Minimum Wage and Unemployment in Developing Countries: A Case of Nigeria

Abstract

This study investigates the validity of the claim that high wage rates exacerbate unemployment, given that unemployment rates are still high in many developing countries despite unusually low minimum wage rates. To this end, the short-run effect of minimum wage on unemployment in Nigeria was evaluated by employing the Autoregressive Distributed Lag (ARDL) model to analyze the secondary data used for the study over the period 2000-2022. Findings of the study indicate that minimum wage, domestic investment, government expenditure, and inflation all positively affect unemployment levels in Nigeria. Conversely, growth rate of minimum wage was found to have negative effect on unemployment. Notably, the estimated effects of minimum wage, government expenditure, and inflation on unemployment were found to be significant, whereas those of growth rate of minimum wage does not necessarily lead to increase in unemployment, but depends on the nature and level of the increase, and the policies that accompany these increments. It recommends that the adjustments of minimum wage should be accompanied by strategic tax policies that seek to increase investment in the real sector while mitigating potential short-run job losses.