Earning Peanuts in Nigeria

People often say that you can't blow on a 9-5 in Nigeria – it's the 5-9 that counts. Your side hustle either financially compliments your job or provides an escape route to blown status. One reason for Nigeria's entrepreneurial drive is the relatively low wages in formal employment, which persuades most of the population to find other means of income.

But just how low are Nigerian wages in comparison to the rest of the world? 

Nigeria has a minimum wage of ₦18,000 per month – or just under $2 a day. Undoubtedly little by international standards, but we must still account for differences in the cost of living across countries. To do this, we can compare wages using a Purchasing Power Parity (PPP) index which can compare currencies while taking into account the price of goods and services in the different countries relative to the United States. Using the 2016 results of this measure, ₦18,000 was worth around $192 per month. This figure compares with minimum wages of roughly $1300 in the US, $1700 in the UK, $600 in South Africa, and $186 in Ghana. 

So we're not far from Ghana but some way off the likes of the UK and even South Africa, who we often jostle with for the largest economy in Africa title. Though the relationship between GDP and wages is not so clear-cut, one reason the two may diverge so much in Nigeria is bargaining power.  

Hunting For Jobs

There are two sides to the labour market: job vacancies (supply) and unemployed workers (demand). When the number of unemployed workers rises relative to job vacancies, employers have more bargaining power and can offer lower wages because many unemployed applicants are willing to work. If, however, there are only a few applicants for many job vacancies, then workers can put out for higher wages to work for any given employer.  

Take your mind back to the unfortunate events of 2014 when over 125,000 people tried to apply for 4500 immigration jobs. With so much competition in that scenario, the Nigerian government could have, in theory, paid low wages and still gotten its 4500 employees. In fact, the government made applicants pay a ₦1000 fee just for a chance at the job – that's how much bargaining power unemployment can give to employers. 

But it's not just the quantity of unemployed workers that can affect bargaining power, the quality of the competition matters too. By the end of 2016, youth unemployment and underemployment (qualified workers doing menial or part-time jobs) was around 47%; that's almost 20 million young people searching for meaningful full-time jobs. It's no surprise then that once upon a time 6 PhD and 704 Masters holders applied to be truck drivers for the Dangote Group.


How Good Is Plan B? 

Bargaining power also depends on each party's outside option, i.e. what each side can get if the employment contract breaks down. If the employer can quickly hire the next man to do the worker's job, then it can underpay the employee. If however, the worker can walk away and join a competitor's company without being quickly replaced, then he or she can bargain for a relatively higher wage.

In advanced economies, employees have an extra card in their deck that Nigerian job seekers don't: social benefits. In the UK, the government pays out Jobseeker's Allowance as a safety net for those seeking employment. At the lowest rung of the employment ladder, employers should be paying at least a wage higher than the effort of working and not receiving unemployment benefits. This is a legitimate outside option for some low-income earners. In fact, the UK government once estimated that almost 200,000 households were earning between £20,800 and £26,000 a year in benefits. Very few people would be happy unemployed, but if a benefits program existed in Nigeria, workers could use it as a temporary resting place to search for a better paying job instead of accepting any menial offer they get. 


Productivity Matters

Of course, bargaining power cannot fully explain the wage difference between Nigerian workers and their counterparts abroad. There are other factors such as trade unions and education, which still have a link back to bargaining power. A trade union with a lot of power can bargain for higher wages, and this power varies across countries. There are also other entirely separate issues such as the difference in institutions, firms and the levels of productivity. 

The most common definition of labour productivity is the amount of value created per hour. And standard economic theory argues that productivity determines wages. The most recently available data puts Nigeria's labour productivity at $2.57, a low figure even when compared with other emerging countries. Yet a 2015 World Bank report suggests that Nigerian wages are high relative to productivity – labour costs as a percentage of value added was around 40% compared to 20% in Kenya – meaning that Nigerian labour may not be cheap.

Unfortunately, too many people are stuck doing unproductive work. The agriculture sector, for example, remains dominated by subsistence farming. 

A lot has to change to improve wages in Nigeria. We need to address our low productivity and shift bargaining power to employees. We cannot do this without creating more jobs, but proper safety nets and supporting institutions would also create a more robust labour market. Finally, we need a better-educated workforce. I mean, employers will always be wary of offering high wages if 66% of the teachers they employ will fail a primary school test.


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