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Weak labor market institutions and regulations hurt Nigerian workers

Abiodun Folawewo's picture
I have recently completed an analysis of the impact of institutions and regulatory frameworks on labor market outcomes in Nigeria, focusing on unemployment, employment and wage effects in the formal sector. I have found that Nigeria’s labor market institutions and regulatory framework negatively affect the quantity and quality of jobs, as well as employment, wages and productivity. Moreover, the institutional and regulatory framework covering workers’ rights, protection of the vulnerable workers, enforcement of minimum wages, and the provision of decent working conditions are weak.

The large informal sector affects the efficacy of the labor market institutions and regulatory framework. The beneficiaries of this ineffectiveness are usually the employers, while workers are usually victims of casualization of employment, underpayment, exposure to health hazards and denial of pensions.

Another noticeable practice across Nigeria is the phenomenon of contract employment, whereby firms are not engaging in direct employment rather they contract employment to recruitment agencies that pay employees below industry standards. In addition, contract workers are not regarded as core workers, and so they lack access to benefits accruable to permanent and/or core workers. The overall effects of this have been a lack of motivation for improved productivity among workers and a widening inequality gap in the country.

Analysing the results

In particular I looked at two variables: union density (UD) and minimum wage index (MWI). The UD variable is measured as a proportion of union membership (total registered members of Nigerian Labor Congress (NLC) and Trade Union Congress (TUC)) to the total workforce; and it is used as a measure of the degree to which employees are organized. The UD variable is used to capture the impact of labor union activities on unemployment, employment and real wage. The kaitz-type index of minimum wage legislation is used as MWI, and it is measured as ratio of the minimum wage to average wage.  Both the union density and minimum wage index were measured at aggregate (economy-wide) and sectoral (public and industrial sectors) levels. The results showed that:
  • The minimum wage index had a positive impact on unemployment when looked at the economy as a whole. This reflects that the higher the influence of minimum wage legislation, the more employers are likely to reduce their work force, thereby increasing unemployment.
  • Union density has an insignificant positive effect on unemployment. This indicates the possibility of employers’ negative reaction to union membership by their workers.
  • The average minimum wage index is negatively related to employment, which shows that minimum wage legislation has a reducing effect on the aggregate employment level. On the other hand, the minimum wage index has a mixed effect on industrial sector employment; while it has a clear negative (reducing) effect on public sector employment level.
  • Union density has a positive but non-significant effect on employment in both the public and industrial sectors. This suggests that even though as more people join the work force they are more likely to become union members, the increase in union membership does not have a meaningful influence on employment level across sectors.
  • The results from wage regression indicate that the minimum wage index has significant positive impact on wages, indicating that as the minimum wage rises there is also the tendency for industrial sector wages to rise. Further, the results show that although union density is positively related to wages in the industrial sector, it has little or no effect on wage determination in the industrial sector. Further, the results show that although union density is positively related to wages in the industrial sector, the relationship does not have any significant effect.
  • The results from the public sector wage regression are similar to that of the industrial sector, but none of the institutional and regulatory variable has any significant impact on public sector wages. This is not unexpected because the rate of adjustment of public sector wages to union pressure and the minimum wage index is sluggish.
Policy implications
An important policy lesson emanating from the study is that although institutions and regulatory frameworks are usually put in place for specific purpose, they have differing effects on different labor market outcomes across public and private sectors. Consequently, the design and implementation of institutional and regulatory frameworks should be done with caution, as they may yield unintended results.

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