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Michael John,SJ
WAGES of Theories
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launching pad
▪ Introduction
▪ Learning Objectives
▪ Wages
▪ Labor and Wages
▪ Theory of wages
– Traditional Theory of Wage Determination
– Theory of Negotiated Wages
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Objective..
⮚ To further understand the concept of
wages
⮚ To understand different Theory of wages
⮚ To know the relation between Labour
and Wages
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Introduce..
Wages
Wages in the widest sense mean any economic compensation
paid by the employer under some contrast to his workers for
the services rendered by them. Wages, therefore, include family
allowance, relief pay, financial support and other benefits.
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narrower Sense wages are the price paid for the services of
labor in the process of production.
They are composed of two parts
• the basic wage
• other allowances.
2. The basic wage is the remuneration, by way of basic salary and allowances, which
is paid or payable to an employee in terms of his contract of employment for the
work done by him.
3. Allowances, on the other hand, are paid in addition to the basic wage to maintain
the value of basic wages over a period of time
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Indian Acts
Under the Workmen’s Compensation Act, 1923, Section
2 (m)
• “wages for leave period, holiday pay, overtime pay, bonus,
attendance bonus, and good conduct bonus” form part of wages.
Under the payment of wages act, 1936 section 2 (VI)
• “any award of settlement and production bonus, if paid,
constitutes wages.”
But under the Payment of Wages Act, 1948,
• “retrenchment compensation, payment in lieu of notice and
gratuity payable on discharge constitute wages.”
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following type of remuneration, if paid, do not amount
to wages under any of the Acts
1. Bonus or other payments under a profit-sharing
scheme which do not form a part of the contract of
employment.
2. Value of any house accommodation, supply of light,
water, medical attendance, traveling allowance; or -
payment in lieu thereof or any other concession
3. Any sum paid to defray special expenses entailed by
the nature of the employment of a workman
4. Any contribution to pension, provident fund, or a
scheme of social security and social insurance
benefits.
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Labour and Wages
Blue Collar - Manual laborers
White Collar - Officer workers
Pink Collar –
• Jobs associated with women like
nursing, secretarial, etc.
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• carpenters, plumbers, electricians, business executives and
managers, artisans, accountants, engineers, police,
1. Skilled mechanics, etc. These may be blue or white collar workers.
Labour
• Examples are construction workers, sanitation and custodial
workers, painters, factory assembly line workers, etc. These
2. Unskilled are blue collar workers.
Labour
• doctors, lawyers and teachers. These are white collar
3. workers.
Professionals
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to focus on..
1. Subsistence theory
2. Wages fund theory
3. The surplus value theory of wages
4. Residual claimant theory
5. Marginal productivity theory
6. The bargaining theory of wages
7. Behavioral theories
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Subsistence theory
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Wages fund
Theory
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This fund could be utilized for employing laborers
for work. If the fund was large, wages would be
high; if it was small, wages would be reduced to the
subsistence level. The demand for labour and the
wages that could be paid them were determined by
the size of the fund.
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The Surplus value theory of Wages
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The price of any product was determined by the labour
time needed for producing it. The laborer was not paid in
proportion to the time spent on work, but much less, and
the surplus went over, to be utilized for paying other
expenses.
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Residual claimant Theory…
Wages represent the amount of value created in the
production, which remains after payment has been
made for all these factors of production. In other
words, labour is the residual claimant.
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Marginal productivity Theory..
⮚ it assumes that wages depend upon the demand for, and
supply of, labour.
⮚ Consequently, workers are paid what they are economically
worth. The result is that the employer has a larger share in
profit as has not to pay to the non-marginal workers. As
long as each additional worker contributes more to the
total value than the cost in wages, it pays the employer to
continue hiring; where this becomes uneconomic, the
employer may resort to superior technology.
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The bargaining theory of wages
• wages are determined by the relative bargaining power
of workers or trade unions and of employers. When a
trade union is involved, basic wages, fringe benefits,
job differentials and individual differences tend to be
determined by the relative strength of the organization
and the trade union.
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Behavioural theories..
❑ Many behavioral scientists - notably industrial
psychologists and sociologists like Marsh and Simon,
Robert Dubin, Eliot Jacques have presented their
views or wages and salaries, on the basis of research
studies and action programmes conducted by them.
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Incentives
✔ Anything that can attract
• employee’s attention
• motivate them to work can be called as incentive.
✔ aims at improving the overall performance of an
organization.
✔ classified as direct and indirect compensation.
✔ They can be prepared as individual plans, group
plans and organizational plans.
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Definition
‘incentive is system of payment emphasizing
the point of motivation, that is, the imparting
of incentives to workers for higher production
and productivity’.
- K. N. Subramaniam
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Minimum wages
“the minimum amount of remuneration that an
employer is required to pay wage earners for the
work performed during a given period, which cannot
be reduced by collective agreement or an individual
contract”.
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Living Wages
Justice Higgins which reads
"Living wage is a wage sufficient to ensure the workman
food, shelter, clothing, frugal comfort, provision for evil days
etc. as regard for the skill of an artisan, if he is one".
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Fair Wages Committee Report
"The living wage should enable the male earner
to provide himself and his family not merely the
basic essentials of food, clothing and shelter but
a measure of frugal comfort including education
for the children, protection against ill-health,
requirement of essential social needs and
measures of insurance against old age."
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Fair Wages
fair wage is something more than the minimum wages.
Fair wage is a mean between the living wage and the
minimum wage.
While the lower limit of the fair wage must obviously be
the minimum wage, the upper limit is the capacity of
the industry to pay fair wage compares reasonably with
the average payment of similar task in other trades or
occupations requiring the same amount of ability.
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Remuneration Meaning- The compensation an
employee receives in return of his or her contribution to
the organization.
Remuneration is the reward for employment in the form
of pay, salary, or wage, including allowances, benefits
(such as company car, medical plan, pension plan),
bonuses, cash incentives, and monetary value of the non
cash incentives.
Components of Remuneration- An average employee
in the organized sector is entitled to several benefits such
as salary and wages, incentives, fringe benefits etc.
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Wages and Salary- Wages represent the hourly
rates of pay whereas salary represents the monthly
rates of pay regardless number of hours put in by
an employee.
Incentives- incentives are basically “payment by
results”. Incentives depend on productivity, sales,
profits. There are two types of incentives schemes:
• Individual Incentive Scheme- Applicable to
specific employee performance.
• Group Incentive Scheme- It is applicable
where a given task demands group efforts
for completion.
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Fringe Benefits- It includes PF, gratuity,
medical care, hospitalization, accident
relief, health & group insurance,
canteen, uniform and recreation etc.
Reinforcement & Expectancy Theory
• Reinforce theory suggests that behavior which
has a rewarding experience is likely to be
repeated. Implication of remuneration in this
theory is that high employee performance
followed by a will make future employee
performance more likely.
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Expectancy theory is link between rewards
and behavior.
Expectancy is the belief that effort will lead
to acceptable performance.
Instrumentality refers to the performance
reward.
Valence is the value of the reward to the
satisfaction of employee.
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Definition
Expectancy
Theory: People perform Equity Theory: People
actions in exchange for derive job satisfaction
rewards based on their by comparing their
conscious expectations. effort and reward ratio
If the reward is fair with with others. If the ratio
their expectation, they is fair or equitable, they
are motivated. feel satisfied.
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Equity Theory- Equity theory emphasis in pay structure of
employee remuneration. It suggests that an employee who
perceives inequity in his or her rewards seeks to restore equity.
When employee perceives inequity it can result in lower
productivity, higher absenteeism or increase in turnover.
Remuneration system needs to meet three types of equity which
directly impact motivation, commitment and performance-
• Internal Equity- Perceived fairness of pay differentials
among different jobs with organization.
• External Equity- Employees’ perception of fairness of
remuneration relative to those outside organization.
• Individual Equity- Employees’ perception of pay
differentials among individuals who hold identical job in
the same organization.
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Agency Theory- Focuses on the divergent
interests and goals of the organization’s
stakeholders and the way that employee
remuneration can be used to align these
interests and goals. This theory talks about
two important stakeholder i.e. employer and
employee. Employer plays a role of principal
whereas employee plays a role of agent.
Remuneration paid to employee (agent) is
called agency cost. Agent wants high agency
cost whereas principals want to minimize it.
• Agency theory says that principal must choose a
contracting schemes that helps align the interest of agent
with the principal’s own interest.
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