1 Labour Economics

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 earnings
The term compensation is of a recent origin which includes everything an employed individual receives in return for
his work
The 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 worked
Wages in the widest sense, means any economic contract to his employees for the services rendered by them
Gross 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 employment
The two terms often used interchangeably are wages and salary

Several terms have acquired currency referring to the wage levels:

Statutory minimum wage
The base or base minimum wage
The minimum wage
The Fair wage
The living wage
The need based minimum wage

Types of Wages
SL Types Description
There can be three kinds of minimum wages:
A minimum wage notified by the government under the minimum wages act, 1948 for different
Minimum scheduled employments
1 Wages 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
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 adjudicators
In calculating the minimum wage, the standard working class family should be taken to consist of
three consumption units for one earner
Need-based Minimum food requirements should be calculated on the basis of a net intake of 2700 calories
Minimum
2 Clothing requirement should be estimated at a per capita consumption of 17 yards per annum which
Wage
could give for the average workers family of four, a total of 72 yards
In respect of housing, the norm should be the minimum rent charged by government in any area for
houses provided under the subsidized industrial housing scheme fro low-income groups
Fuel, Lighting and other miscellaneous items of expenditure should constitute 20% o the total
minimum wages
The Encyclopedia of Social Sciences describes a fair wage as one equal to that skill, difficulty or
unpleasantness.
Fair wage The Committee on fair Wages stated that the Fair wage was something between a minimum wage and
3
a living wage
The 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
4 Living Justice Higgins defined living wage as one appropriate for The normal needs of the average employee,
Wages regarded as a human being living in a civilized community.
There are three possible way of obtaining some indication as to what constitutes a living wage:-
It should be sufficient to pay for a satisfactory basic subject.
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 circumstances
It is a difficult task to fix a living wage in terms of money as it differs From country to country and
 2 Labour Economics
from time to time, according to national economy and social policies
It is obvious that the concept of a living wage is not a static concept; it is expanding

Wages earned by employees are normally expressed in terms of money

There are two aspects of wages
* Money wage
* Real wage
According to Adam Smith money wage level is determined and regulated by the interaction between supply
Money and and demand of necessaries, on the one other with the exception of the First Plan period money wage increases
5 real wages have lagged behind price increases throughout the period of Indian planning
Since the early sixties, there has been a continuous rise in the prices of most of our consumption of
goods and services
In an inflationary situation, there is bound to be erosion of the purchasing power of earnings or
money wages
It is no doubt true that unless money wages rise as fast as consumer prices, it would result in an
erosion of real wages

SL Theory
Subsistence Theory
1 Growth of minimum subsistence, Karl marx argued that subsistence wages emerge because of the
phenomenon of unemployment and the reserve army of labour
2 Wage Fund Theory
Marginal
3 structure of a highly competitive economy in terms of interaction of supply and demand
Productivity Theory
The Residual
4 Claimant Theory
Bargaining Theory
5 Collective bargaining may be seen as the process through which labour supply and demand
Wage Theories
Description
This theory states that in the long run, wages would tend towards that sum which is necessary
to maintain a worker and his family
While Adam smith and David Ricardo argued that it is the
Malthus held that wages were bound to remain at the subsistence level because any increase
in population.
This theory stated that at any given moment, wages are determined by the relative magnitude
of the capital of the country
The wages are paid from a fixed wage fund according to John Stuart Mill, wage was a
variable dependent on the relation between the labouring population and the aggregate funds
set aside by the capitalists to pay them
This theory focused on demand for labour
Marginal productivity theory explains not only the general level of wages but the entire wage
As a demand theory of wages, the marginal productivity theory fails to make full allowance
for the particular nature of supply curves for labour
Francis A. Walker has propounded this theory of wages as apart of residual surplus which is
left after other factor charges have been met
This theory was designed to emphasize the interest of the working class in continual process
and accumulation
It does not explain how trade unions are able to increase the wages
This theory does not consider the aspect of labour market and the role of labour in
productivity
This theory was propounded by John Davidson
According to him, wages are determined by the relative bargaining power between workers
or trase unions and employers and basic wages, fringe tend to be determined by the relative
strength of the organization and the trade union
Bargaining has received considerable attention in view of the fact that wages are now being
determined by collective groups of workers organized into employers association
are equated in the labour market
Walton and MCKersie identified four bargaining sub-processes:
A) Intra-organization bargaining
B) Distributive bargaining
C) Integrative bargaining
D) Attitudinal bargaining
 3 Labour Economics
There are essentially two school of thought which propounded the inter-relationship between
wages and employment
Accourding to Pigou, unemployment would disappear it the workers were to accept a
Employment Theory voluntary cut in wayges
6
John Maynard Keynes, in his theory of employment advocated wage rigidity in place of wage
flexibility
Voluntary of employment would not doubt increase, if the cut in money wages is applied to a
single industry.
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 labourers and when there were
Exploitation Theory
7 neither landlords nor masters to share with them.
Starting with Ricardos notion that labour creates all value, Marx contended that profit,
interest, and rent are unwarranted deductions from the product that labour alone creates.
Accourding to Marx, the simplest concept which related to mans activity of producing his
means of livelihood was human labour.
Labour Theory of He considered labour as an article of commerce which could be purchased on payment of
8 Value
subsistence price
The price of any product was determined by the labour time needed for producing it
His theory is also known as surplus value theory of wages
The competitive theorists assume that neither employers nor employees combine together to
influence demand or supply conditions and that markets are prefect
Unfortunately these do not hold good in the case of a monopolistic world market
9 Competitive Theory
The 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
There are several approaches which can be adopted for analyzing the behaviour of low-
income labour market:
Queue Theory:
Low-wage Labour A) It asserts that workers are ranked according to the relationship between
10
Market Theory their potential productivity and their wages rates.
B) Dual Labour market theory:
This theory argues that labour market is divided into primary and secondary
markets
According this theory, Wages increases are desirable because they, raise labour income and
thereby stimulate consumption
Purchasing Power
Purchasing power and consumption are usually increasing just prior to recession; workers
11 Theory
account for only part of total consumers spending; the assumption that general
overproduction can overcome by higher wages; are some of the basic limitations of this
theory
According to Jean Marchal, such a theory must have three essential requirements:
The usual concept of wages must be replaced by wider concept
Micro-economic
12 General behavior of employers and workers affect the general price level only if there is
wage Theory
sufficient compatibility between the structures of the groups and of production
Integration of the theory of wages into a theory of national income distribution
A number of multi-disciplinary theories have emerged to encompass the increasing range of variables
which empirical work provides
Multi-disciplinary Lester has studied labour market behaviour to explain wage differentials by contemplating
13 Theories
what he call competitive anti-competitive, and impeditive factors
Dunlop sougth 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