Wage-Increment and Development of Black Economy in Nigeria: Influences of Inflation and Taxation

Emmanuel Okon

doi:10.47631/jareas.v1i2.96

Abstract

Purpose: In this paper, wage-black economy relationship was examined while taking into consideration the influences of inflation and taxation. Approach/Methodology/Design: In particular, Value at Risk (VAR) approach was implemented using annually data for Nigeria covering the period 1990-2018 to assess the dynamic relationship among the variables. In light of national minimum wage in Nigeria, impulse response function was used to highlight the plausible responses from black economy to a shock of one standard deviation in each indicated variable. Findings: The result shows that a shock to national minimum wage (LOGMWA) will have a negative effect on black economy (LOGBEC) in Nigeria. Shocks to inflation (LOGINFL) will have a positive impact on black economy (LOGBEC). Shocks to tax (LOGATAX) will have asymmetric impacts on black economy (LOGBEC). The results were robust even when unemployment (LOGUEMP) was included. An unemployment shock was shown to enhance black economy in Nigeria. Practical Implications: The study is significant for the concerned authorities in Nigeria so that policy measures are taken and directed towards the causes that drive the black economy in the country. Originality/value: The impulse response function was estimated. It was estimated to show the plots of the responses from black economy (LOGBEC) to a one standard deviation shock in each indicated variable (national minimum wage (LOGMWA), inflation (LOGINFL), and tax (ATAX)). The shocks to national minimum wage (LOGMWA) will have a negative effect on black economy (LOGBEC) in Nigeria.

Highlights

Many governments around the world set a minimum wage in order to raise wages of workers whose wages are relatively low
Starting with the equation of black economy which is the main focus, a 1% increase in the previous values of black economy (LOGBEC), national minimum wage (LOGMWA), inflation (LOGINFL), and tax (LOGATAX) lead to a 0.287409% increase, 0.025898% decrease, 0.021087% increase, 0.024072% increase in current black economy respectively
It was estimated to show the plots of the responses from black economy (LOGBEC) to a one standard deviation shock in each indicated variable (national minimum wage (LOGMWA), inflation (LOGINFL), and tax (ATAX))

Summary

Introduction

Many governments around the world set a minimum wage in order to raise wages of workers whose wages are relatively low. Requiring that firms or organizations pay minimum wages are illustrations of government interventions designed to raise the income of specific groups; the purpose of which is to provide a ‘wage floor’ that will help less-skilled workers earn enough income to escape poverty (McConnell et al, 2009). The disproportionate increase in the cost of food means that the erosion in the real wages and salaries of workers is alarmingly severe. The process of monetizing and consolidating in-kind benefits which were hitherto not taxed resulted in escalation of the tax paid by workers. This further depressed the real take home pay of workers (Jonah, 2009). This paper is a contribution to filling the gap in research

Methodology and Procedures

Results and Discussion

Conclusion and Suggestion