WAGES AND SALARY ADMINISTRATION

Chapter 2 – Wage Concepts and Theories

Chapter 2

Wages Concepts

The term “wages” may be used to describe one of several concepts, including wage rates, straight-time average hourly earnings, gross average hourly earnings, weekly earnings, weekly take home pay, and annual earningsThe term “compensation” is of a recent origin which includes everything an employed individual receives in return for his work

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Chapter 2The concept “earnings” relates to remuneration in cash and in kind paid to employees, as a rule, at regular intervals for time worked or work done together with remuneration for time not workedWages, in the widest sense, means any economic compensation met by the employer under some contract to his employees for the services rendered by themGross earnings may differ from the wage rate not only because of the number of days or weeks on which a worker is able, or willing to secure employmentThe two terms often used interchangeably are “wages” and “salary”

Chapter 2

Several terms have acquired currency referring to the wage levels:

Statutory minimum wageThe base or base minimum wageThe minimum wageThe fair wageThe living wageThe need based minimum wage

Chapter 2

Minimum Wages

There can be three kinds of minimum wages:A minimum wage notified by the government under the Minimum Wages Act, 1948 for different scheduled employmentsA minimum wage drawn by an unskilled worker in an organized industry as a result of wage settlement which is purely the result of hard bargainingNeed-based minimum wage determined as per the norms prescribed by the 15th Session of Indian Labour Conference

Chapter 2

Need-based Minimum Wage

To calculate the minimum wage, the committee accepted the following five norms and recommended that they should guide all wage-fixing authorities, including minimum wage committees, wage boards and adjudicatorsIn calculating the minimum wage, the standard working class family should be taken to consist of three consumption units for one earnerMinimum food requirements should be calculated on the basis of a net intake of 2,700 calories

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Chapter 2

Clothing requirement should be estimated at a per capita consumption of 18 yards per annum which could give for the average workers’ family of four, a total of 72 yardsIn respect of housing, the norm should be the minimum rent charged by government in any area for houses provided under the subsidised industrial housing scheme fro low-income groupsFuel, lighting and other miscellaneous items of expenditure should constitute 20% of the total minimum wages

Chapter 2

Fair Wage

The Encyclopedia of Social Sciences describes a “fair wage” as one equal to that received by workers performing work of equal skill, difficulty or unpleasantnessThe Committee on Fair Wages stated that the fair wage was something between a minimum wage and a living wageThe lower limit of a fair wage must obviously be the minimum wage, the upper limit is equally set by what may broadly be called the capacity of the industry to pay

Chapter 2

Living Wage

Justice Higgins defined living wage as one appropriate for “the normal needs of the average employee, regarded as a human being living in a civilized community”There are three possible ways of obtaining some indication as to what constitutes a living wage:

It should be sufficient to pay for a satisfactory basic budget

Cont…………

Chapter 2It should be sufficient to purchase the minimum theoretical needs of a typical family, calculated in accordance with some more or less scientific formulaIt should be comparable with a living wage already established in similar circumstances

It is a difficult task to fix a living wage in terms of money as it differs from country to country and from time to time, according to national economy and social policiesIt is obvious that the concept of a living wage is not a static concept; it is expanding

Chapter 2

Money and Real Wages

Wages earned by employees are normally expressed in terms of moneyThere are two aspects of wages:

Money wageReal wage

According to Adam Smith money wage level is determined and regulated by the interaction between supply and demand of necessaries, on the one hand and the supply and demand of labour, on the other

Cont…………

Chapter 2With the exception of the First Plan period money wage increases have lagged behind price increases throughout the period of Indian planningSince the early sixties, there has been a continuous rise in the prices of most of our consumption of goods and servicesIn an inflationary situation, there is bound to be erosion of the purchasing power of earnings or money wagesIt is no doubt true that unless money wages rise as fast as consumer prices, it would result in an erosion of real wages

Chapter 2

Wage Theories

Subsistence TheoryWage Fund TheoryMarginal Productivity TheoryThe Residual Claimant TheoryEmployment Theory

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Chapter 2

Exploitation TheoryLabour Theory of ValueCompetitive TheoryLow-wage Labour Market TheoryPurchasing Power TheoryMicro-economic Wage TheoryMulti-disciplinary Theories

Chapter 2

Subsistence Theory

This theory states that in the long run, wages would tend towards that sum which is necessary to maintain a worker and his familyWhile Adam Smith and David Ricardo argued that it is the growth of population which brings down wages to the level of minimum subsistence, Karl Marx argued that subsistence wages emerge because of the phenomenon of unemployment and “the reserve army of labour”Malthus held that wages were bound to remain at the subsistence level because any increase in wages would bring about an increase in population

Chapter 2

Wage Fund Theory

This theory stated that at any given moment, wages are determined by the relative magnitude of the work force and the whole or a certain part of the capital of the countryThe wages are paid from a fixed ‘wage fund’According to John Stuart Mill, wage was a variable dependent on the relation between the labouringpopulation and the aggregate funds set aside by the capitalists to pay them

Chapter 2

Marginal Productivity Theory

This theory focused on demand for labourMarginal productivity theory explains not only the general level of wages but the entire wage structure of a highly competitive economy in terms of interaction of supply and demandAs a demand theory of wages, the marginal productivity theory fails to make full allowance for the particular nature of supply curves for labour

Chapter 2

The Residual Claimant Theory

Francis A. Walker has propounded this theory of wages as apart of residual surplus which is left after other factor charges have been metThis theory was designed to emphasize the interest of the working class in continual process and accumulationIt does not explain how trade unions are able to increase the wagesThis theory does not consider the aspect of labourmarket and the role of labour in productivity

Chapter 2

Bargaining Theory

This theory was propounded by John DavidsonAccording to him, wages are determined by the relative bargaining power between workers or trade unions and employers and basic wages, fringe benefits, job differentials and individual differences tend to be determined by the relative strength of the organization and the trade union

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Chapter 2

Bargaining has received considerable attention in view of the fact that wages are now being determined by collective groups of workers organized into trade unions and employers organized into employers’associationCollective bargaining may be seen as the process through which labour supply and demand are equated in the labour market

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Chapter 2

Walton and McKersie identified four bargaining sub-processes:

Intra-organization bargainingDistributive bargainingIntegrative bargainingAttitudinal bargaining

Chapter 2

Employment Theory

There are essentially two schools of thought which propounded the inter-relationship between wages and employmentAccording to Pigou, unemployment would disappear if the workers were to accept a voluntary cut in wagesJohn Maynard Keynes, in his theory of employment, advocated wage rigidity in place of wage flexibilityVoluntary of employment would not doubt increase, if the cut in money wages is applied to a single industry

Chapter 2

Exploitation Theory

Adam Smith suggested the basis of an exploitation theory as the original state of things in which the whole produce of labour belonged to the labourersand when there were no landlords nor masters to share with themStarting with Ricardo’s notion that labour creates all value, Marx contended that profit, interest, and rent are unwarranted deductions from the product that labour alone creates

Chapter 2Labour Theory of Value

According to Marx, the simplest concept which related to man’s activity of producing his means of livelihood was human labourHe considered labour as an article of commerce which could be purchased on payment of subsistence priceThe price of any product was determined by the labour time needed for producing itHis theory is also known as surplus value theory of wages

Chapter 2

Competitive Theory

The competitive theorists assume that neither employers nor employees combine together to influence demand or supply conditions and that markets are perfectUnfortunately these do not hold good in the case of a monopolistic world marketThe forces of demand and supply may be affected by government intervention in the regulation of wages, the application of awards, and the statutory extension of the provision of collective agreement to employers and workers who were not parties to them

Chapter 2

Low-Wage Labour Market Theory

There are several conceptual approaches which can be adopted for analysing the behaviour of low-income labour market:

Queue Theory:It asserts that workers are ranked according to the relationship between their potential productivity and their wage rates

Dual Labour market theory:This theory argues that labour market is divided into primary and secondary markets

Chapter 2

Purchasing Power Theory

According this theory, wage increases are desirable because they raise labour income and thereby stimulate consumptionPurchasing power and consumption are usually increasing just prior to recession; workers account for only part of total consumers spending; the assumption that general overproduction can be overcome by higher wages;are some of the basic limitations of this theory

Chapter 2

Micro-economic Wage Theory

According to Jean Marchal, such a theory musthave three essential requirements:

The usual concept of wages must be replaced by a wider conceptGeneral behaviour of employers and workers affect the general price level only if there is sufficient compatibility between the structures of the groups and of productionIntegration of the theory of wages into a theory of national income distribution

Chapter 2

Multi-Disciplinary Theories

A number of multi-disciplinary theories haveemerged to encompass the increasing range ofvariables which empirical work provides

Lester has studied labour market behaviour to explain wage differentials by contemplating what he calls competitive, anti-competitive, and impeditive factorsDunlop sought to identify job clusters by which he meant a stable group of jobs within a company linked together by technology, administrative organization, and social custom

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