CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Income policy is usually used as a principal component of welfare boosting and poverty reduction macroeconomic policy framework in Nigeria. Minimum wage (hereafter MW) legislation is a major income policy readily employed in this regard. Although MW policy has both negative and positive effects on the overall economy, policy makers, especially politicians, have used it more often for political purposes than for socio-economic reasons. MW legislations in the country have been preceded by high inflation rates that erode purchasing power and bring reduction in welfare (Adams, 1987). Consequently, the need for MW legislation, which normally leads to a rise in nominal wage, is justified as a means of adjusting wages and salaries to match with the rise in costs of living.
It is, however, notable that wage increase brought about by MW is usually counter-productive. Apart from leading to a rise in general price level, wage increases, are always followed by
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threat of reduction in government workforce, and in some cases, such threats have resulted into massive laid-off in the civil service (Olaleye, 1974; Owoye, 1994). Also, wage increases in Nigeria do not match up with the rate of increase in prices. As a result, there are always agitations from the labour unions for persistent wages and salaries increase. This regular call for rise in wages is at times based on the wide gap between public sectorâ€Ÿs and private sectorâ€Ÿs wages. The gap between public sectorâ€Ÿs and private sectorâ€Ÿs wages has often been given as one reason for the inefficiency and corruption in the public sector. It is argued that public sector workers deserve adequate compensation commensurate with their labour, in other to bring about efficiency (Obasanjo, 1999).
In view of the above, many stakeholders, particularly the labour union organisations, have severally called for wage indexation. However, given the problem with wage indexation, government has found a convenient means of raising wages by setting up Wage and Salary Commissions (WSCs) over the years. Although WSCs are meant to provide a wide-raging
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solution to civil service problems, increment in wages and salaries is normally embedded in the recommendations of such commissions.
Inspite of the differing effects of MW legislation, its macroeconomic impact has found little interest in empirical study in Nigeria. Although there are sample studies that have tried to examine the impact of MW in an economy across different parts of the world, such studies have often employed a partial analysis, with focus on specific economic effects of MW in the economy. As pointed out by Adams (1987), the impact of MW could only be adequate captured within a macroeconomic model framework. This study, therefore, analyses macroeconomic effects of MW using a computable general equilibrium (CGE) model. The static CGE model developed in the paper allows for an analysis of the impact of MW across several sectors and variables within an economy. In particular, the study examines the impact of MW policy on household income, consumption, general price level, productivity (output), employment and government balances.