EFFICIENCY WAGES AND EMPLOYEE PRODUCTIVITY IN NIGERIA’S SERVICE SECTOR: EVIDENCE FROM SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs)

Investigating the effect of efficiency wages on labour productivity in Nigerian manufacturing firms, the study draws panel data from 1,200 observations across three survey periods: 2016, 2020, and 2024. Utilising a Cobb-Douglas production function within a fixed-effects (FE) estimation framework, the study examines whether firms that pay above-sector average wages exhibit higher productivity. Key explanatory variables include capital intensity, firm size, efficiency wages, and the interaction between efficiency wages and professional management. Descriptive statistics reveal an average Labour productivity of 11.20 (log of sales per worker), while the mean efficiency wage ratio stood at 1.13, indicating that firms on average pay slightly more than their sectoral wage benchmarks. The regression analysis finds that efficiency wages significantly increase Labour productivity (β = 0.289, p < 0.01). Capital intensity (β = 0.294, p < 0.01) and firm size (β = 0.165, p < 0.05) also show strong positive effects. Notably, the interaction term between efficiency wages and professional management is statistically significant (β = 0.118, p < 0.05), suggesting that professionally managed firms extract greater productivity benefits from higher wage policies. Model diagnostics, including the Breusch-Pagan LM test (χ² = 152.4, p < 0.001) and Hausman test (χ² = 11.73, p = 0.009), confirm the appropriateness of the FE model over pooled OLS and random effects alternatives. Overall, the study provides empirical support for the efficiency wage theory in the context of an emerging economy and underscores the importance of wage-setting and managerial professionalism in enhancing firm-level productivity. These findings offer valuable policy implications for improving labour performance and competitiveness in Nigeria’s manufacturing sector.