Compulsory Unemployment In Nigeria

On compulsory unemployment

President Muhammadu Buhari inaugurated a 30-member tripartite National Minimum Wage Committee for the negotiation of a new National Minimum Wage. This has produced a lot of expectations and hope among Nigerians. The committee, which includes cabinet members, governors, labour leaders, and executives from the private sector, is expected to upwardly review Nigeria’s minimum wage from its present monthly rate of N18, 900. Now, Nigerian workers are demanding N56, 000 new minimum wages. The question is, is that realisable given the current comatose economy where the extant N18, 000 minimum wage is not paid as and when due? Correspondingly, given an unemployment rate of 18 %(NBS Q3 2017) which is equivalent to roughly  18 million people and a youth unemployment rate of 33.10% NBS Q3 2017).

The general thesis that makes increasing the minimum wage attractive to the electorate, which makes it attractive to presidential candidates, can be summed up in two propositions: 1) Increasing the minimum wage lifts poor people out of poverty, while having no noticeable impact on unemployment, and 2) Raising the minimum wage is necessary now because so many minimum wage workers are the only means of financial support for their households. It turns out that every part of this thesis is founded on bad economic analysis, a disregard for economic facts, and misleading government pronouncements.

Raising the minimum wage is a formula for causing unemployment among the least-skilled members of society. The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the smaller are the quantities of goods and services demanded and the number of workers employed in producing them. These are all propositions of elementary economics that government should well know. A minimum wage leads to a reduction in the demand for labour and increases in the supply of labour in the relevant market — usually, the market for low-skill workers. It removes the ability of some workers to compete by accepting lower wages and shuts them out of the labour force. As a result, it reduces job opportunities for these workers. A condition I call “compulsory unemployment” for this group of workers.

But there are additional, hidden costs of these interventions, which are more difficult to detect but perhaps more insidious. For example, one effect of a minimum wage is to reduce the availability of on-the-job training, since more resources are required simply to hire and retain a workforce. And further interventions in the labour market (for example, safety regulations and payroll taxes) make it still more costly to employ labour. These burdens together reduce a firms willingness to hire labourer's and — in the long run — must reduce the number of opportunities for those labourers to acquire valuable job skills. Far from increasing opportunities for the working poor, a minimum wage actually restricts their mobility. Moreover, these wage increases do not take into account the opportunity cost, i.e., the cost of the next best option. The higher the minimum wages, the more lucrative other options such as automation appear.

It is true that the wages of the workers who keep their jobs will be higher. They will enjoy the benefit of a government-created monopoly that excludes from the market the competition of those unemployed workers who are willing and able to work for less than what the monopolists receive. The payment of the monopolists’ higher wages will come at the expense of reduced expenditures for labour and capital goods elsewhere in the economic system, which must result in more unemployment. Those who are unemployed elsewhere and who are relatively more skilled will displace workers of lesser skill, with the ultimate result of still more unemployment among the least-skilled members of society.

Competition for labour insures that people are paid according to what economists call the value of their marginal product, which is a fancy way of saying that wages will tend to reflect the value to the employer of the worker’s productivity. If an employer underpays the worker he runs the all too real risk of having that employee leave for another employer who would likely outbid him. This also means that an employer will not pay any worker more per hour than the value of what that worker is producing per hour. Simply put, the cost associated with employing a worker — that is wages, plus benefits, plus employment-related taxes — has to be less than the benefits that are received by employing the worker.

Furthermore, the higher the minimum wage is raised; the worse are the effects on poor people. This is because, on the one hand, the resulting overall unemployment is greater, while, on the other hand, the protection a lower wage provides against competition from higher-paid workers is more and more eroded.

Of course, the minimum-wage has been increased repeatedly over the years since it was first introduced, and there has continued to be at least some significant room for the employment of such workers. What has made this possible is the long periods in which the minimum wage was not increased. Continuous inflation of the money supply and the rise in the volume of spending and thus in wage rates and prices throughout the economic system progressively reduce the extent to which the minimum wage exceeds the wage that would prevail in its absence. The last time a minimum wage was set before the current one being reviewed was in 2000 with effect from May 1, 2001. Then, the wage was set at a N5, 500. To reduce and ultimately eliminate the harm done by today’s minimum wage, it needs to be abolished or left unchanged.

Government needs to understand that the standard of living is not raised by arbitrary laws and decrees of imposing higher wage rates, but by the rise in the productivity of labour, which increases the supply of goods relative to the supply of labour and thus reduces prices relative to wage rates, and thereby allows prices to rise by less than wages when the quantity of money and volume of spending in the economic system increase. If raising the standard of living of the average worker is the government’s goal, it should abandon its efforts to raise the minimum wage. Instead, it should strive to eliminate all government policies that restrain the rise in the productivity of Lab and thus in the buying power of wages. If government’s goal is to raise the wages specifically of the lowest-paid workers, it should strive to eliminate everything that limits employment in the better-paid occupations, most notably the forcible imposition of union pay scales, which operate as minimum wages for skilled and semi-skilled workers. In causing unemployment higher up the economic ladder, union scales serve to artificially increase the number of workers who must compete lower down on the economic ladder, including at the very bottom, where wages are lowest (This is practised mostly in the medical and petroleum sector). To the extent that occupations higher up could absorb more labour, competitive pressure at the bottom would be reduced and wages there could rise as a result.

For the consumer or ordinary citizen, the impact of minimum wage laws on the consumer is felt through an increase in prices, as firms attempt to recover some of their raised production costs. Since employees are also consumers, they are to be impacted by the boost in prices, which reduces what their money can actually buy. Price increases that accompany minimum wage hikes thus lower the real wages of those who are lucky enough to keep their jobs as new minimums are imposed. Additionally, as minimum wages force cash-strapped small business out of business, consumers enjoy fewer choices.

In truth, there is only one way to regard a minimum-wage law: it is compulsory unemployment, period. The law says, it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X Naira an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum-wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result. All demand curves are falling, and the demand for hiring labour is no exception. Hence, laws that prohibit employment at any wage that is relevant to the market must result in outlawing employment and hence causing unemployment.

Yes, it’s hard to make ends meet with a minimum wage job and such jobs certainly aren’t enviable. That being said, cutting out the bottom rung from people just makes it all the harder to get by. A bad job is better than no job and it is often the first step to something better.The principle here is that we need to look to greater economic freedom, not greater government intervention, as the path to economic improvement for everyone, especially the poor. Ending poverty and giving people additional income are praiseworthy goals, but there are no free lunches in this world. And trying to force prosperity through an increase minimum wage simply creates a whole host of negative and unintended consequences especially for those who are the most vulnerable.