The Economics of Wage Withholding: Evidence from Nigerian Firms

Abstract

Wage arrears are a widespread but poorly understood phenomenon that directly affects worker welfare and labor market participation. Do arrears arise primarily from liquidity constraints, or do firms strategically withhold wages to discipline workers or smooth costs? This project addresses this central question through a randomized controlled trial in Lagos, Nigeria, designed to disentangle liquidity-driven from strategic motives for wage arrears. We will conduct a field experiment with small- and medium-sized firms in Lagos. We will independently randomize firms into two interventions: (i) low-cost, short-term credit to cover payroll, and (ii) free legal assistance for employees in wage disputes. This cross-randomization generates four groups: credit only, legal only, both, and control. This design allows us to separate liquidity-driven arrears (reduced by credit) from strategic arrears (reduced by legal enforcement), and to test complementarities between the two. Our primary outcomes are the incidence and duration of wage arrears, measured through firm payroll records and worker surveys. Secondary outcomes include worker productivity, absenteeism, turnover, and firm performance. The experiment will generate a novel dataset on firm payment practices, liquidity shocks, and worker outcomes that will be valuable to the broader research community.