WAGES- THEORIES, CONCEPTS, COMPONENTS AND

DETERMINATION

In recent years wages have tended to increase in the Indian economy. It has led to
considerable concern among the policy makers, employers and trader unionists.
While employers in the public as well as private sector appear to view wage rise as
detrimental to economic growth, unions demand periodic wage increases for
neutralizing the effects of inflation and sharing the gains of productivity growth.

Workers in factories engaged in manufacturing and processing activities

constitute an important single group of organized labour.

The term wages is not a simple as it appears, and some of the disagreement
that arises in discussing wages is due to the fact that people are talking about
different things. Most wage earners have an hourly rate of pay, usually referred to
as the base rate, but this is not necessarily the amount which the workers actually
receive. Many people work on a piece work or incentive basis, under which the
amount they receive depends on how they produce. Under an incentive system a
worker is expected to earn a good deal more than his base wage rate- indeed, it is
the expectation which gives him the incentive to maintain a high rate of output.

The worker is interested in how much he actually receives in his pay

envelope, and in how much this money will buy. His weekly take home pay is
influenced not only by total hourly compensation, but how much of this comes in
the form of cash rather than benefits, by the number of hours worked per week, and
by the size of deductions for social security, personal income tax, and other
purposes. Because of these additional factors take home pay can change
considerably even without any change in hourly compensation.

It is not difficult to understand why wages do play such an important and

controversial role in labour relations. For workers, wages are income that
establishes a standard of living, from the viewpoint of the company, wages are a
cost of production. And here is the heart of the wage controversy. On the one hand,
employees press for higher and higher wages with the objective of raising their
standard of living; on the other hand, employers are confronted with increasing
pressure on the cost of production. When wages are a significant element of cost of
production, when wage increases are not offset by such economic phenomena as
increased efficiency, and when the union has been unable to extract equal wage
concessions from all competitive firms, wage increases tend to place the firm in an
undesirable economic position. A company so placed might not be able to survive
for long in the competitive struggle. Under such a stage of affairs, union wage
policy, instead of advancing the standard of living of its members, could plunge
them into economic oblivion.

Workers in the past, as today, were employed for wages and wages were
central to the problems of industrial peace in those days as well. According to the
ancient authorities wages were the consideration for the performance of a contract
of service entered into between an employer and a workman. Wages in fact
depended on the bargaining capacities of both the employers and the workers. It
appears that wage rates were a result of a process of bargaining and time and work
were the two major considerations in their determination.

WAGE THEORIES:

While it is not intended to trace the entire history of evolution of wage

theories, a brief review of the transition can help understand its dimensions in
todays perspective.

One of the first wage theories came from Adam Smith. Who put forward the
labour theory that the full value of any commodity is the amount of labour it can
buy. His analysis conceived of labour as an undivided homogenous mass.

According to Adam Smith it is labour in general that proclaims the sole

source of wealth i.e., the entire labour of a nation is distributed over the different
branches of production and divided up between society,s individual members.

Smith could accord a central role to the theory of value precisely because he
was able to identify the problem. He said if it is labour that creates wealth, then
increases in the latter can take place under one of the following conditions:-
1. There is a rise in productivity of labour or
2. The number of productive workers increases compared to other members of
society.

Malthus offered an explanation of the supply side of labour that population

is limited by the means of subsistence and suggested that the spurt in population
can outstrip availability of resources like food unless this was checked.

Mill and Ricardo developed the concept of subsistence further to contend

that wages tend to equal the minimum wage subsistence level of the labourers
since the amount of wage goods available for distribution determines the
average wage rate which can stabilize only at the minimum subsistence level.

This theory popularly known as the “Iron Law of Wages” did not envisage
increases in the means of subsistence which would enable the vicious circle to
be transcended and rested on static assumptions oblivions of demographic
transition processes which generate far reaching changes through the impact of
cultural forces on population growth. Further since wages represent only a
chain in the flow of resources, the questionable assumption of a fixed fund
almost akin to idle savings cannot satisfactorily explain wage levels at a time
when investible resources are often realized through an appreciation of market
conditions with market borrowings.

Marx accepted the ideas of Ricardo and Mill and a them of Marxian Wage
Theory is the reserve army of unemployed which is supposed to depress real
wages to the minimum subsistence level.

The classical economists explain the demand side of the wage theory by
treating the wage goods as a fixed wage fund and the supply side in terms of
labour availability which is expected to be influenced to an incremental extent
by the amount of extra wage fund available over the minimum subsistence
outlay so that equilibrium is conceived only at the minimum subsistence level.

Neo classical economists were able to introduce the element of labour

capital substitutability. While the Neo classicals continued to retain the
downward sloping demand curve for labour, they assumed a vertical supply
curve for labour.

In the Keynesian model, the wage rates are determined in the labour market
but the volume of employment is determined by forces outside the labour
market. The real wage rates equated with marginal productivity are adjusted to
whatever level of employment is generated at a given level of consumption and
investment.

However in development economies unemployment is attributable largely to

shortage of investible capital which is influenced in small measure by public
policy.
 3. Wages and Unemployment
The Phillips Curve: A.W. Phillips of London School of Economics, on
the basis of data from 1861 to 1957, concluded that there is a strong inverse
relationship between the rate of money wage increase and unemployment rate.
This relation has been tested and confirmed many times over the United States
and other countries. A curve exhibiting this relation is called a Phillips Curve.

The immediate impact of a given unemployment rate on the rate of wage

increase will differ from its effect over a longer period. The reason lies in the
price wage feed back. At any moment workers will be anticipating a certain rate
of inflation. If they had expected a higher rate of inflation they would also have
expected larger wage increases.

The greater the excess supply of labour market is the less the rate of
change of money wages is to be; and the smaller the excess supply of labour is
the greater the rate of growth of money wages.

Wage Concepts:

Wage concepts have historically evolved from the state policy as well as the
judgements of the Supreme Court. The Supreme Court has taken specific positions
on some of the basic wage concepts.

1. Minimum Wage: No Industry has a right to exist unless it is able to pay its
workmen atleast a bare minimum wage. It is quite likely that in
underdeveloped countries wherein unemployment prevails on a very large
scale, unorganized labour may be available on starvation wages; but the
employment of labour on starvation wages cannot be encouraged or
favoured in a modern democratic welfare state. If an employer cannot
maintain his enterprise without cutting down the wages of his employees
below even a bare subsistence or minimum wage, he would have no right to
conduct his enterprise on such terms.

2. Living Wage: It would be obvious that the concept of living wage is not a
static concept it is expanding and the number of its constituents and their
respective contents are bound to expand and widen with the development
and growth of national economy. That is why it would be impossible to
 attempt the task of determining the extent of the requirement of the said
concept. Indeed it may be true to say that in an underdeveloped country it
would be ideal to describe any wage structure as containing the ideals of a
living wage, though in some cases living wages may be paid.

Looking at the problem of industrial wages as a whole it would not be

possible to predicate that our wage structure has reached even the level of a
fair wage. It is possible that even some employers may be paying a very high
wage to their workmen, and in such a case it would be necessary to examine
whether the wage paid is approximate to the standard of living wage; out in
in deciding this question the proper approach to adopt would be to consider
whether the wage structure in question even approximately meets the
legitimate requirements of the components constituting the concept of a
living wage. For that purpose it may not be essential to determine what in
terms of money these constituents would denote in the context of today.

Broadly speaking the first principle of wage determination is that

there is a minimum wage which in any event, must be paid irrespective of
the extent of profits. The financial conditions of the establishment, or the
availability of workmen or lower wages. This minimum wage is independent
of the kind of industry and applies to all alike. It sets the lowest limit below
which wages cannot be allowed to sink in all humanity.

The second principle is that wages must be fair, that is to say, sufficiently high to provide a
standard family with food, shelter, clothing, medical care, and education to children
appropriate to the workmen but not at rate exceeding his wage earning capacity in the class
of extablishment to which he belongs. A fair wage is thus related to the earning capacity and
workload. It must, however, be realized that ‘fair wage’ is not ‘living wage’ by which is
meant a wage which is sufficient to provide not only the essentials mentioned above but a
fair measure of frugal confort with an ability to provide for old age and evil days. ‘Fair
wage’ lies between the minimum wage, which must be paid in any event, and the ‘living
wage’ which is the goal.

Components of Wage Payment

Wage payment in India consists of basic wage, dearness allowance, bonus

and fringe benefits. While the basic wage has some relation to the economics of the
firm, the other wage components are much less influenced by internal than by
external variables, such as government regulations and inflationary trends in the
economics. As a consequence, managements do not have a completer control over
wage costs. The intervention of external variable introduces a certain degree of
uncertainty in formulating an internal wage policy.

1. Basic Wage:

The basic wage rate is clearly dependent upon the internal

relationship between wages and productivity. The extent to which the wage
rate gets determined is dependent on the marginal revenue productivity of
labour (MRP) which is the contribution of revenue made possible by
employing one more unit of labour. MRP relates marginal physical
productivity (MPP) to average product price. When, for example, price
increases, the MRP tends to shift even with a constant MPP.
It is in this sense that even without an increase in productivity it
should be possible for an employer to increase the wage ratio without
incurring losses. On the contrary, where the product price cannot be
increased as under perfectly competitive situations, the employer may not be
in a position to increase the wage rates unless productivity increases. The
relationship between productivity and wages therefore is complicated by the
product market situation such that under monopoly an employer may be in a
position to raise the wage rate, whereas under perfectly competitive situation
the employer cannot do so. The basic wages are related to the systems of
wage payment in an organization.

2. Dearness Allowance:
It has been estimated that around 80% of employees in manufacturing
industries are covered by one system of Dearness Allowance or other. Even
in the unorganized sector the principle of D.A. has been introduced through
the Minimum Wages Act, 1948. There is, however, no definite estimation of
size of outlay on D.A. While the study group on wage policy set up by the
National Commission of Labour estimated the proportion of D.A. to wage
bill at about 30%, the Employers Federation of India estimated the
proportion in the manufacturing sector at 39%.

The Supreme Court in its judgment in the Bengal Chemical and

Pharmaceutical Works Ltd., 1969 provided a set of principles to be followed
in paying DA. These principles are:-
a) Full neutralization is not normal given, except to the very lowest class of
employees.
b) The purpose of dearness allowance being to neutralize a portion of the
income in the cost of living, it should ordinarily be on a sliding scale and
provide for an increase in the rise in cost of living and a decrease or a fall
in the cost of living.
c) The basis of fixation of wages and dearness allowance is industry cum
region.
d) Employees getting the same wage should get the same dearness
allowance, irrespective of whether they are working as clerks or members
of subordinate staff or factory workmen.
e) The additional financial burden which a revision of the wage structure or
dearness allowance would impose upon an employer and his ability to
bear such a burden are very material and relevant factors to be taken into
account.

3. Bonus Payment:
The Bonus Commission viewed the concept of bonus as sharing
By the workers in the prosperity of the concern in which they are
employed. This has also the advantage that in the case of low paid
worker, such sharing in prosperity augments their earnings and so helps
to bridge the gap between the actual wage and the need based wage.
According to the Bonus Review Committee the concept of bonus is form
of profit sharing which had the incidental advantage of acting in effect as
a supplement to wages, these came to be established.

The impact of bonus on managerial decision making is felt through the

uncertainty regarding the amendments to the payment of Bonus Act,
1965. This Act has undergone several changes in the past. With each
ordinance the element of uncertainty gets further reinforced.
Consequently the planning of working capital requirements and its
management through the financial year becomes complicated. Any
increase in the quantum of minimum bonus may have an adverse effect
on the liquidity of inefficient or marginally efficient firms. In highly
efficient firms, any change in the method of bonus computation may lead
to complications in working capital management.
In view of the historical ambivalence regarding the concept of bonus,
management plan company budget for bonus payments on the basis of
existing legal provisions. It may be useful if the companies could also
 provide for expected changes in the law in their budgetary estimates for
the year. The problem although complicated, may still lend itself to the
managerial practice of planning under uncertainty.

4. Fringe Benefits:
Fringe benefits have by now become an important part of the wage
system. Such benefits are the result of social development in recent years.
Even during the early years of industrialization the employers were
contributing to the welfare of the workers, but in recent years, labour
legislation has imposed statutory requirements. The welfare legislation
includes the Workmen’s Compensation Act, Factories Act, Provident Fund
and Bonus Schemes in Coal Mines, Employees State Insurance Act, and
Employees Provident Fund Act. The statutory benefits are supplemented by
a number of other provisions such as paid festival holidays, housing, profit
bonus, and medical assistance which are paid on a voluntary basis.
Despite the fact that fringe benefits are now being increasingly
provided by the employers in most industries, there is a vagueness about the
definition of fringe benefits. According to Reid and Robertson, the scope of
the term fringe benefits depends in part on whether cost to employer or
payment to employee is used as the criterion of definition. It is believed that
fringe benefits are probably more important as costs and thus include
holiday pay, sick pay, the cost the cost of occupational pensions and
employer contributions to various types of welfare plans.

METHODS OF WAGE FIXATION

The managerial prerogative of setting terms and conditions of employment

is increasingly being limited due to either the emergence to trade unions or active
intervention by the State. As a result of the growth of unionism, collective
bargaining has become an important method of wage fixation, even though state
intervention, adjudication machinery and wage boards retain their primacy in the
wage system.

1. Adjudication:
The Government labour policy supports compulsory adjudication system. Its
rationale for doing so is based on the following arguments.
a) It was feared that collective bargaining might result in work stoppages and
slowing down industrialization.
b) It was held that strikes would be used as a weapon by the policically
motivated trade unions disrupting the industrial relation system.
c) It was assumed that the trade unions were still weak at the plant level and
therefore, collective bargaining may not result in an equal trial of strength
between the unions and the management.
d) It was felt that in the absence of compulsory adjudication the state would be
handicapped in maintaining industrial peace.
e) It was hoped that compulsory adjudication would result in terms and
conditions of employment which may be considered fair and objective by
both workers and employers.

Wages adjudication in the early days was mostly confined to disputes in

individual establishments. With the growth and consolidation of trade unionism,
adjudication of wage disputes arising in a single establishment lost much of its
importance. Unions were no longer confined to the workers of one
establishment. The concept of a representative union for an industry in an area
gradually took shape.

At the same time the establishment of four central organizations of

labour to which unions operating in different industries in different regions
were affiliated, was a direct impetus to the widening of the scope of trade union
action. True, the central organization of labour were in no sense national unions
for any industry, but the heavy dependence on them of numerous weak local
unions necessitated their seeking all India settlements of wage problems.

A few large unions covering units in many states as in banks, insurance

companies, railways, posts and telegraphs, ports and so on, although not fully
qualifying for the status of national unions, also lent powerful support to the
demand for all India wage determinations. That was the reason why all India
adjudications such as those in banks, in colleries and in the case of working
journalists- the statutory wage board having functioned more or less as a
tribunal – were ordered. This trend would have spread to most of the other
industries and employments had not the demand for the setting up of wage
boards eclipsed the importance of compulsory adjudication.

While the adjudication has helped in evolving socially desirable

concepts of wage determination, it cannot be said that it has been able to arrive
at just solutions to problems of industrial relations. First it is doubtful whether
 the courts possess competence in rule making although they might have been
useful in the interpretation of the rules themselves. Second, because of
compulsory adjudication a litigatory approach is being adopted towards wage
determination. This has cost a lot both to Unions and management, and it has
eroded the scope for constructive relationship between them at the plant level.

5. Wage Boards:

Compulsory adjudication fell into disrepute primarily for two reasons,

namely inordinate delays and unsatisfactory results. Dissatisfaction with the
lengthy procedure and frustration over the result drove workers and their
organizations more and more away from determination in which they
themselves might have a effective voice. The system of wage boards seemed
to give them the opportunity they were seeking so earnestly.

The concept of wage board was first enunciated by the Fair Wages
Committee. It was commended by the first Five Year Plan. The Second Plan
emphasized that a more acceptable machinery for setting wage disputes will
be one which gives the parties themselves a more responsible role in
reaching decisions.

It may be noted that the wage board is tripartite in character and

usually consists of an equal number of representatives from employers and
unions, an economist, a consumer representative and an independent
chairman. Generally, a wage board is a non-statutory body; its
recommendations do not therefore have the effect of an award binding on
both sides. They are seen as general guidelines for determination of wage
rates at the plant level. The terms of reference have generally been on the
pattern of those fixed for the wage board for the cotton textile industry:-

a) to determine the categories of employees (manual, clerical, supervisory,

etc) who should be brought within the scope of proposed wage fixation;
b) to work out a wage structure based on the principle of fair wages as set
forth in the report of the Committee on Fair wages;
c) to bear in mind the desirability of extending the systemof payment by
results.

In applying the system of payment by results, the Board shall keep in view
the need for fixing a minimum (fall back wage) and also to safeguard against
overwork and undue speed.
 The Sinha study suggests certain implications for wage structure and
industrial relations. In general wage boards were not in a position to base their
recommendations on job evaluation. Consequently, either the customary skill
differentials were allowed or such differentials were widened. On the contrary,
inter-firm and inter-industry wage differentials tended to decline. Wage board
recommendations had significant implications for industrial relations. It was found
that while wage rates increased even the weaker units were not adversely affected.
Moreover, wage disputes were not generally raised during wage board
deliberations, although disputes did take place on account of interim relief’s. An
important implication of the wage board system was the growth of industry level
federations of both employers and unions.

It is obvious that the wage board method of wage fixation has clearly failed
to evolve a consistent set of guidelines to be followed at the plant level. This
method had the rudiments of an industry level bargaining process, yet it could not
operate efficiently primarily because of a lack of coordination among the wage
boards. Since the wage board recommendations affect both management and
unions, it is in their own interest to strengthen their respective federations and to
provide comprehensive information to these federations for an efficient discussion
at the wage board level.

6. Collective Bargaining:

Reviewing industrial relations in 1931, the Royal Commission on Labour

could detect only one instance of collective bargaining which was that of
Ahmedabad ‘Plague Bonus’ towards the end of 1917.

After independence collective bargaining has received both

encouragement and discouragement. It received encouragement from two
factors, namely the growth of trade unionism and change in attitude of
employers. At the same time there have been other factors tending to
discourage the growth of collective bargaining. Though, judged by total
membership figures, there has been a phenomenal growth of the trade union
movement, such growth has not been matched by a corresponding gain in
strength. The proliferation of small trade unions with wholly inadequate
financial resources and the increasing rivalry among unions have greatly
weakened the movement.
 This has discouraged employers from earnestly pursuing the path of
negotiating and bargaining. Another important factor that has come into the
way of collective bargaining is the increasing tendency on the part of the
Goverments to refer industrial disputes to tribunals for adjudication and to
set up wage boards of the present pattern for drawing up wage structures on
an all India basis.

Despite such pulls in opposite directions, there is no denying the fact

that collective bargaining has gained ground after independence, though at a
slow pace, and that it is becoming an increasingly important factor in the
settlement of wage disputes. But there is no precise information on the
subject. Though there has been considerable improvement in the scope and
coverage of official statistics in the field of labour since the commencement
of planning, there is hardly any connected information still on the number
and nature of collective agreements entered into by management and labour
in the country year after year.

The first plan observed, “Although collective bargaining, as it is

known and practiced in India, is virtually unknown in India as a matter of
principle it was accepted for usage in union management relations by the
state…..The endeavour of the state has all along been to encourage mutual
settlement collective bargaining and voluntary arbitration to the utmost
extent, and thereby reduce to the minimum occasions for its
intervention…….. The workers right of association, organization and
collective bargaining is to be accepted without reservations as the
fundamental basis of the mutual relationship.

The phrase “Collective Bargaining” has its origin in the writings of

Sydney and Beatrice webb. It refers to the joint regulation of terms and
conditions of employment; both management and union participate in their
regulation. The emphasis in Webb’s analysis was on end result- wage
agreement.

Collective bargaining could be said to be having the following feature:-

a) Collective bargaining is a process which involves both economic and

political factors. While economic factors provide the outer limits, the
bargaining power on the two sides would determine the point at which the
equilibrium is attained. The bargaining power is conditioned by the
 representative nature of the bargainers, the economic conditions of the
organization, and the external support that each party could muster.
b) Collective bargaining need not be restricted to a situation where labour’s
gain becomes employer’s loss. On the contrary, both parties could help in
increasing productivity which could result in gains to both. In the latter case,
the field of bargaining is extended to include not only issues but problems
also.
c) The conclusion of the process depends crucially on the attitude of both
parties. These attitudes are largely based on the past and present relationship
between the two parties.

The union management negotiations follow certain pattern. The following

stages identified by Dunlop and Healy my follow each other or be interspersed.

a) Presentation of formal demands by both sides.

b) Exploration of demands and arguments presented by the other side.
c) Informal discussions to ascertain the areas where some concession may be
possible and the development of possible packages for the constituents of
both parties.
d) Off the record meetings of representatives of the two parties to formulate a
package which is likely to find support with the constituents of both parties.
e) Discussion of the package, drawing up of the memorandum of agreement,
and signing of the agreement itself.

At each stage the change of position is accomplished through surprise, make

shift and improvisation of both sides. Accordingly changing positions is at the
heart of the collective bargaining process, and the way in which the negotiator
handles these problems distinguishes a skilled veteran from a novice.

WAGE POLICY IN INDIA

The framing of a wage policy for any country involves the taking of specific stand
on various aspects of the economic development of the country, which can best be
done only through consensus arrived at in an organized manner.

The symposium on Wage Policy issues held by the International Institute for
Labour studies in October 1967, observed: “….the establishment of certain bodies,
suitably constituted and at the appropriate level, offers the best prospects of
formulating an agreed, acceptable, and effective wage policy for a developing
country.

The ILO defines the “Wage Policy” to mean “Legislation or government

action calculated to affect the levelor structure of wages, or both for the purpose of
attaining specific objectives of social and economic policy.

Workers and employers have their own legitimate sectional interests to

sustain and safeguard – interests which need not necessarily coincide with national
interests as a whole, as interpreted by those responsible for the governance of the
country for the time being. While sectional interests tend to pull in their different
directions, it should be the aim of a national policy to advance the interests of the
country as a whole. A national policy is, in effect an essay in balancing sectional
interests and in reconciling them with national interests to the greatest extent
possible.

To a large extent the economic situation of a country dictates the kind of

wage policy that governments in the developing countries are compelled to follow.
The different alternatives are as below:-

1. Low wage with high employment, or high wages with low

employment.
2. An increase in wages such a Pareto income optimality is ensured.
3. A highly centralized policy of wage control or a decentralized wage
policy with the government becoming involved only when the
national interest requires it.
4. Priority for equity among incomes over economic growth.
5. Reliance on wage legislation to ensure wage policy, and therefore, the
determination of minimum wages and differentials by government
authority.
6. The linking or delinking of wages with productivity.
7. Linkage of wage policy with price policy, especially a rice policy
related to the essential wage goods required by workers.
8. A wage policy ignoring wage structure or, alternatively, a policy
concerned to raise the level of wage incomes as well as rationalize the
wage structure.
9. Alternative wage policy makers either the government or a special
group of experts, or a consortium made up of the interested parties,
like trade unions, managements, consumers etc.
It must be emphasized here that the objective of giving the worker ‘a fair’ or ‘due’
share of the national income, or by incorporation of the net factory output, and thus
reducing income inequality is not only different from the objective of providing
him with the basic necessities of life, but is even incompatible with it. The problem
of capital accumulation must on an analytical plane be clearly separated from the
problems of giving the worker his due share in the factory output or from the still
more different problem of reducing inequalities of income.

All the problems cannot be solved simultaneously for they conflict with one
another. The fact of the matter is that, whether we like it or not, under the
circumstances now prevailing in most under developed countries, inequalities of
incomes are bound to remain for many more years to come- socialistic or no
socialistic pattern of society.

According to Saheb Dayal a proper understanding of the cost -productivity

price and wage-productivity price relationships, is essential to reverse the trends of
creeping inflation, low productivity growth stagnant or falling real earning, and
rising unemployment.

Keeping in view the need for uniformity in wage payments across regions,
industries and occupations, the Chakravarti Committee had suggested a National
wage structure on administered wage system….This involved working out a grade
structure based on skill differentials and fixation of wages for each grade. In this
structure, the total wage receivable by a worker or an employee may be made up of
the following: a) Minimum wage; b) Skill differentials depending on the grade; c)
Compensation for exceptional hazards for their exceptional disadvantages; d)
growth dividend; e) Dearness Allowance; f) Share in Profits.

In the ultimate analysis, wage policy in India cannot remain an exclusive

policy; it has to be a part of overall government policy. Within this frame, the wage
policy has to recognize the facts of life; trade union influence, wages lagging
behind productivity, and resistance of wage differentials. The context delimits
policy choices. Nevertheless, there is one redeeming feature: influence of
productivity on wage trends and wage structure. Wage Policy has therefore to
focus on the key concept of productivity.