Wages, Currency Devaluation and Real Consumption in Africa

Abstract

The study examines the effect of minimum wages and exchange rate devaluation on real consumption in SSA. Data for real consumption, exchange rate devaluation and minimum wage for a period of 1991 to 2020 were sourced. Various econometric techniques, suitable for analyzing panel data were employed to estimate the coefficients of panel models for real consumption. Prior to model estimations, we conducted panel unit root test based on Levin, Lin & Chut *Im, Pesaran and Shin W- stat ADF-Fisher Chi - square PP-Fisher to ascertain the stationary level of the series (order of integration) of each of the series. Both the ARDL panel estimation and system-GMM estimation techniques were deployed. In particular instrumented our estimation procedures of the SYS-GMM by Blundell & Bond (1995) and Arellano & Bover (1998) by using differences of the lag variables as instruments for the level equation and lags of the variables at levels as instruments for the difference equation. The empirical relevance and validity of our instruments was reported by the Hansen J-statistic with a zero probability value. The ratio of the mean of real consumption spending to standard error of regression estimate is minimized at 0.08. Both estimates of currency devaluation and minimum wage rates signifies negative effect on real consumption spending in SSA. These short-run findings are indeed well supported by long-run estimates. In the short-run, we had -0.2370 coefficient of exchange rate devaluation at current period and a one lag period coefficient of -0.2106 with ARDL estimation. Both short-run (-0.1363) and long-run (-0.1283) coefficients of minimum wage are negative demonstrating that minimum wage rates in SSA are not positively effective, as such wages cannot be relied upon by workers to increase consumption levels. By implication, aggregate demand is negatively affected. The adjustment coefficient of -0.6065 denotes a rapid adjustment mechanism of the ARDL model. The SYS-GMM estimates are extensively akin to the ARDL results. The research findings thus upholds that (1) minimum wage rates in SSA are not positively effective, as such wages cannot be relied upon by workers to increase consumption levels (2) currency devaluation of SSA countries’ currencies engenders weak purchasing power of their currencies and so real consumption of the individuals in those countries is negatively affected. The negative effects of currency devaluation on consumption could be pointing to some forms of structural imperfections in economies of SSA countries. This study concluded by recommending the need for implementation of economic policies that stimulate minimum wage rate effectiveness in SSA countries while also executing such policies that have the capacity to relieve structural weaknesses and or imperfections in SSA countries in order for currency devaluation to be positively impactful in SSA by restraining the passing-through inflationary effect on the domestic economies of SSA countries.