The labour theory of value argues that the value of a good or service derives from the units of labour that produces it. It describes labour as the source of value. True or false, it highlights labour as an important factor of production or economic agent.
If increasingly, workers cannot afford the product of their labour, whether by outright exploitation or by worsening economic conditions – which confiscates income, it provides grounds for economy-wide wage review. Minimum wage is legislation on the lowest remuneration payable by employers to employees. On the side of the worker, it is the wage below which employees should not offer their labour. Typically, labour exploitation, rising inequality and poverty are reasons for minimum legislation.
The expectation is that legislation on the minimum wage payable to workers would improve their standard of living, reduce poverty and inequality. A satisfied worker would be more efficient at work, and output would increase. But the standard representation of the labour market shows that the application of minimum wage disrupts the efficient working of a competitive market, resulting in a glut in unemployment. Increasing the minimum wage above the market clearing level would increase the wage bills of firms. And as firms adapt, they reduce employment or transfer the cost to consumers of goods – the inflationary effect of minimum wage. However, the evidence is mixed as to how minimum wage affects employment and therefore poverty as empirical studies show contradictory evidence in different economies. In clear terms, minimum wage increases the wages of those who retain their jobs and reduces the benefits of those who lost theirs. Therefore, the effect on poverty overall is ambiguous.
What we know about minimum wage
- The effect of minimum wage varies from country to country depending on the pre-existing labour market condition and the economy at large.
- High unemployment can condition the average wage payable to workers; the effectiveness of minimum wage and black-market in the labour market.
- Minimum wage increases the supply of labour, if not demand.
- Rising misery level influences/necessitates a review of minimum wage
The case for Nigeria
Minimum wage negotiation in Nigeria is never gentlemanly; it is often a brawl between the government and the labour union degenerating into a nationwide strike. In 2010, the Nigerian Labour Congress (NLC) had organised a nationwide protest for an upward review of the minimum wage which at the time was N7, 500 and did not reflect the realities of the time. It ended in a one-day strike following the Belgore committee report and a minimum wage of N18, 000 (a deviation from the N52, 200 demanded) was approved by the National Council of states. Before then, the Wage Review Agreement of 2000 which outlined the stages of wage review by 25 percent in 2001 and 15 percent in 2003 on the existing wage was abandoned; only 15 percent review was made in 2007 increasing the value to N7500. In 1981, Hassan Sunmonu began an agitation for minimum wage review to N300. The agitation culminated in a nationwide strike under the Shagari administration. The eventual settlement was at N125, less than half of the sum demanded.
Today, the agitation is strongest; perhaps the forthcoming elections present the opportunity to back the political class into a corner. The agitation began to brew since 2016, when the NLC leaders, in a press briefing, called for a review of the minimum wage to N56, 000 on grounds that the five-year periodic review as laid out in the Belgore Committee report is long due since the last one in 2011. The scenario as it plays out in Nigeria leaves the discerning mind wondering why governments – federal and states – are vehemently antithetical to wage reviews as against what obtains in other climes where governments and political parties debate the implications and willingly act on the outcome of the minimum wage reviews to curb labour exploitation in industries.
In the United Kingdom, the Low Pay Commission advises the government every October about the future of the national minimum wage. In 2015, setting a wage floor was a key agenda in the demands of the Social Democrats (SPD) to enter a coalition with Merkel; this led to the establishment of a minimum wage commission, Mindestlohnkommission. In an ideal situation, it is the organised private sector and the manufacturers association that should decry inability to pay a wage considered too high; but a good majority of the private employers who are constitutionally obliged to pay the minimum wage already exceed it. The implication is that it is the government, in our case, who is the chief exploiter of labour.
The major grounds for strong resistance against a wage review especially by state governments include the inability to pay, inflation and the unemployment implication. A number of state governments have openly declared their inability to fulfil a reviewed wage and evidence are available about states who are unable to pay the current wage against a backlog of arrears. But should governments’ inability to meet its own obligation excuse mass immiseration? The situation is an indictment on the size of governments and its slack maximizing bureaucracy. In the light of the current high unemployment, downsizing is not much an option. State governments must be efficient in allocating resources and ingeniously increase revenue streams.
The inflation argument is that the quantum of money to raise the minimum wage would cause an increase in price level. Firstly, it is not stylized to argue that a wage review would increase unemployment and inflation simultaneously – Philips curve. Minimum wage reviews are ideally targeted at the low-income group to increase welfare and reduce inequality. The marginal propensity to consume (MPC) of low-income earners is high for an increase in income. Therefore, this consumption spending due to the increase in wage would increase aggregate demand, output and growth, such that the inflation expectation may not hold. Again, in the light of the Minimum wage Act, the review would not affect firms with less than 50 employees, part-time workers, workers on commission, and seasonal employment. Since a significant number of the private sector employers pay above the minimum wage, one can argue that the review affects only a relatively small group of workers, such that any inflationary implication is infinitesimal.
The unemployment implication argues that an increase in wages would increase the wage bills of firms. But I have argued above, firms already pay higher wages and are not significantly affected by the review. And since the minimum wage act as pointed out excludes employers in the informal sector, and SMEs all of which constitute a major employer of labour, the unemployment effect in our case may be well exaggerated – limited only to civil servants. For instance, the survey conducted in 2013 by Small and Medium Entreprises Development Agency Nigeria (SMEDAN) and Nigerian Bureau of Statistics (NBS) revealed that the total number of MSMEs stood at 37,067,416 (Micro: 36,994,578; Small: 68,168; and Medium: 4,670). The total number of persons employed by the MSME sector as at December 2013 stood at 59,741,211 (Micro: 57,836,391), representing 84.02% of the total labour force and contributing 48.47% to nominal GDP. Interestingly, 97.74% of the total number of Microenterprises is Sole proprietorship.
I have argued here that the direction of the debate on minimum wage is not founded on sound economic principles, but on the emotions of those who pay the piper. In fact, the resolve to pay N27, 000 as minimum wage by the government reduces to N900/day and is insufficient per se given the economic realities. This N900/day at N360 per dollar only slightly exceed the extreme poverty threshold of $1.90/day We have recently learned that South Africa would pay the equivalent of N126, 480 as minimum wage in 2019. Another rather interesting aspect of the matter should be the insufficiency of the minimum wage act to reflect the flexibility in the work environment and changes in the future of work. The work environment is not as rigid as it used to be; more and more people are engaged in freelance employment, contract jobs, commission-based employment, and part-time employment. The Act, as it excludes these groups, creates room for labour exploitation.
 Note that Micro and Small enterprise is defined by the number of firms employing between 1-49 employees