‘Cost Of Living Erasing Perceived Benefits Of Higher Wages’

Amid reports that the Federal Government commenced payment of the N70,000 new minimum wage to its workers last Thursday and that several state governments had stepped up preparations to start paying the new wage, Financial Derivatives Company (FDC) has warned that rising prices may make Nigerians not to derive any real benefit from higher wages.

The firm, which stated this in a report released over the weekend, also warned that the new minimum wage could have a negative impact on businesses in the informal sector. It said: “While wage increases seem like relief, wage inflation does little in the current economy, where price inflation dominates. As prices for food, transport, and fuel skyrocket, the increased wages can’t keep up, leaving workers still struggling. “Historically, wage increases, like the Udoji awards, occurred during periods of economic boom, supported by oil revenue.

Today, with inflation, currency devaluation, and borrowing costs, the wage hike loses its intended value. Many Nigerians have already spent their increases on repaying debts, making it difficult to see any real financial improvement. In the end, rising prices have erased the perceived benefits of higher wages.” Furthermore, the FDC stated: “While the formal sector may feel limited effects— given that most corporates already pay more than the new minimum wage—the informal sector tells a different story.

As of Q1’24, informal employment made up a staggering 92.7% of total employment in Nigeria. This sector is far more sensitive to wage hikes and will bear the brunt of these adjustments. “The burden on the informal businesses, heightened by high borrowing costs (32–34%) and soaring PMS prices, will present two difficult choices: absorb the rising costs or pass them on to consumers.

In a worst case scenario, the burdens are absorbed, due to weak consumer spending, leading to potential layoffs and shutdowns. With unemployment already on the rise—reaching 5.3% in Q1 2024, up from 4.1% in Q1 2023—any slowdown in the informal sector could weigh on Nigeria’s overall GDP.”