Minimum Wage and Employment in Nigeria

Employment has been viewed as a crucial factor in promoting inclusive growth and sustainable development. With an average of 3.5 million new labour force entrants annually in Nigeria, employment has consistently fallen behind labour supply. Among policy tools to address unemployment is the minimum wage; however, its effect on employment has produced mixed results despite several reforms. The concern is that minimum wage reforms do not adequately consider the country’s large informal sector, which accounts for about 80% of all jobs. The study examined the impact of the minimum wage on Nigeria's employment rate, addressing the country's large informal sector in policy considerations. Using a Threshold-Autoregressive Distributed Lag approach, the study revealed a long-run relationship among employment rate, minimum wage, the informal sector, real interest rate, and inflation rate. The findings of the study showed that the informal sector (DGE) is the primary transmission channel through which minimum wage variations affect employment, as evidenced by the significant DGE coefficient (LR: 1.270, p=0.047) and the significant MW×DGE interaction coefficient (LR: −0.269, p=0.015). The findings showed that the nonlinear relationship between minimum wage and employment (ln MW)² is concave (-0.272), implying that the marginal employment response to minimum wage increases diminishes at higher wage levels. However, the regime-specific elasticities indicate that the employment response to minimum wage has slightly strengthened across the three major wage regimes (18.01 → 18.24 → 18.40). The study concludes that the informal sector size is the strongest predictor of employment, granger-causing employment at both lag 2 (p=0.031) and lag 3 (p=0.002). This study adds to the existing literature on the minimum wage-employment relationship considering the Nigerian large-sized informal sector.