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Efficiency Wage, Rent-sharing Theories and Wage Determination in the Manufacturing Sector in Nigeria

  • Ben E. Aigbokhan
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    The Nigerian labour market, like other sectors of the economy, witnessed dramatic changes following the introduction of the structural adjustment programmes (SAPs) in mid 1986. The labour market has a central role to play in the attainment of SAP objectives such as employment, income growth, and poverty reduction. In 1998 and 2000 the Federal Government implemented two jumbo salary increases which raised minimum salaries in the public sector. This had further implications for wages and employment in the formal sector of the economy. It then becomes necessary to understand the labour market process in the country. This study, focusing on the wage determination process, particularly in the manufacturing sector seeks to do this. Through this, it is possible to answer to the question: “Why would wages not adjust to equate labour supply to labour demand?” Drawing inspiration from the efficiency wage and related literature, the study uses data from an annual survey of manufacturing establishments conducted by the United Nations Industrial Development Organization in collaboration with the Centre for the Study of African Economies, Oxford, to analyse wage determination process in the manufacturing sector in Nigeria. Production and earning function approaches were used in the analysis. The ordinary least squares and instrumental two-stage least squares techniques were used in the analysis. Results from the production function analysis show that there is a positive and statistically significant relation between relative wage and productivity, consistent with prediction of the efficiency wage model. Estimation of further augmented production function suggests that some rent-sharing variables such as unionization are also relevant. Results from analysis of the earnings function show that earnings differentials seem to be explained mainly by human capital, as predicted by the competitive models. Efficiency wage and rent-sharing models both provide additional explanations.

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    Paper provided by African Economic Research Consortium in its series Research Papers with number RP_222.

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    Length: 38 pages
    Date of creation: Jan 2011
    Date of revision:
    Handle: RePEc:aer:rpaper:rp_222
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