Minimum wage law hurts the poorest workers

By Tunde Obadina

Nigeria’s newly elected government will probably come under pressure from trade unions to hike the national minimum wage. Labour leaders have of late complained that the current wage floor of N18,000 (US$92) per month is not enough to support a decent standard of living. This rate, equivalent of US$3 a day, is certainly poverty pay for workers in both single and two working parent families. Nonetheless, the government should resist any demand to raise the minimum wage.

This advice will appear callous to those who believe that minimum wage protects low-paid workers and boost their purchasing power. It is a morally appealing contention while the case against it is counterintuitive. Pay regulation seems moral only when viewed from the perspective of the workers who benefit from it. Clearly, someone earning US$2 a day in a free labour market is made better off by his employer being compelled to pay US$3 a day. But the unemployed are not made better off. Bearing in mind that Nigeria’s minimum wage law applies only to establishments that employ 50 or more persons, those toiling for less than US$3 a day in small firms also do not benefit from the law. Official minimum pay does not provide social protection for the most vulnerable workers in society, as claimed by its supporters, because the most vulnerable and lowest paid workers exist outside the system. It is a minority of relatively better-off employees who are privileged by the law.

The legislation is part of a number of state interventions that divide the economy into two segments – the formal and informal sectors. The former is comprised of individuals and companies that benefit substantially from government protection and subsidies, while the masses in the informal sector receive little or no state support. It is people in the formal sector that primarily gain from government welfare expenditures, including subsidies on fuel, electricity, housing and other public services. This is also the sector where governments shower businesses with concessions in acts of cronyism disguised as promotion of economic development. It is here that labour regulations apply.

The informal sector, often dubbed as unregulated markets, is where the majority of the population struggle to survive. Less than 20% of Nigeria’s roughly 60 million workforce are in the formal sector and fewer than seven million are part of the official compulsory pension scheme. The formal sector is small throughout Africa. According to the IMF out of sub-Saharan Africa’s around 450 million workforce, fewer than 40 million are on formal payrolls.

The law protects the lowest paid workers in the formal sector by shutting out informal workers from the segmented labour market. Without the legal barrier very low earning workers would compete in open job market and accept a level of pay though below the desired minimum wage is higher than their current income. Critics of capitalism denounce such competition an immoral race to the bottom.

But such moralising is credible only from the standpoint of workers on the right side of the wage barrier. For those at the very bottom rung of the income ladder it is not a race to the bottom. Indeed, for millions who now work for little or nothing, the opportunity to work for minimally higher pay in medium and large sized companies is a forward step. According to a 2010 household survey by the Nigerian Bureau of Statistics out of 54.6 million Nigerians classified as informal sector workers, 9.4 million were unpaid and 4.9 million were apprentices. This suggests that up to almost 15 million adults worked for virtually no financial compensation.

Where is the justice in a legal system that traps millions in small informal jobs or on farms, with little prospect of escape from poverty? Every man and woman should be free to choose to sell his or her labour to corporations at a price acceptable to the worker. Larger companies offer prospects for career advancement often unavailable in small enterprises.

Like it or not, labour is a commodity with a price that is subject to market forces – that is, in the absence of government price-fixing. Decent jobs are everywhere in acute short supply. The formal sector in Nigeria as elsewhere in Africa is not creating many new jobs. In this situation the many competing for the few employment opportunities do so by making themselves attractive to employers. This may seem cruel but it is the nature of trade. Governments are able to secure a minimum wage for some workers only by excluding others from the protected job market. Drawing an arbitrary compensation line does not increase the numbers of quality jobs available, it simply ring fences those able to access premium jobs.

Advocates of minimum wage should consider that had such legislation been in force in the United States after the abolition of slavery far fewer black people would have gained paid employment. Former slaves who gained employment in white own factories did so largely by under cutting white workers, whose unions fought hard to keep blacks out of mainstream job markets. Had employers been compelled to pay a minimum wage they would have employed only whites, not only because of their own racism but also to avoid conflict with white employees who resented working with black people. It was market forces that opened the doors to job markets for black people.

It is the same market forces that today can transform the job market from one that traps a large section of the working population in informal jobs that pay extreme poverty wages or none at all.

Welfarists will contend that minimum wage law protects workers from exploitative, high profit-making corporations. But economic transactions in a market economy take place between two consenting parties. Any undue interference by a third party violates the freedom of both transacting parties. The wage law does not only stipulate the lowest compensation an employer may offer labour, it also determines the minimum that a worker can accept to hire his or her service. By so doing it effectively tells those unable to command the minimum wage that they are better off languishing in extreme poverty than hiring their labour for an amount that may improve their present condition but is below the state prescribed rate. This is not a decision that the state or well-fed welfarists have the moral right to make. Many supporters of minimum wage are so fixated by a moral imperative to deny wealthy employers that they are blind to the consequential and immoral entrapment of people at the very bottom of the income ladder.

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