Need Based Minimum Wage Living Wage Fair Wage Money & Real Wages Wage Theories

Transcription

1 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 Wage Concepts & Theories 1

2 Structure: Wage Concepts & Theories 1.Wage Concepts 2.Minimum Wages 3.Need Based Minimum Wage 4.Living Wage 5.Fair Wage 6.Money & Real Wages 7.Wage Theories 8.Summary Chapter Two Wage Concepts & Theories 2

3 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 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. Chapter Two Wage Concepts & Theories 3

4 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 employer s discretion and the amount to the payment being in accordance with terms stipulated in a contract of service. Chapter Two Wage Concepts & Theories 4

5 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 & Theories 5

6 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 & Theories 6

7 Wage Concepts Terms wages & salary are used interchangeably. 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 & Theories 7

8 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 Wage Concepts & Theories 8

9 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 15 th session of Indian labour Conference. Chapter Two Wage Concepts & Theories 9

10 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 Wage Concepts & Theories 10

11 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 Wage Concepts & Theories 11

12 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 Wage Concepts & Theories 12

13 Minimum Wages Should the minimum wages be uniform among different sectors or regions?. National Commission on Labour ( ) 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 Wage Concepts & Theories 13

14 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 Wage Concepts & Theories 14

15 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 Wage Concepts & Theories 15

16 Need-based Minimum Wages 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 Wage Concepts & Theories 16

17 Need-based Minimum Wages 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.Children s 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 Wage Concepts & Theories 17

18 Need-based Minimum Wages 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 Wage Concepts & Theories 18

19 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 Wage Concepts & Theories 19

20 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 Wage Concepts & Theories 20

21 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 Wage Concepts & Theories 21

22 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 Wage Concepts & Theories 22

23 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 Wage Concepts & Theories 23

24 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 Wage Concepts & Theories 24

25 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 Wage Concepts & Theories 25

26 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 Wage Concepts & Theories 26

27 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 to stop erosion of workers real wages. Higher money wage resulting in higher real wage of workers can improve their health and efficiency and lead to higher productivity. Chapter Two Wage Concepts & Theories 27

28 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 Wage Concepts & Theories 28

29 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 Wage Concepts & Theories 29

30 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 worker s wages must be sufficient to maintain him. Chapter Two Wage Concepts & Theories 30

31 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 Wage Concepts & Theories 31

32 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 Wage Concepts & Theories 32

33 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 Wage Concepts & Theories 33

34 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 Wage Concepts & Theories 34

35 Wage Theories Marginal Productivity Theory: Hick s 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 man s 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 Wage Concepts & Theories 35

36 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 Wage Concepts & Theories 36

37 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 Wage Concepts & Theories 37

38 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 Wage Concepts & Theories 38

39 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 Wage Concepts & Theories 39

40 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 Wage Concepts & Theories 40

41 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 Wage Concepts & Theories 41

42 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 Wage Concepts & Theories 42

43 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 Wage Concepts & Theories 43

44 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 Wage Concepts & Theories 44

45 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 Wage Concepts & Theories 45

46 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 Wage Concepts & Theories 46

47 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 must be replaced by a wider concept. Chapter Two Wage Concepts & Theories 47

48 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 Wage Concepts & Theories 48

49 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 Wage Concepts & Theories 49

50 Wage Theories Multi-Disciplinary Theories : Dunlop relates an organization s 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 Wage Concepts & Theories 50

51 Summary The concept of wages includes economic, sociological, psychological and organizational elements. In an industrial society, wages determine the worker s 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 Wage Concepts & Theories 51

52 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 Wage Concepts & Theories 52

53 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 Wage Concepts & Theories 53

54 Summary iv] wage fund availability & its creation after deduction of prior charges. v] value of product. vi] product demand, supply & competition in the market. vii] bargaining ability of employers & the workers. Chapter Two Wage Concepts & Theories 54

55 Thus we arrive at the end of Wage Concepts & Theories Next we move to Chapter three Wage Payments Good Luck! Chapter Two Wage Concepts & Theories 55