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Labour force participation, earnings and inequality in Nigeria

Fidelis O. Ogwumike, Olufunke A. Alaba, Olumuyiwa B. Alaba, Babatunde A. Alayande, Christiana E.E Okojie

10 – 12 October 2006

SARPN acknowledges the African Economic Research Consortium (AERC) as the source of this document: www.aercafrica.org
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Abstract

The labour market is a very important source that offers explanation for earnings and income inequality. The structure of the labour market has a significant consequence on employment status and it serves as an important determinant of household income and welfare. Like most labour markets in developing countries, the Nigerian labour market represents one of the major sources of risk through which people fall into poverty. Thus, it is important to identify some of the factors that affect earnings and entry into the labour market. This paper analyses, among other things, the distribution and structure of main job earnings, determinants and income inequality in the Nigerian labour market. The study uses tabular presentations, Gini Coefficienst, Theil’s Entropy Index, Ordinary Least Squares technique, Heckman’s two-stage selectivity bias correction procedure, Tobit analytical technique as well as descriptive statistics for analyses.

The results show that inequality is more pronounced in paid employment than in self-employed segment of the Nigerian labour force; it is higher among women involved in paid employment than men in the same employment segment; it is higher among self-employed men than their female counterparts; it is generally higher in the rural areas than in the urban areas; and within group inequality mainly explains income inequality in Nigeria.

The labour market in Nigeria presents opportunities for participants to earn incomes and determine their welfare. The government should in line with its reform programmes take necessary and adequate steps to optimally address the various sources of labour market and earnings inequality in Nigeria. This will pave the way for the opportunities in the Nigerian labour market to be optimally utilised by all participants irrespective of gender or location of residence.

Introduction

The importance of labour market in explaining earnings and income inequality cannot be overemphasised. The structure of the market itself has a significant impact on the employment status and serves as an important determinant of household income and welfare. The labour market consists of several sources of income, including direct remuneration in the form of cash income, and non-cash income (fringe benefits). While these different forms of income sources contribute significantly to dimensions of inequality, income security has relied to a relatively large extent upon the direct remuneration from the labour market (Liebrandt, Bhorat and Woolard, 2001). This suggests that access to employment as well as remuneration attached to such labour market opportunity in important to solving problems relating to inequality and welfare in Nigeria.

The Nigerian labour market like in most other developing countries is characterised by large scale heterogeneity as a consequence of differences in factors affecting earnings and entry into the market. The distinction comes in different forms. Labour markets are mostly distinguished by whether they are formal or informal; or between private sector and public sector. There are three key labour market features that affect the links between income differences and inequality. First, is the extent to which factors affecting inequality is permanent or transitory. Second, is the level of earnings and the degree of income disparities among different groups. The third issue relates to the labour market perception, including type of jobs and hours of labour offered in the market.

Various labour market segmentations exist in the literature, all of which often depend on the purpose for which the classification is made and limitations imposed by survey designs and available data. There have been various classifications of the structure of the Nigerian labour market. For example, in a study of selected metropolitan areas in Nigeria, the National Manpower Board (1998) came up with seven classified forms of the Nigeria labour market, namely; employer, self-employed (farmer), self-employed (trader), self-employed (others), employed wage and salary earners (private), employed wages and salary earners (public) and paid apprentice. Apart from some differences, this classification is in line with the FOS(2001) study that classified the Nigerian labour market into five major forms namely; employer, employees of public companies, employees of private companies, employees of ministries and parastatals, informal employment (unpaid family worker, own account worker and household enterprises).

The Nigerian labour market represents one of the sources of risk through which people fall into poverty. As shown by Ogwumike, Adubi and Agba (2002), people on paid employment and those without adequate skills are most at risk in the events of labour market shocks. It is therefore important to identify some of the factors that affect earnings and entry into the labour market, which more often than not put people at the risk of poverty and inequality across various sectors of employment. This is essential in order to facilitate the formulation of policies targeted at reducing poverty and inequality in Nigeria. Unfortunately, there is virtually no detailed study of the relationship between wage income and inequality in Nigeria despite the relevance of such link to many contemporary growth and development policy debates.

The purpose of this study, therefore, is to examine the distribution and structure of main job earnings, determinants of earnings and income inequality in the labour market. In particular, the study intends to examine the effects of education, work experience, nature of employment, and gender on the wage structure in the country. The import of this study for economic analysis and policy making cannot be overemphasised. Apart from filling the gap in the literature on economic development, it is capable of offering essential guide to labour market policies in Nigeria. This is in view of various reforms that are being implemented in Nigeria, some of which relates to rightsizing of the public sector and the repositioning of the private sector as the engine of growth of the economy. The consequences of these reforms for economic growth and equity will depend largely on how they affect the functioning of the labour market. This depends on the access of both men and women to wage and self-employment in the private sector and on the returns to schooling and experience in private sector employment. Also, by including gender dimension into the analysis of labour market, earnings and inequality, the current study will be filling the gap on gender differences in earnings. Apart from providing policy makers with useful assistance on how labour market outcomes can affect women, it will also identify some constraints on women’s participation in the labour force.

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