally, the wage increase aims to reduce poverty for millions affected by subsidy cuts and inflation, while also addressing income inequality and promoting social equity for vulnerable workers.
- Rising Labour Costs & Job Losses: While the minimum wage increase holds potential advantages, a major concern is the risk of job losses, especially among businesses that may find it difficult to accommodate the new minimum wage requirements. Rising labour costs may lead companies to cut jobs, rely more on automation, or shut down, resulting in job losses and economic uncertainty.
- Inflation: The wage increase could intensify existing inflationary pressures unless appropriate measures are implemented to manage inflation. The recent wage increase carries a risk of triggering inflationary spikes, particularly in the absence of effective inflation control strategies.
- Income Inequality: A key goal of raising the minimum wage is to reduce income inequalities. However, the informal sector, which employs many Nigerians, is likely to experience minimal advantages from the wage increase, as a considerable portion of its workforce is not subject to formal wage regulations. Given that every individual is required to pay personal income tax on their earnings, an individual who earns a little above ₦70,000 will end up with a take-home pay lower than the minimum wage amount after tax.
We have provided an illustration below:
|
Employee |
Wage (₦) |
Tax (₦) |
Net Income (₦) |
|
A |
70,000.00 |
0 |
70,000.00 |
|
B |
72,000.00 |
3,502.67 |
68,497.33 |
|
C |
74,000.00 |
3,678.67 |
70,321.33 |
Therefore, it is crucial to reevaluate the progressive tax rates in the Personal Income Tax Act to ensure income equitability in consideration of those earning slightly above the minimum wage.
- Sectoral Impacts
- Impact on Enterprises and Corporations: Nano, small and medium enterprises (NSMEs) are likely to be most affected by the wage increase due to their narrow profit margins, making it difficult to manage higher payroll costs. Many NSMEs in Nigeria already struggle with high operating expenses and limited credit access, and the wage increase could worsen these challenges. In addition, large corporations, especially multinationals, may absorb increased labour costs but could still face profitability challenges.
- Regional Compliance Differences: Previous minimum wage implementations in Nigeria have shown significant regional compliance differences. Some states have delayed or ignored wage increases, creating disparities in wages and living standards which contradicts the provisions of the Act. The proposed increase could worsen these inequalities if not uniformly enforced. The new wage introduction may create challenges, particularly in financially constrained states, leading to potential delays and regional inequalities. Close collaboration between the federal government and state authorities will be crucial for consistent implementation. Additionally, concerns about the long-term viability of the wage increase will arise if inflation and economic growth are not addressed, risking diminished benefits due to rising prices and reduced purchasing power.
Conclusion & Recommendation
In summary, the recent minimum wage increase in Nigeria is a significant step toward improving employee living standards and reducing poverty. However, it raises important questions about its broader economic effects on businesses, informal sector workers, and those earning just above the minimum wage. Although increasing the minimum wage may offer advantages such as higher incomes for low-wage employees and enhanced consumer spending, it also presents difficulties, including possible job reductions, elevated operational costs for businesses, and inflationary effects. The overall impact on the economy is contingent upon several factors, including the extent of the wage increase, the adaptability of businesses and workers, and the wider economic environment.
The newly established minimum wage is expected to be a topic of continuous discussion and potential future modifications, especially if inflation persists in its upward trend. It will be essential for policymakers to closely monitor the economic impact of this wage increase and to be ready to adjust as may be necessary to maintain its sustainability and fairness.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
