On Minimum Wage and Efficiency Wage, By Prof. Sheriffdeen

By
Prof. Sheriffdeen Tella

There is always controversy over what should be the minimum wage paid to workers in Nigeria and of course, somewhere else. That is why there are often long negotiations between the government and workers’ unions. Sometimes it leads to strikes or threats to go on strike. It is disheartening to even find that when the minimum wage is agreed upon, some state governments would refuse to pay because they were not involved in the negotiations or there were no funds to meet up. Yet we see the same government awarding inflated contracts on roads, purchasing imported expensive official vehicles and other inanimate items and paying armed robber salaries and allowances to themselves and close allies.

The battle between labour and entrepreneur was recognised in economics even before Adam Smith and his colleagues decided to separate economics from political economy as subject matter. The game is the exploitation of labour by the entrepreneur to accumulate more profits. This issue was well captured by Karl Marx in his surplus labour theory of production or economic growth. Marx accused the capitalists, the entrepreneurs, of paying labour pittance for the efforts put into generating output and acquiring illegally the remaining revenue from the sale of products as profits. This, he referred to as the surplus value of labour cornered by the entrepreneur.

Even the capitalists and economists in support of capitalism recognise the importance of labour in the production-profit matrix. Without labour, nothing is produced. Most production in government enterprises is not measured in profits but in welfare terms, yet paying labour the appropriate remuneration is not considered important. The politicians see paying workers appropriate remuneration deprives them of the opportunity to appropriate more money for themselves. They seem to see workers as competing with them in national wealth sharing, which should not be.

Minimum wage is just the amount of remuneration that an employer can legally pay wage earners for work or tasks performed in a country. It is a price floor in wage determination. It is the level below which no labour should be hired. It can be per hour, per week or per month. It is not an efficient wage but who cares about efficient wages in Nigeria? What is an efficient wage?

Efficiency wages was a term coined by Alfred Marshall, one of the fathers of economics, to indicate, in its original form, the wage that a labourer deserves for his efforts; such that a more efficient worker will be paid more than a less efficient one. The meaning of the term, in the modern day, is that higher wages may increase the efficiency of workers by various routes. This implies that it is worthwhile for employers to pay workers over and above normal market-clearing wages or equilibrium wages to extract more commitment or efficiency in outputs. It is therefore not the same as minimum wage, which is lower. But that is what both the private and public sectors in Nigeria should be aiming for, given the general low productivity of labour in both sectors.

There are benefits and costs for enterprises paying higher wages as higher wages can increase workers’ food consumption and consequently be better nourished and more productive. It provides incentives for workers to perform with less supervision particularly if the wage is above the market clearing or equilibrium rate. The increase in consumption implies higher demand for goods and services which can lead to a higher level of employment and national income. In a corruption-prone economy, it can reduce the incidence of corruption as workers will not only get some level of contentment but will be afraid of losing their jobs if caught in the act of corruption. A friend reminded me that such arguments have not worked with the police generally because the higher the wages the higher the denomination of naira they request on the road. We need some empirical verification on this.

In this country, the government is still haggling with labour over what the minimum wage should be. It is currently N30,000 and has been so since 2019. By law, the minimum wage is expected to be reviewed every five years but we are presently in the sixth year. Some states have refused to meet up with the N30,000 despite the increase in funds from the federation account in the last six months and the extra N5bn extended to them by the Federal Government. Workers are treated with disdain by political leaders and even some private sector entrepreneurs who are more concerned about their high standard of living than workers’ existence on slavery wages.

An important part of the rationale for tagging Nigeria the poverty capital of the world is that the minimum wage is below the $2.15 per head, regarded as the international poverty line. That was before the current massive depreciation of the naira. With the depreciation, the high inflation rate and the consequent worsening cost of living, the current minimum wage has become a footnote in the consumer spending equation. Therefore, the starting point of the minimum wage negotiation should be linked to the poverty index of $2.15. There should not be any excuse if the government wants to reduce the poverty level in the country, encourage productivity in public and private sectors production and thus raise the standard of living to take the country out of the appellation “poverty capital of the world.”

Agreeing to a minimum wage in time will stop the need for extending palliatives which have further created illegal enrichment of some individuals at the expense of the masses. It will allow the government to face acts of governance for economic development through direct project intervention, execution and monitoring instead of the economics of tokenism that does no one any long-term good.

Inclusive growth being preached internationally requires government interventions in the short to medium term and the Nigerian government should not shy away from this whenever required. The International Monetary Fund and the World Bank seem to be comfortable with the recent labour crisis on the cost of living. That is how friendly they are. Such interventions can be temporarily subsidising fuel imports, and fund injection into small, medium and large-scale enterprises badly affected by government policies with commitments to reciprocate the good gesture. It should not be like the Dangote refinery that our foreign exchange was committed to making it work only for it to concentrate on satisfying the foreign markets and earning foreign currency for its continued operation without showing concern for the precarious situation in the domestic market.

Studies have shown that part of the determinants of achieving minimum wage for workers include activities of the labour unions; government revenue issues; government priorities; and the existence of legislation. But for the current insistence of the Nigeria Labour Congress and the Trade Union Congress, the government would have continued to deceive people with palliatives or tokenism without consideration for legislation on the time lag in negotiating another minimum wage. The legislation says five years, which I consider too long with dynamics in economic activities including internal and external shocks, but we are in the sixth year and the government is still dilly-dallying, trying to award, rather than negotiate a minimum wage for the nation.

It looks clear that the minimum wage is not even on the priority list of the governments at all levels. They had better reorganise their priorities to put the minimum wage atop to avoid continued disruptions in production processes. The revenue issues should be addressed by rearranging the priorities and paying attention to the productivity of labour. The legislation on minimum wage should be binding on all tiers of government and the private sector. Failure to pay should attract sanctions.

Many governors do not appreciate the payment of salaries to their workers in terms of the multiplier effects on the production of goods and productivity of workers in the state. Unfortunately, most of these states have low levels of industrial ventures that generate the most employment. Industries and businesses generally do not grow where demand for products is low. Governors should know that low spending power is why their states do not attract medium and large industries. We note that all states cannot pay the agreed minimum wage because the cost of living differs. Thus, while some should pay above, no state should pay below the minimum wage. But efficiency wage is the way to go.

Prof. Sheriffdeen Tella