Abstract
The consequences of wage increase on macroeconomic variables have been enormous and worrisome and yet the phenomenon has not been well documented for Nigeria as little information currently exists especially on the linkage between wage increase and inflation and how policy can effectively influence real wage in Nigeria. Consequently, this paper illustrated how wage increase might be linked to the price level dynamics in a small structural model of analysis of an emerging economy. The paper employed standard methodological approach, Vector Autoregressive Model, to determine the sources of shock to price level in Nigeria. The Variance Decomposition results showed that increases in the minimum wage have contributed significantly to shocks in employment and inflation rate. It shows that shocks in wages cause unemployment and are necessarily inflationary in Nigeria. The findings and the conclusion of the study suggested the need for the policy makers to curtail excess liquidly in Nigeria and enforce the respect of monetary requirements and fiscal discipline. In the light of this suggestion, the policy makers should evaluate the productivity of labor and ensure that the aggregate supply is increased to offset the increase in minimum wage.
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