WAGES AND SALARY   ADMINISTRATIONChapter 2 – Wage Concepts and Theories
Chapter 2           Wages ConceptsThe term “wages” may be used to describe one ofseveral concepts, including wage rates, s...
Chapter 2The concept “earnings” relates to remuneration incash and in kind paid to employees, as a rule, atregular interva...
Chapter 2Several terms have acquired currency referring to thewage levels:  Statutory minimum wage  The base or base minim...
Chapter 2            Minimum WagesThere can be three kinds of minimum wages:  A minimum wage notified by the government un...
Chapter 2    Need-based Minimum WageTo calculate the minimum wage, the committeeaccepted the following five norms and reco...
Chapter 2Clothing requirement should be estimated at a percapita consumption of 18 yards per annum whichcould give for the...
Chapter 2                 Fair WageThe Encyclopedia of Social Sciences describes a“fair wage” as one equal to that receive...
Chapter 2                  Living WageJustice Higgins defined living wage as oneappropriate for “the normal needs of the a...
Chapter 2     It should be sufficient to purchase the minimum     theoretical needs of a typical family, calculated in    ...
Chapter 2          Money and Real WagesWages earned by employees are normally expressedin terms of moneyThere are two aspe...
Chapter 2With the exception of the First Plan period moneywage increases have lagged behind price increasesthroughout the ...
Chapter 2       Wage TheoriesSubsistence TheoryWage Fund TheoryMarginal Productivity TheoryThe Residual Claimant TheoryEmp...
Chapter 2Exploitation TheoryLabour Theory of ValueCompetitive TheoryLow-wage Labour Market TheoryPurchasing Power TheoryMi...
Chapter 2          Subsistence TheoryThis theory states that in the long run, wages wouldtend towards that sum which is ne...
Chapter 2           Wage Fund TheoryThis theory stated that at any given moment, wagesare determined by the relative magni...
Chapter 2    Marginal Productivity TheoryThis theory focused on demand for labourMarginal productivity theory explains not...
Chapter 2    The Residual Claimant TheoryFrancis A. Walker has propounded this theory ofwages as apart of residual surplus...
Chapter 2           Bargaining TheoryThis theory was propounded by John DavidsonAccording to him, wages are determined by ...
Chapter 2Bargaining has received considerableattention in view of the fact that wages arenow being determined by collectiv...
Chapter 2Walton and McKersie identified fourbargaining sub-processes:  Intra-organization bargaining  Distributive bargain...
Chapter 2           Employment TheoryThere are essentially two schools of thought whichpropounded the inter-relationship b...
Chapter 2           Exploitation TheoryAdam Smith suggested the basis of an exploitationtheory as the original state of th...
Chapter 2          Labour Theory of ValueAccording to Marx, the simplest concept whichrelated to man’s activity of produci...
Chapter 2           Competitive TheoryThe competitive theorists assume that neitheremployers nor employees combine togethe...
Chapter 2    Low-Wage Labour Market TheoryThere are several conceptual approaches which canbe adopted for analysing the be...
Chapter 2    Purchasing Power TheoryAccording this theory, wage increases are desirablebecause they raise labour income an...
Chapter 2      Micro-economic Wage TheoryAccording to Jean Marchal, such a theory musthave three essential requirements:  ...
Chapter 2      Multi-Disciplinary TheoriesA number of multi-disciplinary theories haveemerged to encompass the increasing ...
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Wages: Concepts and Theories

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In this presentation, we will understand concept theories and types of wages, compensations and earnings.
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Wages: Concepts and Theories

  1. 1. WAGES AND SALARY ADMINISTRATIONChapter 2 – Wage Concepts and Theories
  2. 2. Chapter 2 Wages ConceptsThe term “wages” may be used to describe one ofseveral concepts, including wage rates, straight-timeaverage hourly earnings, gross average hourlyearnings, weekly earnings, weekly take home pay,and annual earningsThe term “compensation” is of a recent origin whichincludes everything an employed individual receivesin return for his work Cont…………
  3. 3. Chapter 2The concept “earnings” relates to remuneration incash and in kind paid to employees, as a rule, atregular intervals for time worked or work donetogether with remuneration for time not workedWages, in the widest sense, means any economiccompensation met by the employer under somecontract to his employees for the services renderedby themGross earnings may differ from the wage rate notonly because of the number of days or weeks onwhich a worker is able, or willing to secureemploymentThe two terms often used interchangeably are“wages” and “salary”
  4. 4. Chapter 2Several terms have acquired currency referring to thewage levels: Statutory minimum wage The base or base minimum wage The minimum wage The fair wage The living wage The need based minimum wage
  5. 5. Chapter 2 Minimum WagesThere can be three kinds of minimum wages: A minimum wage notified by the government under the Minimum Wages Act, 1948 for different scheduled employments A minimum wage drawn by an unskilled worker in an organized industry as a result of wage settlement which is purely the result of hard bargaining Need-based minimum wage determined as per the norms prescribed by the 15th Session of Indian Labour Conference
  6. 6. Chapter 2 Need-based Minimum WageTo calculate the minimum wage, the committeeaccepted the following five norms and recommendedthat they should guide all wage-fixing authorities,including minimum wage committees, wage boardsand adjudicatorsIn calculating the minimum wage, the standardworking class family should be taken to consist ofthree consumption units for one earnerMinimum food requirements should be calculated onthe basis of a net intake of 2,700 calories Cont…………
  7. 7. Chapter 2Clothing requirement should be estimated at a percapita consumption of 18 yards per annum whichcould give for the average workers’ family of four, atotal of 72 yardsIn respect of housing, the norm should be theminimum rent charged by government in any area forhouses provided under the subsidised industrialhousing scheme fro low-income groupsFuel, lighting and other miscellaneous items ofexpenditure should constitute 20% of the totalminimum wages
  8. 8. Chapter 2 Fair WageThe Encyclopedia of Social Sciences describes a“fair wage” as one equal to that received by workersperforming work of equal skill, difficulty orunpleasantnessThe Committee on Fair Wages stated that the fairwage was something between a minimum wage anda living wageThe lower limit of a fair wage must obviously be theminimum wage, the upper limit is equally set by whatmay broadly be called the capacity of the industry topay
  9. 9. Chapter 2 Living WageJustice Higgins defined living wage as oneappropriate for “the normal needs of the averageemployee, regarded as a human being living in acivilized community”There are three possible ways of obtaining someindication as to what constitutes a living wage: It should be sufficient to pay for a satisfactory basic budget Cont…………
  10. 10. Chapter 2 It should be sufficient to purchase the minimum theoretical needs of a typical family, calculated in accordance with some more or less scientific formula It should be comparable with a living wage already established in similar circumstancesIt is a difficult task to fix a living wage in terms ofmoney as it differs from country to country and fromtime to time, according to national economy andsocial policiesIt is obvious that the concept of a living wage is not astatic concept; it is expanding
  11. 11. Chapter 2 Money and Real WagesWages earned by employees are normally expressedin terms of moneyThere are two aspects of wages: Money wage Real wageAccording to Adam Smith money wage level isdetermined and regulated by the interaction betweensupply and demand of necessaries, on the one handand the supply and demand of labour, on the other Cont…………
  12. 12. Chapter 2With the exception of the First Plan period moneywage increases have lagged behind price increasesthroughout the period of Indian planningSince the early sixties, there has been a continuousrise in the prices of most of our consumption of goodsand servicesIn an inflationary situation, there is bound to beerosion of the purchasing power of earnings ormoney wagesIt is no doubt true that unless money wages rise asfast as consumer prices, it would result in an erosionof real wages
  13. 13. Chapter 2 Wage TheoriesSubsistence TheoryWage Fund TheoryMarginal Productivity TheoryThe Residual Claimant TheoryEmployment Theory Cont…………
  14. 14. Chapter 2Exploitation TheoryLabour Theory of ValueCompetitive TheoryLow-wage Labour Market TheoryPurchasing Power TheoryMicro-economic Wage TheoryMulti-disciplinary Theories
  15. 15. Chapter 2 Subsistence TheoryThis theory states that in the long run, wages wouldtend towards that sum which is necessary to maintaina worker and his familyWhile Adam Smith and David Ricardo argued that itis the growth of population which brings down wagesto the level of minimum subsistence, Karl Marxargued that subsistence wages emerge because ofthe phenomenon of unemployment and “the reservearmy of labour”Malthus held that wages were bound to remain at thesubsistence level because any increase in wageswould bring about an increase in population
  16. 16. Chapter 2 Wage Fund TheoryThis theory stated that at any given moment, wagesare determined by the relative magnitude of the workforce and the whole or a certain part of the capital ofthe countryThe wages are paid from a fixed ‘wage fund’According to John Stuart Mill, wage was a variabledependent on the relation between the labouringpopulation and the aggregate funds set aside by thecapitalists to pay them
  17. 17. Chapter 2 Marginal Productivity TheoryThis theory focused on demand for labourMarginal productivity theory explains not only thegeneral level of wages but the entire wage structureof a highly competitive economy in terms ofinteraction of supply and demandAs a demand theory of wages, the marginalproductivity theory fails to make full allowance for theparticular nature of supply curves for labour
  18. 18. Chapter 2 The Residual Claimant TheoryFrancis A. Walker has propounded this theory ofwages as apart of residual surplus which is left afterother factor charges have been metThis theory was designed to emphasize the interestof the working class in continual process andaccumulationIt does not explain how trade unions are able toincrease the wagesThis theory does not consider the aspect of labourmarket and the role of labour in productivity
  19. 19. Chapter 2 Bargaining TheoryThis theory was propounded by John DavidsonAccording to him, wages are determined by therelative bargaining power between workers or tradeunions and employers and basic wages, fringebenefits, job differentials and individual differencestend to be determined by the relative strength of theorganization and the trade union Cont………..
  20. 20. Chapter 2Bargaining has received considerableattention in view of the fact that wages arenow being determined by collective groups ofworkers organized into trade unions andemployers organized into employers’associationCollective bargaining may be seen as theprocess through which labour supply anddemand are equated in the labour market Cont…………
  21. 21. Chapter 2Walton and McKersie identified fourbargaining sub-processes: Intra-organization bargaining Distributive bargaining Integrative bargaining Attitudinal bargaining
  22. 22. Chapter 2 Employment TheoryThere are essentially two schools of thought whichpropounded the inter-relationship between wagesand employmentAccording to Pigou, unemployment would disappearif 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, ifthe cut in money wages is applied to a single industry
  23. 23. Chapter 2 Exploitation TheoryAdam Smith suggested the basis of an exploitationtheory as the original state of things in which thewhole produce of labour belonged to the labourersand when there were no landlords nor masters toshare with themStarting with Ricardo’s notion that labour creates allvalue, Marx contended that profit, interest, and rentare unwarranted deductions from the product thatlabour alone creates
  24. 24. Chapter 2 Labour Theory of ValueAccording to Marx, the simplest concept whichrelated to man’s activity of producing his means oflivelihood was human labourHe considered labour as an article of commercewhich could be purchased on payment of subsistencepriceThe price of any product was determined by thelabour time needed for producing itHis theory is also known as surplus value theory ofwages
  25. 25. Chapter 2 Competitive TheoryThe competitive theorists assume that neitheremployers nor employees combine together toinfluence demand or supply conditions and thatmarkets are perfectUnfortunately these do not hold good in the case of amonopolistic world marketThe forces of demand and supply may be affected bygovernment intervention in the regulation of wages,the application of awards, and the statutory extensionof the provision of collective agreement to employersand workers who were not parties to them
  26. 26. Chapter 2 Low-Wage Labour Market TheoryThere are several conceptual approaches which canbe adopted for analysing the behaviour of low-incomelabour 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
  27. 27. Chapter 2 Purchasing Power TheoryAccording this theory, wage increases are desirablebecause they raise labour income and therebystimulate consumptionPurchasing power and consumption are usuallyincreasing just prior to recession; workers account foronly part of total consumers spending; theassumption that general overproduction can beovercome by higher wages;are some of the basiclimitations of this theory
  28. 28. Chapter 2 Micro-economic Wage TheoryAccording to Jean Marchal, such a theory musthave three essential requirements: The usual concept of wages must be replaced by a wider concept General behaviour of employers and workers affect the general price level only if there is sufficient compatibility between the structures of the groups and of production Integration of the theory of wages into a theory of national income distribution
  29. 29. Chapter 2 Multi-Disciplinary TheoriesA 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 factors Dunlop 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
  30. 30. “Like” us on Facebook:  p // /http://www.facebook.com/welearnindia “Follow” us on Twitter:http://twitter.com/WeLearnIndiahttp://twitter com/WeLearnIndiaWatch informative videos on Youtube: http://www.youtube.com/WelingkarDLP
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