Wage Structure

17/08/2020 1 By indiafreenotes

Wage structure may be defined as the internal pattern of varying job ranking and basic wage rates and differentials of different categories of employees in a company according to skill, qualifications and experience. Together with this, wage structure may also be influenced by labour market forces. But the outside market impinges only at certain points in the company wage structure.

There is a great array of semi-skilled and unskilled production jobs that are specific to a particular industry or even a particular company. Workers are usually not recruited into these jobs from the outside, but work up from within the company on a seniority basis. These types of jobs, if not easily available elsewhere, wage rates become subject to inside market.

Factors Affecting Wage Structure

The wage structure in a modern plant may be influenced by the following factors:

(i) Collective bargaining and labour relations

(ii) Management discretion and custom

(iii) Skill and production operation sequence

(iv) Job evaluation or job rating

(v) Minimum wage legislation

(vi) Dearness allowance

(vii) Bonus

(viii) Wage incentives

(ix) Wage differentials

(x) Company wage policy

(xi) Governmental wage fixation methods

(xii) Tripartite convention

(xiii) ILO convention.

Wage structure may be industry based or there may be inter-industry wage structure or Federation level wage structure. In India, wage structure for different industries has been set on the basis of Government wage regulation, and tripartite negotiation.

Theories of Wage Structure

The classical economists were of the view that wage ultimately gets settled at the subsistence level, a level determined by custom. The two main assumptions underlying this view are the Malthusian Theory of Population and a fixed amount earmarked from the national dividend as wage fund. The wage fund is an amount set apart by the entrepreneur towards the payment of wage bill.

It is, according to the classical economists, fixed in quantity once for all. Therefore whenever the supply of labour increa­ses, the wage per head goes down and with a decrease in the supply of labour the wage goes up. If the wage is above the subsistence level, population tends to increase bringing down the wage level and vice versa.

Wage level ultimately settles down at the subsistence level. The classical analysis of wage determination relies more on the supply side of the picture. Though Marx stresses the influence of ‘bargaining power’ on the level of wages, he also believes that, under capitalism, wage tends to be at subsistence level due to the substitution of machinery for labour which helps to maintain ‘reserve army’.

The Marginal Productivity Theory looked at distribution as a relationship between the marginal product of the factor and the demand for it. Marginal Productivity Theory is an extension of marginal utility analysis. The firm combines the various factors of production in such a way as to maximise its profits just as the consumer varies the combination of goods to maximise his utility.

In doing so the entrepreneur, as a logical deduction, pays each factor of production according to its marginal physical productivity. This theory says that wage, the price paid to labour, thus should be equal to its marginal productivity expressed in terms of value.

Wage rate will be higher when the marginal productivities are higher and vice versa. It is the marginal revenue product of labour that establishes its demand schedule.

This theory stresses the demand side; the supply side is only indirectly accounted for. Secondly, Marginal Productivity Theory concentrates more on ‘how much labour would be employed at a particular wage’ than how the wage rate is determined and what are all the factors that influence such determination.

This is evident from the fact that it is based on the neoclassical idea of isoquants where it is assumed that there is perfect substitutability between capital and labour.

It tries to bring out the demand schedule for labour under an assumption of labour being the only variable factor. If that is so it implies that capital is malleable in the sense that the same amount of capital can be stretched or contracted in such a way that any number of labourers can work with it.

In reality we find that there is a definite relationship between capital input and labour input irrespective of whether the technique is primitive or sophisticated.

Even if capital is expressed in money terms, the problem cannot be solved because whenever the technique is changed from a capital intensive to a labour intensive one, additional costs in terms of money and time are involved in converting the existing capital good into the other one.

Above all, measuring the marginal productivity of labour itself is not possible as production is the result of coordination between labour and capital. It is not possible to keep capital constant and increase the labour content in order to know the marginal productivity of labour. That is why probably the Marginal Productivity Theory is considered more as a statement of demand side than a theory of wages.

Reservation price of labour dictated by custom or need or the trade union action does not have much of a place in the theory. Marginal productivity theory, as Dunlop says, ‘cannot be applied to the complexities of wage structures’ also.

It may be true that wages tend to measure the marginal productivity of labour, but it cannot be a theory of wage rate determination; wage according to this theory depends upon the marginal productivity of labour but at the same time it is also true that the productivity of labour depends upon the wage that the labourer receives.

In the context of industrialization and economic development, it is found that the institution of collective bargaining has been playing an important role in wage-setting in the areas where labour is organized. Government, through legislative measures, like the Minimum Wages Act, is another institution that has considerable influence on wage-setting.

Reformation of Wage Structure

  1. Wage Policy

The main aim of wage policy is to bring wage structure in conformity with the expectations of the working classes and in the process, to maximize wages and employ­ment. Wage changes beyond a certain level must reflect productivity changes. Any substantial improvement in real wages, which is an important objective of wage policy, cannot be achieved without increasing productivity.

Wage policy has to be framed taking into account such factors as the price level which can be sustained, the employment level to be attained at requirements of social justice, capital formation needed for the future growth of the economy, and the pattern of income generation and its distribution.

Wage policy should foster an appropriate choice of techniques so as to maximise employment at rising levels of productivity and wages. Wage policy should be so designed as to check living costs from rising.

It may be possible to fix a regional minimum for different homogenous regions in each state. Need based minimum wages can be introduced keeping in mind the extent of the capacity of the employer to pay the same. Every organized worker has a claim to this minimum. Prices constitute an important indicator of the economic health of a nation. They exercise a profound influence on the economy of a country.

During the last several years, the inflationary trends in India have inflicted a great hardship on the workers with rising prices, the cost of living of the workers also increased leading to a persistent demand for higher wages.

Ever rising prices exercise a retarding influence on economic growth. In order to secure economic development with stability, all possible efforts should be made to prevent any further rise in prices of essential goods.

The prime interest of workers is fair wages, satisfactory conditions of work such as security of service, justice and fair play. In a developing economy, wage policy is faced with a real conflict between the needs of workers for larger consumption and the demands of the company for a higher rate of capital formation.

The rate of progress has to be determined not only by the needs of the workers but also by the limitations of the national resources.

  1. Wages and Productivity

The proposition that linking wages with productivity provides a generally agreed basis for wage adjustment. There seems no general consensus on the linking of wages with productivity. Industrial production had also risen by about 10 per cent in 1976-77 and perhaps by another 6 per cent in 1976-78. It was obvious that industrial pro­duction per man had gone up recently and productivity also had increased.

Workers ought to switch over to a wage augment based on productivity per man. There is no tradition yet in India for demanding a wage increase according to profitability and productivity per man, the unions might not change their basis for bargaining.

As wage increases in India had been linked to the cost of living rather than productivity, there have been reasons for regional differences in wages of similar workers, since the cost of living rose differently in different parts of the country.

Corrections in wage rates for the cost of living changes should be regional in character. There is a point in not having a national but a regional wage and regional wage structures in a few regions would probably be ideal. The basic issue of the rationality of a wage structure is that wages in order to be just would have to be related to the productivity of workers.

  1. Bonus

This also has become a subject of persistent dispute between management and the workmen.

It is rather ironic that while bonus was intended to give a sense of partnership to labour in industry and help the identification of workmen with the welfare of the industry, it has been responsible for some of the major strikes in industry and has often hundred the establishment of harmonious relations between the workmen and the employers.

As far as raising the minimum bonus from 4 per cent to 8.33 per cent is concerned, this decision has been taken on political consideration rather than on merit. However, once the workmen have come to enjoy 8.33 per cent as minimum bonus, it will be a practical wisdom to restore the same.

  1. Wage Motivation and Productivity

In some quarters, it is felt that wage should not be linked with productivity until workers are given need based wages and financial motivation through sharing the gains of productivity, is not effective unless it is preceded by psychological motivation.

National Productivity Council, in the guidelines, has clearly stated that sharing the gains of productivity should be regarded more as a philosophy of industrial relations rather than a statistical technique or a mathematical formula of distribution of gains.

In reality, no person would deny the fact that workers should get need based wage. The economy has to be geared at a faster rate to fulfill this objective. Productivity also helps considerably to improve the wage level of workmen. If an industry prospers through increased productivity, the employees should be given due share in the prosperity of an industry.

Some felt that wages should definitely be linked to productivity where even the minimum wages for a fair day’s work should be linked to certain minimum norms of output. As for higher production or work output beyond the minimum, payment by results systems be used.

There are different ways of linking wage with productivity. National Productivity Council has developed eleven different models for this purpose. These models can be changed according to the need of an organization. Different systems of payment by results could be considered to increase productivity if it is preceded by psychological motivation.

Distortion in Wage Structure

In the developed countries, several studies have demonstrated the importance of economic variables in determining the wage structures. In India, studies have been neglected. This may be partly due to paucity of data. Wage structure is grossly distorted so that different industries and professions are divided into water-tight compartments, with wages bearing no relation to one another.

As a result, workers of the same category may be getting different wages. The classic example is one of wage levels of unskilled workers in the organized and unionized industries, and those in unorganized and un-unionized sectors. Even with two main sectors, there are different wage payments for the same or similar work.

This glaring distortion is to be found in case of organizations which often maintain two different rates for workers doing the same job, one for regular employees and another for workers employed on a daily wage basis.

Even in the case of the Government, the minimum pay of class IV employee is almost double of that prescribed for a daily wage earner; and this without any consideration for holidays, house rent allowance, medical facilities and provision for pension. Another example is that of high payments made by foreign companies which bear no relation to and are much higher than, the wage paid in domestic companies.

The huge differentials exist between different types of wages as also of salaries. Top salaries in enterprise, net of income tax, are often sixteen to eighteen times as high as wages of unskilled workers. If to this, perquisites, such as free house or cheap houses and subsidized travelling or free travelling, are added the differential would be higher still.

Within the organized sector, the wage levels are determined more by unionized action. Outside the organized sector, workers are paid wages which are almost equal to distress selling of labour. It is, therefore, clear that wage structure is a haphazard one, and is full of incompailities and imbalances.