Increasing wages could boost consumptions in Africa

June 13, 2013

Last evening, I met an economist friend for a chinwag and ended up discussing how low wages affect overall consumption in Africa. As a graduate of London School of Economics, she centred our chat on matters economy. Last time we met it was Greece and Eurozone events that dominated but this time round the debate was on the minimum wage as the UN prepares to replace the Millennium Development Goals set 13 years ago. Even as other developing countries keep raising their rates, developed countries continue to offer the most generous minimum wage in the world. I asked her how minimum wages affect the spending patterns of consumers across different social classes and what are the pros and cons. She informed me that a wage increase does boost consumption in any country that effect minimum wages. The trend ensures manufacturers can expect sales increase from consumers, who mostly purchase more premium products and there is also a possibility that huge number of population will become regular consumers.

Nairobis Skyline - Picture Jason Roberts
Nairobis Skyline – Picture Jason Roberts

Recently, she was involved in a study into fast moving consumer goods in Africa that found optimism in consumption was correlated with income. That means upstream income earners in the continent are more optimistic than low and midstream income earners. According to her, the study of households across the continent also found that people with higher levels of optimism toward the economy spend more on average than those who are more pessimistic. Fast moving consumer goods, their study found consumers in Africa are more likely to purchase International brands on personal care categories compared with other segments, like home care or food and beverages where in case of beer foreign brands are laggards among the drinkers. Research conducted in Australia last year found that food and beverage purchases constitute the bulk of household spending. In East Africa, the same sector is where the spending gap between the rich and the poor is largest. When I read the book Freakonomics, I learnt that minimum wage increase leads to fall in jobs because most companies and employers seek to control their costs. Although there will be an increase in spending that will eventually drive the economy after wage increment, I think such an outcome would affect discretionary spending of a country.

Contador Harrison