CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Inequality is a matter of wide concern. It is probably a major factor in producing or worsening a range of social problems, including educational disadvantage, health inequalities, low intergenerational mobility and crime, and it may weaken social cohesion. Its relationship with economic performance is also more complicated than a simple trade-off between growth and equality. Ostry, Berg and Tsangarides (2014) find that lower net inequality is robustly associated with faster and more durable growth, and they describe inequality and the inability to sustain growth as two sides of the same coin. The implication is that persistent inequality limits a society's productivity and eventually slows its growth, so that the economy pays through lower productivity today and reduced national output tomorrow. The same authors note that the international financial institutions themselves have come to treat growth, stability and equality as inseparable, which shows how central rising inequality in earnings and household income has become as a policy issue.

In Nigeria, inequality is generally said to have worsened, and household surveys based on income and consumption support this view. According to the National Bureau of Statistics (NBS), the Gini coefficient within the rural population rose from 0.4239 in 2004 to 0.4334 in 2010, while that within the urban population rose from 0.4154 to 0.4328 over the same period. Inequality therefore increased in both sectors, with the urban figure rising faster and almost reaching the rural one. The picture is not uniform, however. Odozi and Oyelere (2023) analysed four waves of the General Household Panel Survey using consumption expenditure and found that measured inequality had fallen and median consumption had risen, even though poverty rose and regional differences persisted. They also found that education and urban residence remain significant contributors to inequality, although their effects have weakened over time. These mixed findings show that the direction of the trend depends on the period and the measure used, and they strengthen the case for examining the sources of inequality directly.

Inequality can arise from many socio-economic factors and takes many forms. This study concentrates on wage differentials, which contribute substantially to overall inequality. A wage differential is the difference between individuals' earnings in a given society, and the narrower this gap is, the lower inequality tends to be. Nigeria's human development index (HDI) value for 2011 was 0.459, placing the country 156th out of 187 countries and territories. Between 2005 and 2011 the value rose from 0.429 to 0.459, an increase of 7.0 percent, or about 1.1 percent a year (UNDP, 2011). Even so, poverty remains widespread and acute. Five decades after independence, Nigeria was still one of the world's poorest economies, as its HDI ranking shows. Mukaila and Egwue (2022), citing later UNDP data, report that Nigeria ranked 161st with an HDI of 0.539 in 2020. This situation has clear implications for policies aimed at reducing inequality.

The Nigerian economy has a large, traditional, rural and agriculture-based sector that accommodates roughly two-thirds of the population, most of it in the low-income class. Many of the people at the bottom of the income distribution live in abject poverty. Income is distributed very unevenly between rural and urban areas, and Odozi and Oyelere (2023) confirm that urban residence is a significant contributor to inequality. The low incomes of rural dwellers are readily explained by the fact that most are primary producers, whereas urban dwellers are mainly salary and wage earners in private or public organizations, or businesspeople and contractors. Urban centres generally have livelier economies, with steadily rising incomes and employment opportunities, while rural dwellers depend on relatively stagnant agricultural economies. The Nigerian economy can also be divided into formal and informal sectors. The formal sector comprises wage employment in the private and public sectors, where wage levels are set institutionally. Governments at the federal, state and local levels are the main employers of labour there, and salary scales differ between some federal and state workers. The informal sector comprises rural and urban informal activities, where wages are determined largely by market forces. This structure naturally produces differences in the incomes of the workers concerned.

The Nigerian labour market is also characterized by high unemployment and underemployment, a large public sector, low wages and poor working conditions. These differences in wages are a strong stimulus to income inequality. The government has made some efforts to narrow them, the most recent being the increase in the minimum wage, a policy meant to raise the earnings of the lowest-paid workers. It is believed that the policy will stimulate both the formal and informal sectors and thereby reduce overall inequality.

The roles, responsibilities, constraints and opportunities of women in different activities are also unevenly treated compared with those of men. Discrimination has its roots not only in ethnic segregation but also in social culture, which narrows women's opportunities. The evidence points to gender discrimination as an important determinant of wage differentials. Orji and Nwosu (2023) compared household surveys from 2003–2004 and 2018–2019 and found a significant gender wage gap in Nigeria at every point of the wage distribution, with men still earning more than women, although the gap had narrowed over the period. Daudu et al. (2023) similarly find that female farm workers in Nigeria earn ₦9,170.83 less than their male counterparts. Women are also less likely to be employers in the informal sector. The gender breakdown for 2004 and 2005 shows that unemployment was higher among women, at 11.2 percent and 14.1 percent respectively. Income inequality may therefore be considered in relation to several interrelated factors, such as education, occupation, region, ethnicity, rural expenditure patterns and even political differences. Among these, education appears to play a major role.

The historical roots of inequality in Nigeria have been linked to differences in education. Women generally have less education than men, particularly in some social groups, mainly in the northern regions, and the education levels of husbands and wives are highly correlated, with husbands generally somewhat more educated. Ozougwu (2020), using a Mincer-type wage equation, finds earnings skewed against women, especially in Northern Nigeria, and finds that private returns at every level of education are lower in the North. Gender inequality in education, notably the markedly lower educational attainment of females in many parts of the country and among some ethnic groups, is therefore associated with income inequality. In a country with such large differences in educational attainment between social groups, it is reasonable to expect education to be a major determinant of income inequality. This is consistent with a global review of 1,120 estimates from 139 countries by Psacharopoulos and Patrinos (2018), which finds an average private return of about 9 percent for each additional year of schooling, higher returns in low-income countries and higher average returns for women.

Beyond general education, type of profession and occupation also influence income inequality. Orji and Nwosu (2023) find that occupation, education, unionization and urban residence all have a major influence on pay gaps in Nigeria. In practice, a medical doctor will earn more than a graduate of economics, a doctor in the army will earn more than one in the civil service, and a senior medical officer will earn more than a newly recruited one. In the Nigerian university system, a graduate entering the academic profession is placed two steps ahead of counterparts in the non-academic cadre. It has also been observed that workers in the petroleum sector are the highest paid in Nigeria, followed by those in communications and banking in that order.

Other NBS reviews show that people working in agriculture are more likely to live in poverty, and this holds across all years. The reasons why agriculture in Africa is so often associated with poverty are many and varied. For Nigeria, low wages, poor productivity of land and labour, and depressed commodity prices are often cited, together with shortages of land, labour and capital (World Bank, 2008). Mukaila and Egwue (2022) show that rural income inequality in Nigeria fell by about 6 percent between the pre-democratic and democratic eras, and they recommend strengthening education, empowering women and consolidating democratic institutions to promote greater equality.

Most statistics on inequality, such as those above, deal with inequality in the country as a whole and break it down into subgroups. This study instead concentrates on the determinants of inequality in wages or earnings. The theoretical and empirical literature holds that earnings are determined mainly by experience and education.

1.2 Statement of the Problem

Nigeria's problem has been its inability to draw the best from its human resources. The problem goes beyond low income, low savings and slow growth. It includes high inequality, with unequal access to basic infrastructure and unequal capabilities in education and health. Since the mid-1990s in particular, there have been debates and commentaries exploring the concept, types, size and economic implications of wage differentials, especially in Nigeria. Some authors have focused on the relationship between growth and income distribution. Yet the basic problem of poverty and inequality continues to worsen despite the emphasis placed on economic growth. According to NBS data, inequality in Nigeria worsened, as shown by a Gini coefficient of 0.447 in 2010 against 0.4296 in 2004, which contrasts with the higher economic growth recorded in the period. As noted above, later panel evidence points to falling measured inequality alongside rising poverty (Odozi & Oyelere, 2023), so the relationship between growth, inequality and welfare remains unresolved.

Wage differentials can also generate internal conflict. Some contemporary work on the economics of conflict argues that feasibility rather than motivation has driven recent social instability in Africa, and Cederman, Weidmann and Gleditsch (2011) observe that much recent civil war research has downplayed grievances in favour of opportunity. However, their global comparison finds that both economic and political inequalities between groups raise the risk of ethnonationalist civil war, and there is a general consensus that high inequality, if unchecked, can foster internal conflict. The determinants of inequality in Nigeria therefore cannot be ignored, because income inequality is becoming a source of political and social unrest in many developing countries, Africa included. Wage differentials, an integral part of inequality, are very sensitive in terms of political stability, since they reflect the gap between the rich administrative and political class and the lowest cadre of wage earners. The contribution of each determinant to the distribution of income will accordingly be examined, so that greater weight can be given to the factors with the largest effect. This will help in designing policy to reduce income inequality and in making such policy more efficient, which is particularly important in a country where resources for such policies are misallocated. It is also important to determine the likely impact of social policies on different socio-economic groups.

Every government in Nigeria adopts one strategy or another for reducing income inequality (World Bank, 2011). What remains unanswered is whether these policies and programmes address the factors that actually caused the inequality. Despite the huge resources committed to eradicating or reducing the problem, income inequality has grown and more people have fallen into poverty rather than escaping it. The striking issue is the wage differential, which contributes significantly to overall income inequality. This is critical because wages and earnings drive the general trend of income in the formal sector. The recently raised minimum wage is evidence of efforts to narrow the gap between rich and poor. Wage differences are due mainly to education, experience, sex, trade unionism, state of origin and other socio-economic characteristics. If the determinants of wage differentials are not known, the problem of income inequality will remain obscure and difficult to resolve fully. Estimating the determinants of wage differentials is a way of tackling the problem at its roots.

Many recent studies have examined parts of this problem for Nigeria. Orji and Nwosu (2023) study the gender wage gap along the whole wage distribution. Ozougwu (2020) estimates returns to education by gender and by zone. Daudu et al. (2023) analyse gender wage gaps among farm workers. Odozi and Oyelere (2023) and Mukaila and Egwue (2022) examine the evolution and sources of inequality at national and rural levels. These studies tend to concentrate on one dimension, such as gender, region, farm employment or inequality trends. This study differs in that it examines the joint determinants of wage differentials, namely education, experience and other socio-economic characteristics, across sex, state and sector, using the specification suggested by Mincer's earnings function. The Mincerian function has itself been the subject of controversy in the literature (Psacharopoulos & Patrinos, 2018), which is a further reason to test its validity empirically.

Oyelere (2010) points out that anecdotal evidence suggests low returns to education in Africa, and that, unfortunately, econometric evidence at the micro level to support this claim is limited. Her own estimates for Nigeria show returns of only about 2.8 percent for each additional year of schooling in the late 1990s, which is low by developing-country standards. More recent estimates, such as those of Ozougwu (2020), find substantial regional and gender differences in returns. It is therefore important to establish whether low returns also characterize the data used here and to identify the real determinants of wage differentials, rather than relying only on theoretical frameworks. This study accordingly seeks to identify the major source of inequality in earnings, so that policies to reduce wage differentials can be properly targeted. Because inequality is related to several interrelated factors, it is also useful to examine whether these factors produce a similar pattern of wage differentials in Nigeria. These considerations give rise to the following research questions.

1.3 Research Questions

1. What is the impact of education and experience on wage differentials in Nigeria?
2. What is the impact of other socio-economic characteristics on wage differentials in Nigeria?
3. Does income differ with respect to socio-economic characteristics, namely sex, marital status and sector, in Nigeria?

1.4 Objectives of the Study

The broad objective of this study is to investigate the determinants of wage differentials in Nigeria. This broad objective can be attained through the following specific objectives:

1. To ascertain the impact of education and experience on wage differential in Nigeria.
2. To ascertain the relationship that wages have with experience and education in Nigeria.
3. To analyse wage differential with respect to different socio-economic groups, namely sex, state and sector, in Nigeria.

1.5 Statement of Hypotheses

The hypotheses are stated as null hypotheses, and the alternative hypotheses are implied.

• H01: Education and experience are not significant determinants of wage differential in Nigeria.
• H02: There is no significant impact of socio-economic characteristics on wage differential in Nigeria.

1.6 Justification of the Study

Reducing inequality is one of the major macroeconomic objectives of any economy, and Nigeria is badly affected by inequality. Many efforts have been made to reduce it, yet it continues to grow. This study therefore aims to identify the determinants of wage differentials in Nigeria. Differences in earnings are the major cause of inequality, because they first sort individuals into different levels before other socio-cultural and socio-economic characteristics come into play. Evidence that the wage gap also shapes outcomes in other areas, including conflict risk (Cederman et al., 2011) and growth (Ostry et al., 2014), adds to the importance of understanding it.

The results will help policy makers to trace the problem of inequality to its roots and to focus their efforts on reducing wage differentials. The study also tests the validity of Mincer's theory of wage differentials, and it will serve as a reference point for other researchers and stimulate further debate on this and related subjects.

1.7 Scope of the Study

Given the nature of the study, it uses survey data. The analysis of the determinants of wage differentials in Nigeria draws on the 2010 General Household Survey (GHS), which has a richer set of variables than most other cross-sectional data sets and is more recent than they are. Wage or earnings here means the remuneration of individuals as recorded in this data set.

1.8 Limitations of the Study

All research has limitations, and this study is no exception. It was difficult to obtain very recent data, and the study had to rely on the 2010 GHS, which was the most recent source containing data on employment and related indicators. The study would also have liked to include other variables, such as trade union activity, but could not do so because the available GHS does not contain them. This is a real limitation, since Orji and Nwosu (2023) find that unionization significantly influences wage gaps in Nigeria.

1.9 Organisation of the Study

The study is organized into five chapters. The first chapter sets out the background, including related work, policies and existing debates, and then the statement of the problem, which identifies the research and economic problem and leads to the research questions. The second chapter presents the conceptual framework and reviews the theoretical and empirical literature on the subject. The third chapter describes the analytical framework and the specification of the model, and the fourth presents the results and evaluates the hypotheses. The fifth chapter summarizes the work, draws conclusions, makes recommendations from the findings and suggests areas for further research.

References

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Daudu, A. K., Kareem, O. W., Olatinwo, L. K., Shuaib, S. B., & Abdulrahman, A. I. (2023). Does gender wage gap exist among farm workers in Nigeria? Evidence from decomposition-matching analysis. Acta Universitatis Sapientiae, Economics and Business, 11(1), 115–137. https://doi.org/10.2478/auseb-2023-0006

Mukaila, R., & Egwue, L. O. (2022). Analysis of rural income inequality in Nigeria: Before and during the democratic era. Scientific Papers Series Management, Economic Engineering in Agriculture and Rural Development, 22(4). https://www.managementjournal.usamv.ro/pdf/vol.22_4/Art49.pdf

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Ostry, J. D., Berg, A., & Tsangarides, C. G. (2014). Redistribution, inequality, and growth (IMF Staff Discussion Note No. 2014/002). International Monetary Fund. https://doi.org/10.5089/9781484352076.006

Oyelere, R. U. (2010). Africa's education enigma? The Nigerian story. Journal of Development Economics, 91(1), 128–139.

Ozougwu, B. (2020). Learning and earning in Nigeria: Who works for less? International Journal of Education Economics and Development, 11(3), 244–259.

Psacharopoulos, G., & Patrinos, H. A. (2018). Returns to investment in education: A decennial review of the global literature. Education Economics, 26(5), 445–458. https://doi.org/10.1080/09645292.2018.1484426