Impact Of Salary Increase On Inflation
The impact of a salary increase on inflation is a complex interplay influenced by various economic factors. When salaries rise across industries, it can lead to increased consumer spending power, potentially driving up demand for goods and services. If this demand outpaces supply, it can contribute to inflationary pressures. Additionally, higher wages may prompt businesses to increase prices to maintain profit margins, further fueling inflation. However, the extent of these effects depends on the overall economic environment, including factors such as productivity levels, monetary policy, and global economic conditions. While salary increases can stimulate economic activity, excessive or unsustainable wage growth may exacerbate inflationary trends, necessitating careful consideration and management by policymakers to maintain a balanced economic equilibrium.
No economy can escape the evils done is by inflation and unemployment because when measures to control one are being employed the other is being upset. However, we are dealing with inflation alone. In fact, this study investigates the impact of salary increase on inflation in Nigeria. In a bid to achieve the objective of the study, ordinary least square regression method was adopted using secondary data from 1984 to 2009 the results indicate that there is a negative relationship between the dependent variable (inflation) and the independent variable (salary). The result of study showed that salary increase has a negative relationship with inflation and salary does not have a significant impact on inflation in Nigeria, therefore inflation is not adequately explained by changes in salary. Hence, inflation should be track led adopting other fiscal and monetary measures and not necessarily income policies
i Title page
ii Approval Page
iii Certificate
iv Dedication
v Acknowledgement
v Table of content
vi Abstract
CHAPTER ONE:
1.0 INTRODUCTION
1.1 Background Of The Study
1.2 Statement Of Problem
1.3 Objectives Of The Study
.4 Statements Of Hypothesis
1.5 Significance Of The Study
1.6 Scope And Limitation Of The Study
Reference.
CHAPTER TWO:
LITERATURE REVIEW
2.0 REVIEW OF RELATED LITERATURE
2.1 Theoretical Review
2.1.1 Wage Induced Inflation
2.1.2 Types Of Inflation
2.1.3 Theories Of Inflation
2.1.4 Causes Of Inflation
2.1.5 Inflation In Nigeria
2.1.6 Money Supply And Inflation
2.1.7 Salary And Inflation
2.1.8 Measurement Of Inflation
2.1.9 Effects Of Inflation
2.1.10 The Positive Impact Of Wage Increase On Inflation In Nigeria
2.1.11 The Negative Impact Of Wage Increase On Inflation In Nigeria
2.2 Emperical Literature
2.3 Limitation
REFERENCES
CHAPTER THREE:
3.0 Research Methodology
3.1 Research Design
3.2 Model Of Specification
3.3 Apriori Expectation
3.4 Sources Of The Data
REFERENCES.
CHAPTER FOUR:
4.0 DATA ANALYSIS AND INTERPRETATION
4.1 Presentation of Data
4.2 Presentation of result
4.3 Interpretation of Regression Result
4.3.1 Analysis of Coefficents
4.3.2 Economic Criteria (apriori expectation)
4.3.3 Statistical Criteria.
4.3.4 Econometrics Criteria
REFERENCES.
CHAPTER FIVE:
5. 0 FINDINGS, SUMMARY, RECOMMENDATION AND CONCLUSION
5.1 Summary of findings
5.2 Recommendation
5.2.1 Recommendation on this topic for further studies.
5.3 Conclusion
Bibliography.
Appendix
INTRODUCTION:
1.1 BACKGROUND OF THE STUDY.
The Nigerian economy is a middle income economy emerging market with well developed financial, legal, communication, transported entertainment sectors. It is ranked 31st in the world in terms of gross domestic product (GDP)as 2009 and its emergent through currently under performing manufacturing sectors is the second largest on the continent, for the west African region scholars have characterized the Nigerian economy to be associated with a high cost of living putting it in words,(EKAN 1998)states that Nigerian economy is characterized by high cost of living which is resultant effect of the persistent increase in the general price level in the economy. In an effect to solve the problem of low standard of living, government expenditure has been on the continual increased which is partially caused by trade unions agitations and partly by continual increase in prices of goods and services in the product and factors markets in the product.
Since the independence the country’s recurrent expenditure has been on the increase in 1970 total recurrent expenditure stood at two thousand seven hundred and thirty four naira, ninety kobo in 1980 when the economy was on a persistent growth our recurrent expenditure stood at four thousand eight hundred and twenty kobo in 1986 when SAP (structural adjustment programme) was introduced it.
Stood at seven thousand, six hundred and ninety nine kobo. The increase in the country’s recurrent expenditure was necessitated by the need to create employment and increase money supply to match the output level. (NBS, 2009).
However, the purchasing power of the average Nigerian has been reducing because of the increase in price level in the economy. In an attempt to solve this problem, various perspective and annual plans have been formulated and implemented. Examples are the vision 2020, vision 2010, and Yaradua’s 7 points agenda, Millennium goals and 2013 budget by Goodluck Jonathan.
The problem of inflation is a national nightmare to economic growth and development. It should be noted that it cannot be eliminated absolutely. In an actual sense, inflation rate can only be reduced to bearable limit. It should also be noted that inflation is not faced by less developed countries alone but the Western countries are also facing the problem.
For Nigeria, as the general price level is on the increase so is the recurrent expenditure which has created the inflationary gap in the economy (WAHAB 2004).This research is investigating the impact of salary increase on inflation in
Nigeria.
1.2 STATEMENT OF THE PROBLEM.
The problems that occur when salaries are increased are raising labour costs which in turn lead to cost push inflation. As workers demand wage increases, companies usually choose to pass on those costs to their customers through
price increases, thus causing inflation that is where prices are forced upwards because when people have much money with them. It increases aggregate demand.
Also wages increase leads to retrenchment of workers thus causing inflation has tremendous impact on the output and employment decision by firms because inflation distorts the price mechanism by making it difficult to distinguish changes in the general prices level, it creates uncertainty making the investors less willing to take risks and invest especially in long term project, inflation push up real interest rates as lender demand a bigger risk premium on their money.
This work therefore aims at investigating the impact of salary increase on inflation in the Nigeria economy. For the purpose of this study the salary increase as represented with federal government recurrent expenditure excluding social service, economic service, transfers. If government wants to solve the problems of inflation it will end up creating unemployment .As a result of this, various economics theorists have theorized about the relationship between salary increase and inflation thus giving rise to the theories, causes and effects of inflation.
1.3 OBJECTIVES OF THE STUDY.
This research is solely aimed at finding out the impact of salary increases on inflation in Nigeria. The specific objectives of the study are as follows;
1. To investigate the impact of salary increase on inflation in Nigeria.
2. To examine the trend of inflation in Nigeria over the years.
1.4 STATEMENT OF HYPOTHESIS.
Based on our study of the impact of salary increase on inflation in Nigeria, the research question has been used to formulate the following hypothesis;
Ho: Salary increase does not lead to inflation in Nigerian.
Hi: Salary increase has caused inflation in Nigeria.
1.5 SIGNIFCANCE OF THE STUDY.
This study will be useful to policy makers in the economy to aid them formulate sound economic policy that will keep inflation at the barest minimum in the economy. The study is also important to other researchers in this field as a reference materials to aid them in their own research that are yet to be conducted.
1.6 SCOPE AND LIMITATION OF THE WORK
The Nigerian economy with a labour force of 47.33million persons who produced a national income of $353.2billion (CBN 2009) is dominated by the public sector because 65% of the labour force are employed in the public sector, 20% in commercial activities, 10% in agricultural activities and 5% in
the services (NBS 2009). The above data imply that the study will cover government employees alone because they dominate the labor force in the country. Data collected from a secondary source ranged between 1984 to 2009.
The year 1986 was chosen because that era was characterized by the SAP (Structural Adjustment Program me).
However, this study has its limitations, which include;
1. There are very limited materials for the research. This is because few authors have thought on this issue.
2. The unfriendly attitude of staff of various ministries and companies where I went to collect materials because of secrecy and other reason like money.
3. Difficulties in collecting data relating to my project. Due to not enough information was available. After all the difficulties I still got few materials that will help enrich my project.
Impact Of Salary Increase On Inflation:
The impact of a salary increase on inflation can be complex and depends on several factors. Inflation is the general increase in prices of goods and services over time, while a salary increase is an increase in the compensation paid to employees. Here are some key points to consider when examining the relationship between salary increases and inflation:
- Demand-Pull Inflation: When people receive higher salaries, they typically have more disposable income. If this leads to an increase in consumer spending, it can create a demand-pull inflationary pressure. This happens when demand for goods and services exceeds their supply, leading to price increases.
- Cost-Push Inflation: On the other hand, if businesses respond to increased labor costs due to salary increases by raising prices on their products or services, this can contribute to cost-push inflation. When businesses’ operating costs go up, they may pass those costs onto consumers.
- Expectations: Inflation can also be influenced by expectations. If people expect prices to rise in the future, they may demand higher wages to keep up with the expected cost of living, leading to a self-fulfilling prophecy of inflation.
- Central Bank Policies: The actions of a country’s central bank play a crucial role in controlling inflation. Central banks may raise interest rates to combat inflation by reducing consumer spending and investment. This can counteract inflationary pressures caused by higher salaries.
- Productivity: If salary increases are tied to increased productivity, they may not necessarily lead to inflation. When workers become more efficient or contribute more to a company’s output, higher wages can be sustainable without causing price increases.
- Global Factors: Inflation can also be influenced by global factors such as the cost of imported goods and changes in exchange rates. If a country relies on imports and the cost of imported goods rises due to global inflation, this can contribute to domestic inflation.
- Time Lag: The impact of salary increases on inflation may not be immediate. It can take time for the effects of higher wages to ripple through the economy and manifest as increased demand or cost-push pressures.
In summary, the relationship between salary increases and inflation is not straightforward. Salary increases can contribute to inflationary pressures, but the extent and timing of their impact depend on various economic and policy factors. Central banks and governments often use monetary and fiscal policies to manage inflation and ensure it remains within a target range to promote economic stability.