Concept of wages

1. Unit 1

2. Concepts of Wage
Wage:
• Refers to the hourly or daily payment for manual or unskilled labor.
• Usually applies to blue-collar workers like construction workers, agricultural laborers, or manufacturing
line workers.
• Determined by minimum wage laws set by the government based on skill level, location, and industry.
• Often paid in cash at regular intervals (daily, weekly).
Salary:
• Refers to the fixed monthly payment for white-collar or professional jobs.
• Typically associated with salaried employees like office workers, teachers, managers, or executives.
• Determined by individual contracts or collective bargaining agreements between employers and
employees.
• Often paid through bank transfers or paychecks at the end of the month.
Earnings:
• A broader term encompassing all forms of income earned through employment, including wages, salaries,
bonuses, allowances, commissions, overtime pay, etc.
• Can apply to both blue-collar and white-collar jobs.
• Used for tax purposes and determining financial stability.

3. Feature Wage Salary Earnings
Payment Type Hourly/Daily Monthly
All forms of
income
Job Type Manual/Unskilled White-Collar/Professional Both
Determination Minimum Wage Laws
Contract/Collective
Bargaining
All income
sources
Payment Frequency Cash at intervals Bank Transfer/Paycheck Varies

4. Types of Wages
Minimum Wage:
• Definition: The lowest legally allowed hourly, daily, or monthly wage for specific sectors and skill levels.
• Set by: State governments under the Minimum Wages Act, 1948.
• Significance: Ensures a basic level of income for vulnerable workers.
• Challenges: Often considered inadequate for decent living, prompting calls for increases and expansion
to more sectors.
Fair Wage:
• Definition: A wage deemed equitable and sufficient for basic needs, social participation, and a decent
standard of living.
• Not legally defined: Often used as a reference point in debates about minimum wage adequacy.
• Calculation: Varies based on cost-of-living, family size, and local needs.
• Significance: Provides a benchmark for evaluating the fairness of wages beyond legal minimums.
Nominal Wage:
• Definition: The face value of the wage earned in current rupees without adjusting for inflation.
• Significance: Reflects the immediate buying power of wages.
• Limitations: Doesn't account for rising costs of living, potentially obscuring real income changes.

5. Real Wage:
• Definition: Nominal wage adjusted for inflation to reflect its actual purchasing power over
time.
• Calculation: Nominal wage divided by the inflation rate for the same period.
• Significance: Provides a more accurate picture of how wages translate into living standards.
• Challenge: Fluctuations in inflation can make real wage trends complex to interpret.
Living Wage:
• Definition: A wage that enables a worker and their family to meet basic needs like food,
housing, healthcare, education, and transportation.
• No legal standing: Estimated by NGOs and activists based on living cost calculations.
• Significance: Raises awareness about the need for wages that ensure true economic security
and well-being.
• Challenges: Lack of legal enforcement and varying calculation methods create inconsistencies.

6. Wage Payments
• Time Rate System: In a time-rate system, employees are paid a fixed hourly, daily, weekly, monthly, or yearly rate
for the time they work, regardless of their output. This system is simple to administer and is often used for jobs
where output is difficult to measure or where quality is more important than quantity.
Formula: Gross wages = Hourly rate * Number of hours worked
Example: An employee who earns Rs.100 per hour and works 40 hours in a week would earn Rs.4000 in gross
wages.
• Piece Rate System: In a piece rate system, employees are paid a fixed rate for each unit of work they produce. This
system can be an effective way to motivate employees to be productive, but it can also lead to quality problems if
employees are focused on quantity over quality.
Formula: Gross wages = Piece rate * Number of units produced
Example: A garment worker who is paid Rs. 0.50 per shirt and makes 100 shirts in a week would earn Rs. 50 in
gross wages.
• Payment by Results: Payment by results is a system where employees are paid a bonus based on their
performance. The bonus can be based on a variety of factors, such as sales, productivity, or cost savings. This
system can be an effective way to motivate employees to achieve results, but it can also be complex to administer
and can lead to morale problems if employees feel that the bonus is unfair.
Formula: Gross wages = Base salary + Bonus
Example: A salesperson who earns a base salary of Rs.40,000 per year and receives a 10% bonus for exceeding their
sales target would earn Rs.44,000 in gross wages.

7. • Balance or Debt Method: The balance or debt method is a system used to pay
agricultural workers. Under this system, workers are paid a fixed amount at the end of
the harvest season, based on the value of the crops they have helped to produce. If the
value of the crops is not enough to cover the workers' wages, the workers go into debt to
the employer.
Formula: Gross wages = Value of crops produced - Expenses
Example: A group of migrant workers who harvest grapes for a winery earn Rs.1
per pound of grapes picked. If they pick 10,000 pounds of grapes and the winery’s
expenses are Rs. 5,000, the workers would earn Rs. 5,000 in gross wages.
• Incentive Rate System: An incentive rate system is a system where employees are paid
a bonus for exceeding a set production target. This system can be an effective way to
motivate employees to be productive, but it can also lead to quality problems if
employees are focused on quantity over quality.
Formula: Gross wages = Base rate + Incentive bonus
Example: A factory worker who is paid Rs.10 per hour and receives a Rs.1 bonus
for each unit produced above 100 units will earn Rs. 11 per hour if he produces
105 units.

8. Wage theory
• Wage theory is a branch of economics that seeks to understand why
workers are paid certain amounts for their labor. It explores the forces
and factors that determine the level of wages in an economy and the
differences in wages across different jobs and individuals.
1. Subsistence theory,
2. Wage fund theory,
3. Marginal productivity theory,
4. Residual claimant theory,
5. Bargaining theory

9. Subsistence theory
• This theory, also known as ‘Iron Law of Wages,” was propounded by David
Ricardo (1772-1823). This theory (1817) states that: “The laborers are paid to
enable them to subsist and perpetuate the race without increase or diminution.”
• The theory was based on the assumption that if the workers were paid more than
subsistence wage, their numbers would increase as they would procreate more; and
this would bring down the rate of wages.
• If the wages fall below the subsistence level, the number of workers would
decrease - as many would die of hunger, malnutrition, disease, cold, etc. and many
would not marry, when that happened the wage rates would go up.
• In economics, the subsistence theory of wages states that wages in the long run
will tend to the minimum value needed to keep workers alive. The justification for
the theory is that when wages are higher, more workers will be produced, and
when wages are lower, some workers will die, in each case bringing supply back to
a subistence-level equilibrium.

10. Wage fund theory
• This theory was developed by Adam Smith (1723-1790). His basic
assumption was that wages are paid out of a predetermined fund of
wealth which lay surplus with wealthy persons - as a result of savings.
• This fund could be utilized for employing laborers for work. If the
fund was large, wages would be high; if it was small, wages would be
reduced to the subsistence level. The demand for labour and the wages
that could be paid them were determined by the size of the fund.

11. Residual claimant Theory
• Francis A. Walker (1840-1897) propounded this theory. According to
him, there were four factors of production/business activity, viz., land,
labour, capital and entrepreneurship.
• Wages represent the amount of value created in the production, which
remains after payment has been made for all these factors of
production. In other words, labour is the residual claimant.

12. The bargaining theory of wages
• John Davidson propounded this theory. Under this theory, wages are
determined by the relative bargaining power of workers or trade
unions and of employers.
• When a trade union is involved, basic wages, fringe benefits, job
differentials and individual differences tend to be determined by the
relative strength of the organization and the trade union.

13. Case Study
Gilson steel is a local fabricating and supply firm. Situated in open country, far from the
large steel making centers. The firm has been in business many years. About the third of
employees have worked in the organization for more than ten years.Top management
would like to get away from the current practice in which negotiations on wage matters
and fringes follow the pattern.
The firm's president feels that industry – wide bargaining tends to divorce employees
from the firm . He thinks they feel that their employer is a combination of U.S steel and
bethlem steel instead of Gilson. He argues that the local firm which has prospered , can
do better by employees than is possible in national pattern. He says that the local
conditions should be taken into account. His basic objection to current practice,
however, is his conviction that it tends to divorce its employees from local employer.
The labour relations manager has been urged to try negotiating terms at variance with the
national pattern.
• What theory and policy do you read into the president's suggestion?
• How will his ideas fit into the existing pattern of public union policy?
• Can you suggest a promising innovative approach.

14. Components of wage structure
• The components of a wage structure can vary depending on factors like location,
industry, and employer size. However, most structures generally fall into three categories:
direct, indirect components and deductions.
• Direct components are what you might typically think of as salary, and they form the
base of your financial compensation. They include:
• Basic salary: This is the fixed amount you receive every pay period, usually expressed as a monthly or
annual figure. Other components are often calculated as percentages of your basic salary.
• Allowances: These are specific financial reimbursements meant to cover certain expenses related to
your job, such as:
• House rent allowance (HRA): Helps with your rent costs.
• Dearness allowance (DA): Compensates inflation and the rising cost of living.
• Conveyance allowance: Covers travel expenses incurred for commuting to work.
• Medical allowance: Reimburses or contributes towards medical expenses.
• Other allowances: Some employers might offer allowances for food, childcare, education, or
mobile phone usage.

15. • Indirect Components: These are non-monetary benefits provided by the
employer that contribute to the employee's overall compensation package, such as:
• Provident Fund (PF): A retirement savings scheme where both employee and employer
contribute.
• Employee State Insurance Scheme (ESIC): Provides healthcare benefits to employees and their
families.
• Medical Insurance: Covers medical expenses beyond the scope of ESIC.
• Paid Leave: Annual leave, sick leave, and other types of paid leave.
• Retirement plans: Pension plans or other retirement benefits.
• Training and development: Opportunities for professional development and skill enhancement.
• Employee discounts: Discounts on company products or services.
• Work-life balance initiatives: Flexible work arrangements, childcare facilities, etc.

16. • Deductions: These are the amounts deducted from the employee's salary before
they receive their net pay, such as:
• Income Tax: Paid to the government based on the employee's taxable income.
• Provident Fund employee contribution: Employee's share of the PF contribution.
• Employee State Insurance Scheme contribution: Employee's share of the ESIC
contribution.
• Professional tax: A state-level tax levied on salaried employees.
• Other deductions: Loan repayments, insurance premiums, etc.

17. Variable Dearness Allowance
• It's a component of salary paid to certain employees in India to offset the impact of
inflation on their cost of living.
• It's primarily applicable to workers in the central government and those covered under the
Minimum Wages Act.
• It's revised periodically, usually every six months, based on the Consumer Price Index
(CPI).
• Calculation of VDA:
The general formula for calculating VDA is:
VDA = (Average CPI for the last 6 months - Base Index) x Variable DA amount
Where:
• Average CPI for the last 6 months: The average of the monthly CPI values for the preceding
six months.
• Base Index: A fixed index value set by the government for a particular period.
• Variable DA amount: A fixed amount set by the government, which may vary depending on
the employee's category or location.

18. Example:
Assuming:
Base Index = 256
Variable DA amount = ₹1 per point increase in CPI
Average CPI for the last 6 months = 270
VDA = (Average CPI for the last 6 months - Base Index) x Variable DA amount
VDA = (270 - 256) x ₹1 = ₹14

19. Dearness Allowance (DA): Variable Dearness Allowance (VDA):
Definition: A general category of allowances paid to
salaried employees and pensioners to adjust their
income with the rising cost of living.
Definition: A specific type of DA paid to central
government employees in India.
Applicability: Applicable to various public sector
employees, state government employees, and even
some private sector organizations.
Applicability: Only applicable to employees under the
central government pay commission system.
Revision Frequency: Varies depending on the specific
sector and organization. May be revised quarterly, half-
yearly, or annually.
Revision Frequency: Revised every six months
(January and July).
Calculation: Determined by a percentage of the basic
salary, often linked to an index specific to the
employee's location or sector.
Calculation: Based on the difference between the
current average Consumer Price Index (CPI) for the
past six months and a fixed base index, multiplied by a
fixed variable DA amount set by the government.

20. Incremental System
An incremental system in compensation management refers to a way of structuring and adjusting
employee compensation based on small, regular additions or subtractions to their base salary. It's a
dynamic approach compared to traditional, fixed-rate systems.
Key features of an incremental system:
• Components: Instead of a single salary figure, compensation is broken down into smaller,
individual components. These could include base pay, performance bonuses, skill-based
allowances, cost of living adjustments, etc.
• Regular adjustments: Each component is adjusted independently based on predefined criteria and
schedules. For instance, performance bonuses might be awarded quarterly, skill allowances
reviewed annually, and cost of living adjustments applied yearly based on inflation.
• Transparency: The criteria for adjusting each component are clearly defined and communicated to
employees. This helps ensure fairness and understanding of how their compensation evolves.
• Flexibility: The system allows for targeted adjustments based on individual performance, skill
development, changing market conditions, and company goals.

21. Benefits of an incremental system:
• Improved fairness and alignment: By tailoring adjustments to specific criteria, the system can
better reward high performance, valuable skills, and contributions to company goals.
• Enhanced employee motivation: Regular, transparent adjustments can provide ongoing feedback
and recognition, which can motivate employees to perform better and stay with the company.
• Increased agility: The system allows the company to quickly adapt compensation to changes in the
market, performance, or strategic goals.
• Reduced administrative burden: By automating calculations and adjustments for individual
components, the system can streamline compensation management processes.
Challenges of an incremental system:
• Complexity: Setting up and managing a system with multiple components and adjustment criteria
can be complex and require robust HR systems and processes.
• Potential for bias: If criteria are not well-defined or applied consistently, the system can introduce
new biases into compensation decisions.
• Employee anxiety: Frequent adjustments, even positive ones, can create uncertainty for some
employees. Clear communication and transparency are key to mitigating this.

22. Fringe benefits
• Fringe benefits, also known as employee benefits, are additional forms of compensation
provided by employers beyond base salary. They encompass a wide range of perks and
programs designed to support employees' well-being, attract and retain talent, and enhance
job satisfaction.
Types of fringe benefits:
• Mandatory benefits: These are legally required by the government, such as health insurance, social
security, and unemployment insurance.
• Voluntary benefits: Employers offer these benefits at their discretion, commonly including:
• Health and wellness: Dental and vision insurance, life insurance, disability insurance, flexible spending
accounts, wellness programs.
• Financial benefits: Retirement plans, profit-sharing, stock options, tuition reimbursement, employee
discounts.
• Work-life balance: Paid time off (vacation, sick leave, personal leave), parental leave, flexible work
arrangements, childcare assistance, and eldercare assistance.
• Professional development: Training programs, conferences, tuition assistance, career coaching.
• Other perks: Gym memberships, on-site meals, transportation subsidies, entertainment discounts, and
company cars.

23. Benefits of fringe benefits:
• Increased employee satisfaction and morale: Feeling valued and supported by their employer can
lead to happier and more engaged employees.
• Improved employee retention: A strong benefits package can help attract and retain top talent,
reducing turnover costs.
• Enhanced productivity and performance: Employees who are healthy, financially secure, and have
a good work-life balance tend to be more productive and perform better.
• Reduced costs for employers: Offering certain benefits, such as health insurance, can sometimes be
cheaper than paying higher salaries.