Chapter 02

Wage Concepts & Theories
Learning Objectives:
To Understand
Wage Concepts
Minimum Wages
Need Based Minimum Wage
Living Wage
Fair Wage
Money & Real Wages
Wage Theories
Chapter Two

Structure:
1.Wage Concepts
2.Minimum Wages
3.Need Based Minimum Wage
4.Living
5.Fair
Wage
Wage
6.Money & Real Wages

7.Wage Theories
8.Summary
Chapter Two
Wage Concepts
The institution of wages , the concept
for doing the work for some other in
exchange for cash or kind, is one of the
oldest ones.
The
Chapter Two
term wages is used to describe

wage rate,
straight-time average hourly
earnings,
gross average hourly earnings,
weekly earnings,
weekly take home pay,
annual earnings.
Wage Concepts
Money paid to workers is considered as
his wages. Other types of payments, as well
as pension, welfare funds, social security,
vacations and holidays , are regarded as
fringe benefits.
The benefits are in addition to wages
and form part of total labour costs.
Wages are defined as the payment to
workers for placing their skill & energy at
the disposal of an employer, the method of
use of that skill & energy being at the
employers discretion and the amount to the
payment being in accordance with terms
stipulated in a contract of service.
Chapter Two
Wage Concepts
The concept earnings relates to
remuneration in cash or in kind paid to
employees, as a rule, at regular intervals
for time worked or work done together with
remuneration for time not worked such as
annual vacation, other paid leave or
holidays.
Earnings
exclude
employers
contributions,
in
respect
of
their
employees, paid to social security &
pension schemes and also benefits received
by the employees under these schemes.
Chapter Two
Wage Concepts
When we speak about wages, we refer
broadly to
(i) the settled wage rate per day,
week or month.
(ii) the gross earnings for the days
worked, which would include over time
payment, incentive payment & allowances
payable in cash,
(iii) the take-home pay , which would
be the gross earnings minus deductions of
all
kinds
such
as
social
security
deductions, tax deductions etc.
Chapter Two
Wage Concepts
Terms
wages
interchangeably.
&
salary
are
used
A person paid by the year receives

salary & not wages, while one paid by the
hour or day receives wages. If he is paid
by month he is looked upon as salaried
employee rather than a wage earner.
Normally the term salary is used for
compensation to white collar office workers
and term wages is used for compensation to
factory blue collar workers.
Chapter Two
Wage Concepts
Under
wages
several
terms
have
acquired currency like, statutory minimum
wages, the base or basic minimum wages, the
minimum wages, fair wage, living wage and
need based minimum wage.
Some of these terms have their origin
in labour legislation others in labour
awards and court decisions.
These terms cannot be described in
finite terms with universal application as
their contents are elastic & they vary from
time to time and from country to country.
Chapter Two
Minimum Wages
The practice of minimum wage was first
developed in Australia & New Zealand. It
was a part of the procedure to settle
industrial disputes.
Minimum Wage can mean the minimum
wage notified by the government under
Minimum Wages Act, 1948 or
a minimum wage drawn by [ unskilled]
worker under a wage settlement after hard
or even coercive bargaining or
need based minimum wage determined as
per the norms prescribed by the 15th
session of Indian labour Conference.
Chapter Two
Minimum Wages
The content of the minimum wage is not
fixed or static. It is dynamic and is bound
to vary from time to time & place to place.
The International labour organization
[ILO] has listed three criteria for fixing
minimum wage.
[i] the needs of the workers;
[ii] the capacity to pay;
[iii] wages paid for comparable work
elsewhere in the economy or more
generally the standard of living of
other social groups.
Chapter Two
10
Minimum Wages
The Committee on Fair wages (1948),
felt that different considerations arise in
determining minimum wages. In developed
foreign countries living wage formed the
basis for minimum wages. But for developing
countries, like India, per capita national
income was so low that country could not by
law
fix
a
minimum
wage
that
would
correspond to the concept of living wage.
The committee felt that the minimum
wage in India must provide for bare
subsistence of life plus for preservations
of
efficiency
of
worker.
This
means
provision for education, medical needs &
amenities.
Chapter Two
11
Minimum Wages
A
bare subsistence or minimum wage

would be sufficient to cover the bare
physical needs of a worker and his family.
If an industry is unable to pay its
employees at least this bare minimum wage,
it has no right to exist.
The statutory minimum wage may be
higher than the bare subsistence wage. The
courts and tribunal have laid emphasis upon
fulfillment of the needs of an industrial
worker , irrespective of the capacity of
the industry or his employer to pay.
Chapter Two
12
Minimum Wages
Should the minimum wages be uniform
among
different
sectors
or
regions?.
National Commission on Labour (196669)
expressed that minimum wage in the sense of
uniform minimum monetary remuneration for
the country as a whole is neither feasible
nor desirable.
Minimum wages may be fixed at regional
levels and must be fixed even at national
level
in
sweated
industries
to
stop
exploitation of labour.
Chapter Two
13
Minimum Wages
Minimum Wages Act, 1948, lays down
norms and procedures for fixation of wages
in the industrial services and agricultural
sectors. Minimum wages have been fixed &
revised for various industries and for
certain categories of workers.
Minimum Wages Act is not vigorously
implemented , especially in rural sector.
Further revision of wages has been tardy
and given to long delays.
Chapter Two
14
Need-based Minimum Wages

Indian labour Conference held in 1957
attempted to put content into the concept
of minimum wages for all workers in the
industry.
With regard to the
Minimum Wages
fixation , it was agreed that such wage was
need-based and should ensure the minimum
human needs of the industrial worker ,
irrespective
any
other
considerations.
Certain norms were recommended to the
authorities responsible for fixing minimum
wages.
Chapter Two
15

1.Standard working class family should be
taken to consist three consumption units.
Earnings
of
women,
children
to
be
ignored.
2.Food requirements to be calculated at net
intake of 2,700 calories.
3.Clothing 18 yards per person per year or
72 yards per family.
4.The norm for housing should be minimum
rent charged by the government for houses
provided for low income group.
5.Fuel, lighting and other miscellaneous
items should constitute 20% of the
minimum wage.
Chapter Two
16

Giving
monetary
content
to
physical units is a difficult job and
systematic attempts have been made by
wage fixing authorities.
Socio-economic aspects of the
wage structure demand that one more norm
be added for need based minimum wages.
i.e.
6.Childrens
education,
medical
requirements,
minimum
recreation
including
festivals/ceremonies
and
provision for old age, marriages etc.
This should constitute further 25 % of
the minimum wages.
Chapter Two
17

The wage structure which approximately
answers the suggested six norms
is nothing more than a minimum wage at a
subsistence level .
The employees are entitled to this minimum
wage at all times and under all
circumstances.
An employer who cannot pay the minimum
wage has no right
to engage labour and no justification
to run the industry.
Chapter Two
18
Fair Wage
Definitions:
Fair wage is one equal to that received
by workers
performing work of equal
skill, difficulty or unpleasantness.
A wage rate is fair in a narrower sense
when it is equal to the rate current for
similar workmen in the same trade &
neighbourhood & in a wider sense when it
is equal to the predominant rate for
similar work throughout the country and
in generality of trades.
Chapter Two
19
Fair Wage
Definitions:
A
step
towards
the
progressive
realization of a living wage.
A fair wage is something between a
minimum wage and living wage .
While the lower level of fair wage is
obviously the minimum wage, upper limit is
set by the capacity of the industry to pay.
This will depend not only on present
economic position of the industry but
also on its future prospects.
Chapter Two
20
Fair Wage
Between these two limits, the actual
wages depend on
the productivity of labour;
the prevailing rates of wages in
the same or similar occupations
in the same or neighbouring
localities;
the level of national income and
its distribution;
the place of the industry in the
economy of the country.
Chapter Two
21
Fair Wage
It is recognized that our present level of
national income does not permit payment
of living wage based on standards
prevalent in more advanced countries.
But that does not prevent authorities from
fixing
wages
at
different
lower
standards.
There is always a level of minimum wages
that the country can afford, what it
cannot afford is wages fixed at the level
that
reduces
employment
itself
and
thereby diminish the national income.
Chapter Two
22
Living Wage
Living wage is the one appropriate for
the normal needs of the average employee,
regarded as a human being in a civilized
society. It must provide for frugal
comfort estimated by current standards.
Living wage should be
sufficient to purchase minimum
theoretical needs of a typical family,
calculated in a scientific form;
sufficient
to
pay
for
a
satisfactory family budget as revealed by
a survey
comparable to living wage already
established
Chapter Two
23
Living Wage
Living wage can be precisely
defined , but it expresses an idea a
belief, a conviction, a demand. The idea
of living wage comes from a fountain of
justice which no man has ever seen, or
explained but we know is an instinct
planted in human heart.
A living wage is something far
greater than the figures in a wage
schedule.
It is at the same time
condemnation of unmerited and unnecessary
poverty and demand for some measure of
justice.
Chapter Two
24
Money & Real Wages

Money wages give to the workers command
over goods and services. The actual goods
and services for which wages can be
exchanged constitute real wages.
Real wages are calculated by relating
changes in money wages to changes in
the consumer price index. Workers usually
are far more conscious of changes in
money wages rather than of changes in
real wages.
Money wage increases have lagged behind
price increases throughout the planning
period.
Chapter Two
25
Money & Real Wages

The National Commission on Labour has
observed that that increases of money
wages
of
industrial
worker
since
Independence have not been associated
with a rise in real wages nor have real
wages increases been commensurate with
improvements in productivity.
During the recent past general price level
has registered a sharp rise, wages in
organized sector are allowed to chase
prices through CPI based DA. Phenomenon
called cost push inflation.
Chapter Two
26
Money & Real Wages

Inflationary spiral
in Indian economy is
caused
by
output
of
food
grains,
shortages, deficit financing and dearness
allowance linked to the CPI.
Inflation has to be contained
erosion of workers real wages.
to
stop
Higher money wage resulting in higher real

wage of workers can improve their health
and
efficiency
and
lead
to
higher
productivity.
Chapter Two
27
Wage Theories
Wage
theory,
a
highly
systematized body of knowledge began to
emerge some two hundred years ago. First
theories are discarded by later ones
mainly because they fit new facts.
A variety of new social ideas,
institutional
forces,
egalitarian
&
ethical
considerations,
political
&
economic
factors,
demands
of
social
justice & equity are at work in the
establishment of wage level and wage
structure.
Chapter Two
28
Wage Theories
The activity of the trade unions
& the positive interference of the state
in the regulation of wages for the
benefit of wage earners have brought to
light inadequate treatment to the supply
side of the wage theory.
Most people consider theory to be
something that will not work in practice.
And many theories in economics are open
to this criticism. Essentially, theorist
reasons things out , and the theory is
the
result
of
reasoning
from
past
experience.
Chapter Two
29
Wage Theories
Subsistence Theory:
The subsistence theory of wages by
Adam Smith, states that in the long run,
wages would tend towards that sum which
is necessary to maintain a worker & his
family.
If wages were to rise above this
subsistence level, worker will be induced
to have larger families resulting in more
supply of labour that will
bring down
wages to the original level. And the wage
level would not fall below subsistence as
workers wages must be sufficient to
maintain him.
Chapter Two
30
Wage Theories
Subsistence Theory:
Ricardo later stated that the natural
price of labour is that price which is
necessary to enable the labourers to
subsist and to perpetuate their race
without either increase or diminution.
Malthus reiterated that the wages were
bound to remain at subsistence level,
precisely because any increase in wages
would bring about an increase in the
population, and the competition among the
larger labour force would tend to reduce
wages.
Chapter Two
31
Wage Theories
Wage Fund Theory:
This
theory
supplemented
the
Subsistence Theory. The theory stated
that at any given moment, wages are
determined by the relative magnitude of
work force and the whole or a certain
part of the capital of the country.
John Stuart Mill stated that wage was
a variable dependent on the relation
between the labouring population and the
aggregate of funds set aside by the
capitalists to pay them.
Chapter Two
32
Wage Theories
Wage Fund Theory:
This theory is criticized by FA Walker
who insisted that wages were paid out of
the product of the labour and not from
some previously accumulated capital.
There is no reason to assume that the
available fund would be constant . It is
production
that
furnishes
the
true
measure of wages. After deduction of
rent, interest & profit, the remaining
portion
of
wealth
reverts
to
the
labouring class.
Chapter Two
33
Wage Theories
Marginal Productivity Theory:
This theory focused on demand for
labour unlike earlier classical theories
that considered only supply side.
According to Marginal Productivity
theory, propounded by Marshall & Hicks,
in a competitive market condition, reward
for labour, like any other factor of
production is determined by the marginal
productivity
of
labour.
The
wages
received
by
the
marginal
labourer
determines wages
paid to all other
labourers of the same grade.
Chapter Two
34
Wage Theories
Marginal Productivity Theory:
Hicks theory of Marginal Productivity
differs from Marshall's net productivity
doctrine because while Marshall assumed
the methods of production to be fixed,
Hicks assumes them to be variable.
Hicks concludes that a mans wages
will be proportional and not equal to the
value of his marginal product. Hicks,
further, analyzes the pressure of trade
unions and collective bargaining on the
wages and wage structure.
Chapter Two
35
Wage Theories
The Residual Claimant Theory:
FA Walker propounded a residual theory
of wages as that part of residual surplus
which is left after other factor charges
have been met.
Rent,
interest
and
profits
are,
according to him, determined by definite
laws , but there is no specific law which
determines wages. So workers get the
residual.
The theory ignores the fact that wages
is the first charge on an industry and
the role of trade unions in increasing
wages.
Chapter Two
36
Wage Theories
Bargaining
Theory:
According
to
Davidson
wages
are
determined by the relative bargaining
power between workers or trade unions and
employers;
and
basic
wage,
fringe
benefits
,
job
differentials
and
individual
differences
tend
to
be
determined by relative strength of the
organization and the trade union.
The
greatest
weakness
of
bargaining
theory is its failure to
define upper & lower limits within which
the two parties are to bargain for the
acceptable rate .
Chapter Two
37
Wage Theories
Bargaining
Theory:
Collective bargaining may be seen as a

process through which labour supply and
demand are equated in the labour market.
Various aspects of bargaining could
usefully be summarized into three groups:
contract for sale of labour;
form of industrial government
method of management.
It is a system in which the union and
management
participate
together
to
regulate the terms and conditions of
employment and in decision making.
Chapter Two
38
Wage Theories
Employment Theory:
According to classical economists,
unemployment
would
disappear
if
the
workers were to accept voluntary cut in
wages.
The reduced wages
result in reduced
cost and price. This reduction in price
would
cause
additional
demand
necessitating
increased
production
&
hence employment of more workers.
The theory fails to recognise the fact
that
cut
in
wages
would
decrease
purchasing power and result in fall, and
not the rise, in demand.
Chapter Two
39
Wage Theories
Exploitation Theory:
Marx contended that profit, interest
and rent were unwarranted deductions from
the product that labour alone creates.
The capitalist compels his employees to
work for more ours a day than is
necessary in order to produce their
subsistence.
The difference between the exchange
value of the workers product and the
subsistence wages they receive, is the
surplus value which is expropriated by
capitalists and distributed as profit,
rent and interest.
Chapter Two
40
Wage Theories
Labour Theory of Value:
Marx contended that worker considered
labour as an article of commerce which
could
be
purchased
on
payment
of
subsistence wages. The price of any
product was determined by the labour time
needed to for producing it. But workers
were not paid in proportion to the time
spent on work, but much less and surplus
went to the owner. This labour theory of
value is also known as surplus value
theory of wages.
Chapter Two
41
Wage Theories
Competitive Theory :
Economists have traditionally held
that wages are determined, as any other
commodity, by forces of demand & supply.
Workers would be attracted by high wages
to industries, occupations and localities
where
they were most needed and would
tend to leave industries and places where
supply of labour was more than the
demand.
The theory assumes that employers
compete among themselves by offering
higher wage to attract employees.
Chapter Two
42
Wage Theories
Competitive Theory :
Employees, on the other hand, compete
with others for jobs by offering their
services for lower wage. Competition
then, is essentially a disequilibrium
process by which excess demand and excess
supply cause changes in wages.
The theory assumes that employers and
employees do not combine together to
influence the demand or supply conditions
and the labor market is perfect. It also
ignores the fact that social forces do
not permit workers to relocate in search
of better wages.
Chapter Two
43
Wage Theories
Low Wage Labour Market Theory :
There
are
several
conceptual
approaches which can be adopted for
analysing the behaviour of low income
labour market.
The Queue theory states that workers
are ranked according to the relationship
between their potential productivity and
their wage rates. Most preferred workers
are selected from the queue first, and
less preferred ones are left for low
wages jobs or allowed to remain to
unemployed.
Chapter Two
44
Wage Theories
Low Wage Labour Market Theory :
Other theory states that there are two
segments of labour market.
One primary
which is marked by high wages, good
working conditions, stability, chances of
advancement etc.
The Secondary market is marked by low
wages, poor working conditions, high
turnover and arbitrary and capricious
supervision.
Most preferred worker take jobs in the
primary market and disadvantaged workers
are confined to the secondary market.
Chapter Two
45
Wage Theories
Purchasing Power Theory :
According
to
this
theory,
wage
increases are desirable because they
raise
worker
incomes
and
thereby
stimulate consumption. This increased
consumption stimulates the economy.
The argument has been used by unions
time and again in all periods, booms, and
recession but is not sustainable. Wages
form a small part of total consumption.
The
assumption
that
general
over
production can be overcome by higher
wages is a major limitation of the
theory.
Chapter Two
46
Wage Theories
Micro-economic Wage Theory :
After discussing the various wage
theories , Jean Marchal advocated the
necessity of evolving a truly macroeconomic wage theory.
Such theory must have three essential
requirements.
1.The usual concept of wages
replaced by a wider concept.
Chapter Two
must
be
47
Wage Theories
Micro-economic Wage Theory :
2.General
behaviour
of
employers
and
workers affect the general price level
only if there is sufficient compatibility
between the structures of groups and of
production.
3.Integration of theory of wages into a
theory on national income distribution.
Chapter Two
48
Wage Theories
Multi-Disciplinary Theories :
Lester
has
studied
labour
market
behaviour to explain wage differentials
by
contemplating
what
he
calls
competitive,
anti-competitive
and
impeditive factors.
Reder
has
considered
economic,
psychological and institutional factors
in his theory of wage determination.
Chapter Two
49
Wage Theories
Multi-Disciplinary Theories :
Dunlop relates
an organizations
internal wage structure to its milieu
through a limited number of key job rates
and
key
settlements
determined
by
technology.
Administrative
practices,
product market competition and source of
labor supply.
A discussion of wage theories reveals
that each theory contains some truth, but
none of them alone covers the whole
ground and explains all the facts.
Chapter Two
50
Summary
The concept of wages includes economic,
sociological,
psychological
and
organizational elements. In an industrial
society , wages determine the workers
way
of
life,
including
his
social
position. A number of theories have been
advanced
attempting
to
explain
the
different dimensions of wages and their
evolution.
Experience has shown that while the various
theories and policies have some validity
in certain defined conditions and serve
to explain many aspects of the wage
situation, none is adequate to apply to
all circumstances.
Chapter Two
51
Summary
Wage theorists, however, have given much
thought & developed much research to
attempting to discover an acceptable
general theory of wages that would
explain in all circumstances the way in
which the levels of wages are determined.
No such theory has worked out because the
factors affecting wages are very complex
& are closely linked with whole economic
& industrial system and with social
considerations.
Chapter Two
52
Summary
However, on the basis of the above theories
, it can be stated that the fundamentals
of wage determination are related to
i] ratio of capital and labour value
of the marginal net product of labour.
ii] labour market supply & demand.
iii] wage requirements of labour & his
family.
Chapter Two
53
Summary
iv] wage fund availability
creation
after
deduction
of
charges.
&
its
prior
v] value of product.
vi]
product
demand,
competition in the market.
supply
&
vii] bargaining ability of employers &

the workers.
Chapter Two
54
Thus we arrive at the end of

Next we move to Chapter three

Wage Payments
Good Luck!
Chapter Two
55

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Wage Concepts & Theories

Need Based Minimum Wage

Money & Real Wages

Wage Concepts & Theories

Wage Concepts & Theories

6.Money & Real Wages

Wage Concepts & Theories

term wages is used to describe

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

A person paid by the year receives

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

bare subsistence or minimum wage

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Need-based Minimum Wages

Wage Concepts & Theories

Need-based Minimum Wages

Wage Concepts & Theories

Need-based Minimum Wages

Wage Concepts & Theories

Need-based Minimum Wages

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Money & Real Wages

Wage Concepts & Theories

Money & Real Wages

Wage Concepts & Theories

Money & Real Wages

Higher money wage resulting in higher real

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Collective bargaining may be seen as a

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories

Wage Concepts & Theories