Investigation of Inflation and Wage Dynamics in Nigeria: New Empirical Insights

Abstract

The current inflationary pressure in Nigeria is eroding the purchasing power of the salaried workers and the value of the national currency with the proposition that it could worsen the welfare of the citizens despite the abject and extreme poverty that prevails in the country. The paper therefore made an empirical investigation into the inflation and wage dynamics in Nigeria. The variables were tested for unit roots using ADF tests. The unit roots shows that all the variables are non-stationary at levels except the Consumer Price Index of Transportation (CT) and Wages and Salaried Workers as Proportion of Total Employment (WSW). Employee compensation including remittances (COMP), inflation rate (INFR), WSW and Consumer Price Index of Transportation (CT) are stationary at first difference. Autoregressive Distributed Lag (ARDL) model was used in the methodology. The ARDL long-run result shows that the Consumer Price Index for Food (CF) has the highest impact on the Compensation of Employees (COMP). For every 1 percent change in COMP, CF changes by 19 percent. As INF rises, COMP falls. This is shown by the negative coefficient of INFR. The long-run result also suggests that for every 1 percent change in COMP, CT increases by 9%.The short-run dynamic model showed that a 6% fall in the lag period of inflation level led to a 1% increase in employee compensation and a one-year previous period fall of 30% in WSW, bringing about I% increase in employee compensation. The long-run model showed that the variables are co-integrated which indicates that variation in the short run will be corrected in the long run with 59% speed of adjustment. The study shows that the main drivers of inflation in Nigeria are Consumer Price Index for Food (CF) and Consumer Price Index for Transportation (CT) which directly have negative impact on Employee Compensation (COMP). In line with the above findings, It was recommended that maximum price legislature, demonetisation of currency, exercising great caution in incurring public debt, drastic reduction in government expenditure and adoption of rational wage policy can be a viable macroeconomic policy option.