New minimum wage will spur capital market growth

Uche Uwaleke

At a time that politics is dominating national discourse, the
current agitation by organised labour for a new national minimum
wage seems to, once again, draw attention to the economy.

Many state governors claim they do not have the capacity to
implement a new wage floor of N30,000 for employees. But Labour
leaders disagree taking the view that it is more about the
willingness to implement, requiring cutting costs and prioritising
spending, than the ability to pay. The fact that real wages have
dropped drastically in Nigeria since the current N18,000 minimum
wage came into force in 2011 is not in contention. As evidence, the
average inflation rate in Nigeria was 16.5 per cent in 2017
compared to 10.8 per cent in 2011 according to the National Bureau
of Statistics.

Also, the naira/dollar exchange rate which feeds into the rate
of inflation, thereby impacting purchasing power, has moved from
about N162 to N360 over the same period. Certainly, the current
minimum wage has not kept pace with trends in the cost of living
and the erosion in purchasing power has created a situation where a
lot of low-paid workers live in abject poverty.

One major criticism of a minimum wage hike is that it would
result in a demand-pull inflation and complicate monetary policy.
On this score, the evidence is scanty. When the National Assembly
amended the National Minimum Wage Act in February 2011, increasing
the minimum wage from N7,500 to N18,000, average inflation rate
actually dropped from 13.7 per cent in 2010 to 10.8 per cent in
2011 and further down to nine per cent in 2016. It was not until
2016 that inflation spiked to 15.7 per cent on the back of an
increase in both the pump price of fuel and electricity tariff.
What is clear from quarterly reports of the National Bureau of
Statistics is that inflation in Nigeria is more from cost-push than
demand-pull factors.

It goes without saying therefore that the cost of energy and
transport are among the greatest inflation drivers in Nigeria today
not least because these cost elements directly or indirectly impact
the prices of commodities due to the tendency for other sectors of
the economy (even with no link to petrol) to take advantage of any
increase in transport costs. This fact is corroborated by various
communiqués issued by the Monetary Policy Committee of the CBN
which have not failed to note the “structural factors driving the
sustained pressure on consumer prices, such as the high cost of
power, energy and transport factors”. In this regard, the key to
bringing about a low inflation environment is fixing
infrastructural bottlenecks to reduce the cost of doing business in
the country.

A sunny side to the new minimum wage that is often overlooked is
its potential for impacting positively on the capital market and
financial markets in general. This is due to the fact that not all
the increase in income will be consumed. Much as consumption, a
positive function of the absolute level of current income, is bound
to increase, John Keynes, a famous economist, in his “General
Theory” published in 1936, points out that consumption expenditure
does not have a proportional relationship with income. Consumption
actually increases by less than the increase in income implying
that the average propensity to consume falls as income increases.
It has been established in empirical literature that marginal
propensity to consume varies between zero and one. The implication
is that any increase in income is partly consumed and partly saved.
The import of this is that a part of the increase in minimum wage
is likely to be saved. A lot of workers who have borrowed from
their cooperative societies will be put in a better position to
liquidate such debts. Many others are bound to increase their
monthly savings contribution. Such savings will likely flow into
financial markets especially the capital market where uptake in
government savings bonds, pension funds, mutual funds, assets of
cooperative societies and all manner of collective investment
schemes are expected to receive a boost.

Expectedly, Nigeria’s pension assets under the Contributory
Pension Scheme which is currently in excess of N8tn will grow from
increased contributions bearing in mind that a majority of low-paid
workers in Nigeria are below 49 years. According to the NBS,
“Pension Asset and Membership Data (Q2 2018) report, participants
within the ages of 30 to 39 had the highest percentage composition
closely followed by participants within the age bracket of 40-49
while those above 65 years had the least percentage composition.
The new minimum wage will also support the implementation of
micro-pension scheme by PenCom which is expected to accommodate
more contributors. Furthermore, the new minimum wage holds a lot of
promise for financial inclusion in Nigeria. The National Financial
Inclusion Strategy was introduced in 2012 with the goal of reducing
the number of Nigerians without access to financial services from
46.3 per cent to 20 per cent by 2020. The new minimum wage
increases the chances of the financially excluded to participate in
the financial system. Through financial empowerment, it presents a
huge opportunity to improve access to and use of
Smartphones/devices, which is a platform for improving financial
services.

Just like in the United States where studies have found a strong
positive correlation between rising wages and equities prices, a
higher wage floor in Nigeria is bound to have a salutary effect on
stock prices in Nigeria. This is because with a rise in income,
households have more money to spend. This growth in consumption
could increase corporate sales and corporate earnings, especially
if costs remain stable, potentially leading to an increase in stock
market activity.

Overall, the new minimum wage is positive for the financial
markets and the capital market in particular. It does appear to be
the missing piece of the post-recession growth trajectory. The
growth in GDP is still weak due in part to weak aggregate demand
and therefore one way to stimulate the economy should be by
implementing the new minimum wage. Given the continuous decline in
economic activities evidenced by sliding GDP growth rates and
relatively low inflation rate, the economy can absorb the new
minimum wage without any significant knock-on effect on price
levels and employment.

In view of the nature of the current fiscal federalism in
Nigeria which places the Federal Government at a dominant position
with respect to revenue allocation, (under the current revenue
allocation formula, the Federal Government receives the lion’s
share of 52.68 per cent leaving the 36 states and 774 local
government councils to share 26.72 per cent and 20.60 per cent
respectively), the Federal Government should explore ways of
assisting sub-national governments to implement the new wage floor.
In return, the Federal Government should demand from state
governments concrete plans aimed at improving states’ Internally
Generated Revenue as well as enthroning transparency and
accountability in the management of their finances.

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