Elasticity of Labour and the Wage-Automation Trap in Nigerian Agrifood Systems

Abstract

This study examines the elasticity of labour demand and the emergence of a wage-automation trap within Nigeria’s agrifood processing systems. It is motivated by the persistent reliance on low-cost manual labour despite increasing demand for processed agricultural products and growing availability of labour-saving technologies. The study argues that depressed rural wages may weaken firms’ incentives to substitute capital for labour, thereby constraining capital deepening, labour productivity and wage growth. The analysis is anchored on Induced Innovation Theory, the Task Framework of Automation and Agrifood System Transformation Theory, which explain how factor prices, task allocation and structural transformation influence technology adoption and labour demand. The study employs secondary microdata from the World Bank Living Standards Measurement Study–Integrated Surveys on Agriculture (LSMS-ISA) for Nigeria, complemented by National Bureau of Statistics enterprise survey data. A Translog Cost Function estimates the own-price elasticity of labour demand and the Allen-Uzawa elasticity of substitution between labour and capital, while Two-Stage Least Squares/Instrumental Variable estimation addresses potential endogeneity between wages and output. Results indicate a labour-share coefficient of 0.642, negative translog wage elasticity of −0.118, positive capital-labour interaction coefficient of 0.089, and negative output-wage interaction coefficient of −0.025, all statistically significant. Labour demand among small-scale rural processors is price-inelastic, while capital and labour remain imperfect substitutes. A real daily wage threshold of approximately ₦3,500–₦4,200 is identified, below which automated processing equipment remains relatively costly compared with manual labour. The study concludes that low wages can discourage technological upgrading and reinforce low-productivity equilibria. It recommends improving rural wages and productivity, access to appropriate technologies, energy infrastructure, machinery maintenance and capital investment to promote technological upgrading, structural transformation and productive employment in Nigeria’s agrifood system.