New Minimum Wage : When Economic Relief Becomes Economic Grief — By Oladigbolu Taofeek

When Babajide Sanwo-olu announced 85,000 naira as the new minimum wage in Lagos state, the celebrity governor received accolades and was named the man of the people. Surely, his ‘benevolent’ act will leave more cash – in the hands of Lagos civil servants – to purchase little more inflated goods and further promote his public image. Whether the alms are for the public good or public praise is a debate for another day. Let’s leave the charade and take the bull by its horns. The effects of increased minimum wage on the dying economy.

Increased minimum wage, like every other economic relief initiative adopted by the present government, can be best described by the Yoruba proverb ‘a fi ete le, npa lapalapa,’ which depicts the irrationality of addressing an issue while ignoring its cause. At this state of the state, it is rational to say the government is irrational and confused on the way out of the menace they incurred on Nigerians. Or what will you call Tinubu’s habitual response of deploring bags of rice after launching a missile of anti-masses policy and the Senate President’s ill-logical advice of ‘Nigerians should help themselves wherever they see free food.’

Many may not see the increment as problematic to the deteriorating economy. And, that should be expected. Famously renowned economy expert and a seasoned investor, Benjamin Graham discussed this bias in his famous book, The Intelligent Investor. He stated, “As long as the nominal change is positive, we view it as a good thing – even if the real result is negative.” As long as we have more disposable income to purchase little more inflated foodstuffs, the increase in minimum wage is a good thing. Even if we have to purchase goods twice their market price. Even if its overall effect is negative on the economy in the long run.

For a society that is experiencing a hunger epidemic, a wage increment seems like a bail from the shackles of untold hardship. At least civil servants will have more disposable income to meet the minimum of their basic needs, and so the logic goes. Except the negative consequences of the ransom on the economy in the long term can be stagflation. A rise in the minimum wage in a run-up economy results in wage-push inflation. The Noble-wining Economist, Edmund Phelps, describes it as a situation when an increase in wage increases purchases, triggering an increment in the prices of products and services. This wage-price spiral erodes the purchasing power of the newly increased wage, which leads to higher inflation. The surge in inflation leads to demand for higher wages. Economists describe this situation as an inflationary spiral. The economy thereby returns to square one, if not to a much more worse state.

In a study by Neyavan Suthaharan and Joanna Bleakley on the impact of wage increase in a hyperinflated economy titled ‘Wage-price Dynamics in a High-inflation Environment: The International Evidence’. The researchers contended that “In many countries, inflation is at historically high rates, the labor market is exceptionally tight, and wage growth is picking up, so there are risks that a wage-price spiral could emerge in some economies.” Nigeria’s economic situations meet the criteria the scholars argued could lead to an inflationary spiral; we are experiencing stagflation, the unemployment rate has spiked, and the minimum wage has been increased.

On April 18, 2019, Mohammadu Buhari signed a new minimum wage bill into law; a 67% increment. Those who are not aware of the situation behind it may think the former president was altruistic. But Buhari’s approval wasn’t benevolent but transactional. The election was around the corner, and the former president needed the NLC’s support. However, approving a minimum wage over 700% above the inflation rate of the country invited economic disasters. This political decision (for political gain) at the expense of the nation’s economy resulted in economic disasters in the longer term for the country.

Let’s assume the Tinubu Administration is trying to stir the economy into an equilibrium position, which the reality of the daily lives of Nigerians says otherwise, An increment in minimum wage could end up plunging the country into higher inflation that could result in more anti-masses policy. Economic reforms are backed by job creation, empowerment, and investment incentives, not bags of rice, ‘ill-logical’ advice, and increased minimum wages.

Most state and private enterprises can’t afford (or won’t pay) the minimum wage. So we should applaud states that pay beyond the minimum that can’t cater to the minimum of Nigerians’ basic needs. And await when NLC strikes when owned months of salary. The grand announcement of the increment has set the ocean in waves; may we not all be a victim of the disaster of the coming storm.

Oladigbolu Taofeek is a seasoned journalist, and writes from Ibadan.

 

 

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