Introduction

The term wage and salary administration or compensation administration denotes the process of managing a companys compensation programme. The goals of compensation administration are to design a cost-effective pay structure that will attract, motivate and retain competent employees.

Salary or wage means all remuneration (other than remuneration in respect of over-time work) capable of being expressed in terms of money. Wages are defined broadly as any economic compensation paid by the employer to his labourers under some contract for the services rendered by them. In its actual sense which is prevalent in the practice, wages are paid to workers which include basic wages and other allowances which are linked with the wages like dearness allowances, etc. , but does not include(i) Any other allowance which the employee is for the time being entitled to; (ii) the value of any house accommodation or supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of food grains or other articles; (iii) Any traveling concession; (iv) Any Bonus (including incentive, production and attendance bonus); (v) Any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the employee under any law for the time being in force; (vi) Any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex gratia payment made to him; (vii) Any commission payable to the employee.

Wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation .It includes such areas as job evaluation, surveys of wage and salaries, analysis or relevant organizational problems, development and maintenance of wage structure, establishing rules for administering wages, wage payment incentive, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items. Employee compensation may be divided into two types- base compensation and supplementary compensation. Base compensation refers to the monetary payments to employees in the form of wages and salaries. The term wage implies remuneration to workers doing manual work. The term salaries is usually defined to mean compensation to office, managerial, technical and professional staff. Base compensation, should be noted here is a fixed and non-incentive payment on the basis of time spent bt an employee on the job. Supplementary compensation signifies incentive payments based on actual performance of an employee or a group of employees.

Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees. Compensation is a monetary benefit given to employees in return for the services provided by them.

Difference between wages & salary

Wage usually refers to an hourly rate, and salary to a weekly or semi-honthly rate. So if a wage earner works 40 hours one week and 45 the next week, he gets paid more for the second week. A salaried worker works long enough to get the job done and usually gets the same pay every payday. A wage is paid per hour with extras for working during holidays, after normal hours, in hazardous conditions, etc.; a salary is paid per year requiring a set amount of work to be completed in that time and usually entails a set amount of paid leave
Wages usually refers to the hourly rate or daily rate paid to such groups as production and maintenance and for blue- collar workers (A blue-collar worker is a member of the working class who performs manual labor. Blue-collar work may involve skilled or unskilled, manufacturing, mining, construction, mechanical, maintenance, technical installation and many other types of physical work. Often something is physically being built or maintained.) Salary normally refers to the weekly or monthly rates paid to clerical, administrative and professional employees and for white- collar workers (the white-collar worker typically performs work in an

office environment and may involve sitting at a computer or desk. A third type of work is a service worker whose labor is related to customer interaction, entertainment sales or other service oriented work.) It is important to understand the difference between wages and salaries. A wage is based on hours worked. Employees who receive a wage are often called "non-exempt." A salary is an amount paid for a particular job, regardless of hours worked, and these employees are called "exempt." The difference between the two is carefully defined by the type of position and the kinds of tasks that employees perform. In general, exempt employees include executives, administrative and professional employees, and others . These groups are not covered by minimum wage provisions. Non-exempt employees are covered by minimum wage as well as other provisions. It is important to pay careful attention to these definitions when determining whether an individual is to receive a wage or a salary. Improper classification of a position can not only pose legal problems, but often results in employee dissatisfaction, especially if the employee believes that execution of the responsibilities and duties of the position warrant greater compensation than is currently awarded.

When setting the level of an employee's monetary compensation, several factors must be considered. First and foremost, wages must be set high enough to motivate and attract good employees. They must also be equitablethat is, the wage must accurately reflect the value of the labor performed. In order to determine salaries or wages that are both equitable for employees and sustainable for companies, businesses must first make certain that they understand the responsibilities and requirements of the position under review. The next step is to review prevailing rates and classifications for similar jobs. This process requires research of the competitive rate for a particular job within a given geographical area. Wage surveys can be helpful in defining wage and salary structures, but these should be undertaken by a professional (when possible) to achieve the most accurate results. In addition, professional wage surveys can sometimes be found through local employment bureaus or in the pages of trade publications. Job analysis not only helps to set wages and salaries, but ties into several other Human Resource functions such as hiring, training, and performance appraisal. Wage is payment received by an employee in exchange for labor. It may be in goods or services or food during the labor and its improvement. As per the old custom, the wage is decided as per the hardship of the work, for example, a mason $100, a carpenter $110, a helper $60, a supervisor $80, or so. Besides, when once paid, the relationship of the worker and employer is over. But salary, is the form of money only, i.e., is paid or regular basis such a weekly, monthly along with related insurance plan and retirement benefits and it is fixed on the basis of category / nature of work. A person can get different wages in the same month depending on the work he does but a person can get only one fixed salary for a month. A person who earn wages has no fixed work whereas the person earning salary have a fixed post and a particular work schedule to do. Wage is paid only on the basis of the work done, irrespective of provision of work by the employer or not, but what the worker has carried out, whereas salary is paid every interval of week or month based on the schedule of work entrusted and not the work carried out. In terms of accounts, wages is direct expense and is included in trading account whereas salary is indirect expense and is included in profit and loss account. Principles of Wage Determination The basic principle of wage and salary fixation is that it should be based on the relative contributions of different jobs and not on the basis of who the job holders are. If this principle is adopted, the first requirement is to identify the likely contributions of different jobs. This is what job evaluation precisely does. It provides the information about what is the worth of a job in terms of its contributions to the achievement of organizational effectiveness.

Overcoming Anomalies Job evaluation, if carried on periodically and objectively, helps in overcoming various anomalies which may develop in an organization over the period of time with regard to compensation management. Knowles and Thomposon have identified that there are following anomalies and evils which may develop in an organization and may be overcome by job evaluation: 1. Payment of high wages and salaries to persons who hold jobs and Positions not requiring great skill, effort and responsibility; 2. Paying beginners less than that they are entitled to receive in terms of What is required of them? 3. Giving a raise to persons whose performance does not justify the raise; 4. Deciding rates of pay on the basis of seniority rather than ability; 5. Payment of widely varied wages and salaries for the same or closely Related jobs and positions; and 6. Payment of unequal wages and salaries on the basis of race, sex, religion, or political differences. As the major production cost, wages affect profits, business investment, competitiveness, and are a cost push inflationary factor. As the major income in the economy, wages affect standard of living, income distribution and poverty, and demand pull inflation. As the source of wage disputes is the employer treating wages as their major cost, and the employee viewing wages as their major income. Norms for fixation of wages in industry. 1. While computing the minimum wages, the standard working class family should be considered as consisting of four consumption units and the earnings of women, children and adolescents should be excluded. 2. The minimum food requirements should be determined on the grounds of a net intake of 2700 calories as laid down by Akroyd for a normal adult in India. 3. Clothing needs should be established on the basis of a per capita consumption of 16.62 meters per year. 4. As regards housing, the minimum wages should be determined from the standpoint of the rent corresponding to the minimum area specified under the government Industrial Housing Scheme. 5. Miscellaneous expenditure on items such fuel, lighting etc. should from 20 per cent of the total minimum wage. The resolution further prescribes that the authorities involved in the issue should justify any deviation from these norms.

The following principles have always been the bases of the wage determination process. All are economically valid. At different stages they have collectively, and singularly, been used to determine wage increases. 1. Preserving real income: This is the argument used by employees and Unions viewing wages as an income. Following this principle usually results in wages being indexed to inflation. In periods of rising inflation, indexation becomes a problem of an institutionalized wage-price spiral. Underlying aspects that have also impacted on real wage preservation arguments have been a "basic" minimum wage, and comparative wage justice. 2. Labour productivity: A valid economic theory connects wages to labour productivity. Conflict arises over the measurement of productivity. Rewarding labour with a wage increase when technology, and/or capital investment, increases labour efficiency may not be justified. 3. The capacity of business to afford wage increases: This emphasizes wages as a cost of production, and the threat of wage increases to squeeze profits. This "capacity" argument is that followed by business owners. 4. The capacity of the Economy to absorb wage increases: This "capacity" argument views the macro impact of wage increases on inflation, competitiveness, and other aspects of internal and external balance; as well as the affect on business profits and investment from 3. This is the main argument of the Federal Government recognizing the macro policy potential of an Incomes Policy to address external and internal balance goals to supplement demand management policies, and the effects on income distribution. 5. Supply and Demand of labour: The labour market conditions or supply and demand forces operated at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills and the supply are low, the result is a rise in the price to be paid for these skills. The other alternative is to pay higher wages if the labour supply is scarce, and lower wages when it is excessive. 6. Prevailing Market rate: This is also known as the comparable wage or going wage rate and is most widely used criterion. An organizations compensation policies generally tend to conform to the wage rates payable by the industry and the community. It is observed: Some Companies pay on the high side of the market in order to obtain goodwill or to insure adequate supply of labour, while other organizations pay lower wages because economically they have to, or because by lowering hiring requirements they could keep jobs adequately manned.

7. Living wage: This means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favor using the concept of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather on his need. 8. Managerial Attitudes: Top managements desire to maintain or enhance the companys prestige is a major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high caliber employees, to reduce turnover, and to provide a high living standard for employees as possible also appear to be factors in managements wage policy decisions. 9. Psychological and social factors: these determine in a significant measure how hard a person will work for the compensation received or what pressures he would exist to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life, people might feel secure, has an inferiority complex, seem inadequate or feel the reverse of all these. Sociologically and ethically, people feel that equal work should carry equal wages that wages should be commensurate with their efforts that they are not exploited and that no distinction is made on the basis of caste, color, sex or religion. To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration. PRINCIPLES OF WAGE AND SALARY ADMINISTRATION The government of India provides many regulations for regulating the wages and salary administration such as,  The minimum wages act 1998  The equal remunerations act 1976  The companies act 1956  The industrial dispute act 1956  The payment of wages act 1936 etc. The following guidelines should be followed in the administration of wages and salary, 1. Wage policy should be developed keeping in view the interests of the employer, the employees, the consumers and the community. 2. Wage policy should be stated clearly in writing to ensure uniform and consistent application. 3. Wage and salary administration should be consistent with the overall plans of the company. Compensation planning should be an integral part of the financial planning. 4. Wage and salary plans should be sufficiently flexible or responsive to changes internal and external conditions of the organization.

5. Management should ensure that employees know and understand the wage policy of the company. 6. All wages and salary decisions should be checked against the standards set in advance in the wage policy. 7. Wage and salary plans should simplify and expedite administrative process. 8. An adequate database and proper organizational setup should be developed for compensation determination and administration. 9. Wage policy and programme should be reviewed and revised periodically in conformity with changing needs. Thus, by following the above mentioned principles of determination and administration of wages and salary the objectives such as- to establish fair and equitable remuneration, to attract competent personnel, to retain present employees, to improve productivity, to control costs, to establish job sequences and lines of promotion wherever applicable, to improve union management relations, to improve public image of the company can be effectively met.

The elements of wage and salary system

Wage and salary systems should have a relationship with the performance, satisfaction and attainment of goals of an individual. Henderson identified the following elements of wage and salary system: 1. Identifying the available salary opportunities, their costs, estimating the worth of its members, of their salary opportunities and communicating them to employees. 2. Relating salary to needs and goals. 3. Developing quality and time standard related to work and goals. 4. Determining quality, quantity and time standard related to work and goals. 5. Measuring the actual performance. 6. Comparing the performance with the salary received. 7. Measuring the job satisfaction of the employees. 8. Evaluating the unsatisfied wants and unrealized goals aspirations of the employees. 9. Finding out the dissatisfaction arising from unfulfilled needs and unattained goals. 10. Adjusting the salary levels according with a view to enabling the employees to reach unreached goals and fulfill the unfulfilled needs and aspirations.

Factors influencing wage and salary administration:

A sound wage policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents. Beside the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are:
y y y y y y y y y y y

The organizations ability to pay Supply and demand of labour The prevailing market rate The cost of living Living wage Productivity Trade unions bargaining power Job requirements Managerial attitudes and Psychological and sociological factors Levels of skills available in the market

The organizations ability to pay: Wage increases should be given by those organizations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher those which running at a loss or earning low profits because of higher cost of production or low sales. In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need to pay no more if they wish to attract and keep workers. In the long run, the ability to pay is important. During the time of prosperity, pay high wages to carry on profitable operations and because of their increased ability to pay. But during the period of depression, wages are cut because the funds are not available. Marginal firms and non profit organization (like hospitals and educational institutions) pay relatively wages because of low or non profits. Supply and demand of labour: The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and supply is low, the result is a rise in the price to be paid to these skills. When prolonged and acuter, these labour market pressures probably force most organizations to reclassify hard to fill jobs at a higher level that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive. Similarly, if there is a great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on going wage concepts since; in essence, all of these remuneration standards are determined by immediate market forces and factors. Prevailing market rate: This is known as the comparable wage or going wage rate, and is the widely used criterion. An organization compensation policy generally tends to conform to the wage rate payable by the industry and the community. This is done for several reasons. First,

competition demand that competitors adhere to the same relative wage level. Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. Third, trade union encourages this practice so that their members can have equal pay, equal work and geographical differences may be eliminated. Fourth, a functionally related firm in the same industry requires essentially the same quality of employees, with same skill and experience. This results in a considerable uniformity in wage and salary rates. Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organizations competitors, it will not be able to attract and maintain the sufficient quantity and quality of manpower. Some companies pay on a high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organizations pay lower wages because economically they have to or because by lowering hiring requirements they can keep jobs adequately manned. The cost of living: The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living. escalator clauses are written into labour contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline, the management does not resort to this argument as a reason for wage reductions. The living wage: Criterion means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favor using the concepts of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. Also, they feel that the level of living prescribed in a workers budge is open to argument since it is based on subjective opinion. Psychological and Social Factors: These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in the wages they get. Therefore, these things should not be overlooked by the management in establishing wage rate. Sociologically and ethically, people feel that equal work should carry equal that wages should be commensurate with their efforts, that they are not exploited, and that no distinction is made on the basis of caste, color, sex or religion. To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration. Skill Levels Available in the Market: With the rapid growth of industries business trade, there is shortage of skilled resources. The technological development, automation has been affecting the skill levels at faster rates. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to suit the market needs.

Theories of wages:
There are various theories of wages which lave been put forward by different economists from time to time but none of them is free from criticism. The most important theories of wages determination are: (1) Subsistence Theory of Wages. (2) Wage Fund Theory. (3) Residual Claimant Theory. (4) Marginal Productivity Theory. (5) Modern Theory of Supply and Demand. Let us now explain these theories one by one. (1) Subsistence Theory of Wages/Iron or Brazen Law of Wages: The subsistence theory of wages owes its origin to Physiocratic School of France. The theory is also named as Iron or Brazen Law of Wages. According to this theory: "The wage in the long run tends to be equal to the minimum level of subsistence. By 'minimum level of subsistence is meant the amount which is just sufficient to meet the bare necessities of life of the worker and his family". It is argued that if wages exceed the subsistence level, the labor will marry earlier and will produce more children. This will result in the increase in number of workers than what is required by employers. So the money wages will fall to the level of subsistence. If wages remain below the subsistence level, the labor will not be able to maintain their families. Due to starvation and malnutrition, etc. the death toll will increase. The-supply of labor will fall short of demand and the wages would go up to the subsistence level. Criticism on Subsistence Theory of Wages: This theory has beep criticized on the following grounds: (i) It is incorrect to say that when the money income of a person increases above the subsistence level, he marries early and the birth rate increases. On the other hand, the fact is that when the income increases, it is generally followed by a higher standard of living and the workers do not produce more children. (ii) The theory fails to explain the wage differences in different employments. According to the theory, the wage rate tends to be equal to the subsistence level of all the workers. So then, how is it that wages differ from occupation to occupation and from person to person The theory has

nothing to say in defense of this criticism. (iii) The third criticism levied on the subsistence wages is that it entirety ignore the demand side of the labor and emphasizes only the supply side for the determination of the wages. (iv) The theory does not take into account the influence of trade unions in the determination of wage rate though it is one of the every important factor to be taken into consideration. (2) Wage Fund Theory: The theory of wage fund first introduced in Economics by Adam Smith and later on it was developed by J.S. Mill. The theory briefly explains that: "Wages depend upon the proportion between population and capital, or rather between the number of laboring classes who work for hire and the aggregate of what may be called the wage fund which consists of that part of circulating capital which is expanded in the direct hire of labor". In short, we can say, wage fund is that amount of' floating capital which is set apart by employers for paying wages to the labor. The average wage rate is determined by dividing the wage fund by the total number of workers employed. Formula for Wage Fund Theory: Wage Rate = Wage Fund Total Number of Workers

If it is desired that the average rate should increase, it can be achieved in two ways. Firstly, by increasing the floating capital and secondly by reducing the number of workers. Criticism on Wage Fund Theory: The theory has been subjected to a great deal of criticism by Longe, Thornton and Jevon on the following grounds: (i) There is no special fund which is particularly meant for the payment of wages to the workers. The wages are paid out of the national dividend which is a flow and not fixed like that of fund. (ii) The theory is inadequate to explain the wage differences in different occupations. (iii) The theory gives undue importance to the supply side. It makes wrong assumption that the demand for labor remains constant. (iv) The theory assumes that labor is homogeneous but in fact it is heterogeneous. (v) The level of wages do not necessarily depend upon remuneratory capital. In newly developed

countries, the capital available is generally less than the established countries but there the wages are relatively higher because of the greater productivity of each worker. (3) Residual Claimant Theory: Residual claimant theory is associated with the name of American economist Walker. According to Walker: "Wages equal to Whole product minus rent interest and profit". Jevon has stated the theory of residual claimant in the following words: "The wages of a working man are ultimately coincident with what he produces, after the deduction of rent, taxes and the interest on capital". In short, the theory states that labor receives what remains after payment of rent, interest, profit and taxes out of the national dividend. Criticism on Residual Claimant Theory: The theory has been criticized by Longe and Thornton on the following points: (i) The theory ignores the influence of supply side in the determination of wages. (ii) If fails to explain as to how the trade unions raise the wages of the workers. (iii) It is also point out that the residual claimant is the entrepreneur and not the labor. The labor gets his share during the process of production of a commodity. (4) Marginal Productivity Theory of Wages Under Perfect Competition: Some of the modern economics explain the determination of wages by means of marginal productivity analysis. According to this theory: "Wages in perfect competition tend to be equal to the marginal net product of a labor. By marginal net product of a labor is meant net addition or net subtraction made to the value of the total produce of a firm when one unit is added or withdrawn from it". When an entrepreneur employs a unit of labor, how much he pays to him as wages depend upon the addition which he makes to the total revenue of the firm. If the addition made to the total revenue by a labor is $5000, the rate of wages wilt be equal to $5000. The entrepreneur will not pay him more than the return which he contributes to the total production. The aim of the firm, as we already know, is to maximize profits. If the net product of a labor is higher than the amount paid to him. the entrepreneur will go on employing more units of labor. As he engages more and more units of labor, the net produce on the successive units begins to

diminish. It is not because the successive units of labor are in any way inferior to the previous units but because of the operation of law of diminishing returns. When the net product of the labor becomes equal to the rate of wages paid to him, the employer discontinues the employment of further unit of labor, The last unit which he thinks just worth while to engage is called the marginal unit. The net addition made to the total revenue of a firm by the marginal labor is called the marginal net product. The rate of wages paid to the labor tends to be equal to the marginal net product of the labor employed '<' the margin. As we have assumed that all units of labor are of the same grade, the remuneration which is paid to the marginal labor will be given to all the units of labor employed earlier. If any worker demands more than the marginal net product of the labor, he will not be engaged by the employer. Professor Taussing has reproduced the marginal productivity theory of wages in a slightly refined form. According to him: "Wages tend to be equal not to the marginal net product but the discounted marginal net product of the labor employed at the margin". When goods are produced, he says, they are not sold at the same time. There is a time lag between the production and the sale of the commodities. The labor receives their remuneration during the course of production. If the prices of goods fail, the entrepreneur will have to undergo losses as he has paid the wage to the labor keeping in view the prices of the goods prevailing at that time. As the entrepreneur has borne the risk, so he should pay little less that the actual marginal net product of the labor keeping in view the risk of fluctuation of price. Secondly, the entrepreneur has to pay interest on the capital invested. So a deduction at the current rate of interest is to be made from the final output of the labor. Thus, we find that wages according to Taussing tend to be equal not to the marginal net-product but discounted marginal net product of a labor employed at the marginal. Criticism on Marginal Productivity Theory of Wages: The theory of marginal net product of wages has been criticized on the following grounds: (i) The theory assumes that there is perfect competition, among the entrepreneurs and the wage earners while in the real world there is no such perfect competition. (ii) The theory assumes that all units of labor engaged are perfectly homogeneous but the fact is otherwise. (iii) The theory also assumes perfect mobility amongst the labor but the assumption does not held good in the real life. (iv) The theory emphasizes on the demand side of the problem and makes a wrong assumption that the supply of labor remains constant.

It is dear now that marginal net product theory of wages is true only under certain assumed conditions. In. spite of the flaws which have been discussed above, it offers a bit satisfactory explanation of the wages. (5) Modern Theory of Wages: Wages Determination Under Perfect Competition: We have studied various theories which explain the determination of wages but they all stand discredited as they do not offer satisfactory explanation of wages. The modern economist are of the opinion that just as the price of a commodity is determined by the interaction of the forces of demand and supply, the rate of wages can also be determined in the same way with the help of usual demand and supply analysis. Let us now discuss in brief as to what we mean by demand for and supply of labor. (A) Demand for Labor: There are various factors which influence the demand for labor. These factors in brief are as under:(i) Demand for labor is a derived demand. The demand for labor is not a direct demand. It is derived from the demand for the commodities and services it helps lo produce. If the demand for a product is high in the market, the demand for labor producing that particular type of product will also be high. In case, the demand for a commodity is small, the demand for that labor will also be low. (ii) Elasticity of demand for the product. If the demand for a particular product is inelastic, the demand for the type of labor that produces this product will also be inelastic. The demand for labor will be elastic, if cheaper substitutes of the product are available in the market or the demand for the commodity it produces is elastic. (iii) Proportion of labor cost to total cost. If the wages of workers account for only a small proportion to total cost of a product, then the demand for labor will tend to be inelastic. In a capital intensive industry, for instance, a slight increase in the workers wages with have little effect on the unit cost of product; So, the rise in wages will not reduce the demand for labor. (iv) Availability of substitutes for labor. If the substitutes of labor producing a particular product are easily available in the market, the demand for labor will then be elastic. After considering the various factors which influence (he demand for labor, we now take up the demand price of labor. Demand Price of Labor: Marginal Revenue Productivity (MRP). An employer hires labor in order to make profit. He, while employing a worker, compares the cost of hiring a worker to the contribution he is

expected to make to the total revenue of the firm. So long as the addition made by the labor to the revenue is greater than the cost of employing him, the entrepreneur will engage that labor. In other words, we can say that so long as the marginal revenue product of labor is higher than the cost of employing him, the employer employs that worker. The entrepreneur will continue hiring the worker up to the point at which the cost of employing a worker is just equal to the marginal revenue product of the labor. The marginal revenue productivity of labor due to the operation of law of diminishing returns decreases, as more workers are put to work. The wage rate also decreases with the fall in the MRP of labor. Thus the demand curve for labor is downward, sloping (The demand curve for labor is the MRP curve of the firm as each worker earns what his labor is worth). If we add up the demand curves for labor of all the individual firms (the MRP curves) we get the demand curve of the industry, it is the demand of the industry which determines wage rate for labor. The individual firm in a competitive market has to accept wage rate set in the market. Diagram for Demand Price of Labor : The demand for labor of an individual firm in a competitive market is explained with the help of diagrams.20.1(a) and 20.1(b).

In a competitive labor market, a firm employs 100 workers at a wage rate of $10 each per hour and 250 workers at the wage rate of $2 per hour, see fig 20.1(a). The demand curve of the industry for labor is down sloping. In fig 20.1(b) the demand curve of the industry for labor is derived from the total summation of the demand: curves of the individual firms. The total demand of all the firms in the market is 2000 workers at the wage rate of $10 per hour. (B) Supply of Labor:

Supply of labor is the number of hours of work which the labor force offers in the factor market. The supply of labor for the entire economy is influenced by various factors such as wage rate, size of population, age composition, availability of education and training, the length of training period, provision of opportunities for women to work, the social security programmes etc., etc. The supply of labor for the industry as a whole is less elastic in the short-run. The supply of labor here depends on the availability of workers in the locality and from the nearby areas and the willingness of the labor to work overtime. In the long-run, the supply of labor for the industry is more elastic. The labor can be attracted by offering higher wages, providing training facilities, making working conditions pleasant etc, So the supply of labor for the industry is of the normal shape rising upward from left to the right. Diagram for Supply of Labor: In the figure (20.2), supply curve of labor to an industry shows an upward slope.

At OW wage rate, ON workers are ready to work. At OW1 wage, the supply of labor increases to ON1. Wage Determination: So far we have discussed the forces operating behind the demand for and supply of labor in the market. As regards the price or the wage of particular grade of labor, it is determined by the interaction of the forces of. demand for and supply of labor in the competitive market. The determination of wage, rate is explained with the help of diagrams.

Diagram of Wage Determination: In fig. 20.3(a) DD/ is the demand curve of labor say carpenters to the industry.

It is found by summation of the demands of carpenters of all the firms. Similarly SS represents the supply curve of carpenters to the industry. The market demand curve DD/ intersects the market supply curve SS at point N. The equilibrium wage rate is NL or $20 and the number of workers hired at the equilibrium wage rate ($20) is 200 thousand.

Fig. 20.3{b) shows that a firm in a competitive market takes the market wage rate of carpenters as given. So the supply curve which it faces is a horizontal one. A firm will continue hiring labor so long the MRP is higher than the wage rate. When the MRP and the wage rate are equal, it will stop employing further labor. The firm at the wage rate of $20 per hour employs 40 workers. We, thus, conclude that in a competitive market, the wages are set in the market much like other prices.