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What is Wage ? | Definition, Methods, Concept & Wage Theories


What is Wage ?

A wage is the payment made to the workman for his services to the organisation. Wage is differentiated from the salary on the basis of "how the organisation computes an employee's compensation". Wages (Wage) are generally paid hourly to blue-collar workers such as production and maintenance workers while salary is a monthly payment made to an employee for the services he has rendered to the organisation.

Definition of Wage

According to P.M. Stochank :
"Wage is that labour's remuneration which creates the utility".

According to Yoder and Heneman :
"Wages are the compensation of wage earners, the numerous employees who use the tools and equipment's for their employers to produce goods and services that are sold by their employers".

According to Benham :
"Wages means the amount paid to the labour for his services to the employer".

Methods of Wage and Salary Payments

Various methods of wage payment or types of wages are as follows :

Methods of Wage and Salary Payments

1) Time Rate/Wage System

Time rate or time wage system is also called as day wage system. Under this system, wages are paid to the worker according to the time that a worker spends on his/her work in the workplace. The unit of measurement of time may be based of an hour, a day a week, or a month. Although, in this system of wage payment, for actual amount of the work completed by the workers, no record is maintained.
As per formula :

Wages = No. of Days Worked x Rate per Day 
Wages = No. of Hours Worked x Rate per Hour

Advantages of Time Rate System  :

Time rate system has the following advantages :

i) Simple : 
Time rate system is very easy to administer and needs nominal clerical work.

ii) Secure : 
In this system, no deduction made in the wages of a worker, in case if he is temporarily unable to perform a job due to injury. Hence, it induces a sense of security among workers. 

iii) Superior Quality : 
In time wage system, worker gets sufficient time to perform his work. This results into superior quality of products. 

iv) Fairness in Remunerations : 
Workers who perform same type of job get the same wages. This induces a feeling of equality in the workers. 

v) Favorable for Beginners : 
With this scheme, a certain and specific amount is guaranteed even to the workers those who are not capable to achieve the specified target, in the initial stages of their jobs.

vi) Minimal Waste : 
Under time wage system, workers never compete to earn more money by producing more out. They pay attention towards the quality. As a result, the piece produced by them is less defective and wastage is also nominal.

vii) Helpful for Trade Unions : 
Time wage system does not differentiate among employees on the basis of their output, due to this reason it is always preferred by trade unions.

Disadvantages of Time Rate System :

Time rate system suffers from the following disadvantages :

i) Lack of Motivation : 
The time wage system does not differentiate between workers according to their performance, consequently, efficient workers get no recognition or reward for their better performance which ultimately results in lack of motivation in the efficient workers to work hard.

ii) Enhanced Supervision : 
A great amount of supervision is required in order to prohibit the workers from wasting their time on unproductive activities.

iii) Rise in Cost of Production : 
In this scheme, as the workers are being paid on the basis of time, the total production of the output is bound to be low.

iv) Discontentment : 
Under time wage system, all workers tend to be treated equally by the management which brings a great disappointment to the efficient workers. Finally, it leads to disappointment and creates conflict among the workers.

2) Piece/Wage Rate System

In the piece rate system, an employee is being remunerated on the basis quantity of work, regardless of the time taken to complete the work. The system does not give guarantee of a fixed amount of wage, but a fixed rate is compensated for each unit of output produced. This system is used by those organisations where the workers have to do the same kind of work again and again or produces same quantity of output. Wages of a worker under this system is calculated in the following
Manner :
The wage of a worker under piece rate system can be given as : 

Wage = N (Number of Units Produced) x R (Rate per Unit)

Advantages of Piece Rate System :

Piece rate system has the following advantages : 

i) Higher Incentive for Higher Production : 
It differentiates between the competent and incompetent workers and it also offers strong motivation to the efficient workers to achieve their desires. 

ii) Justified : 
As wages are related to the performance and output of the workers, they are considered as justified. Employees with reduced efficiency are highly criticized in this system. 

iii) Easy to Ascertain the Cost : 
The cost of labour at per unit of production remains stable and as a result employer can easily ascertain labour cost for each job.

iv) Reduced Supervision : 
In the piece wage system, the workers are engaged in increasing their wages by increasing their output. As the wages are remunerated on the basis of production, hence continuous monitoring is not required under this system.

v) Cost Saving : 
This system ensures cost reduction in production because the cost of production decreases with increase in output.

vi) Improved Planning and Efficient Control : 
Piece wage system results in improved planning and efficient control. This is so because the possibility of achieving production target is high.

Disadvantages of Piece Rate System :

Disadvantages of piece rate system are as follows :

i) Poor Quality of Output : 
Employees are more focused on the quantity of production instead of quality of production. This may lead to poor quality of output unless strict supervision and efficient measures of quality check are implemented. 

ii) Minimum Wages are not Assured : 
Wages of workers depends upon the quantity of the work; hence, any kind of disturbance in the work may reduce their wages. Consequently, a sense of insecurity prevails among them. 

iii) Unfit for Beginners : 
This system is not appropriate for the workers, who have just began their career as initially they may produce little quantity of product. 

iv) Poor Health : 
Under this scheme. the employees try to go beyond their normal capacity in order to maximize their payments. Hence, they can become unhealthy. 

v) Lack of Harmony : 
The rapport between workers and management becomes poor and stressed when low output of the employees is because of some defects in the scheme.

vi) Complexity in Fixing Piece Rates : 
It is difficult to fix the piece rate of work, which is satisfactory to both workers and management, in some production processes, like sugar production.

vii) Resistance from Unions : 
Trade unions are against piece wage system as it increases the probability of unfair competition between the employees.

3) Balance or Debt System

This system is a mixture of both piece and time rate system. In this system, a worker gets a fixed time-rate payment with an option of piece rate. In case, if the wages designed at piece rate are more than the time rate, the worker gets the incentive in addition to the normal time-rate based wages. On the contrary, if time wages go beyond piece wages, the worker is paid wages based on time, and the shortage is carry-forwarded for future settlement.
The balance system creates a feeling of security in employees. At the same time, an employee gets a chance to improve his earnings more than the fixed time wages. This-system is more suitable for the industries where the work flow is low, e.g., dock employees. The wage rates should be fixed on the most scientific basis in this method.

Concept of Wages

While evolving wage policies, following wage concepts are generally considered :

concepts of wages

1) Minimum Wage

According to Government Committee on Wages, 1948,
"Minimum wage is a wage which must provide not only for bare sustenance of life but for the preservation of efficiency of the worker". Minimum wage should also provide for the requirements like education of children, medical facilities, etc. It is fixed by an agreement between worker and the management but usually it is determined by the legislation's related to wages.
This is mostly visible in unorganized sector in which labour is unionized. While fixing the minimum wages, other factors like organisation's ability to pay, type of job, etc, are also taken into consideration along with the needs of workers.

According to Professor Dobb,
"Minimum wages can be defined as the standard rate which a trade union attempts to establish by collective bargaining". 

The resolutions undertaken at the 15 Indian Labour Conference, which was held in 1957, related to minimum wage, are as follows : 
  1. To compute the minimum wage, the standard working cost per family must be taken, which consist of three consumption units for one earner. The wages of children, adolescents and women should be ignored.
  2. Dr. Aykroyd has recommended consumption of 2700 calories for the average Indian adult who performs moderate activity. This minimum requirement of food should be taken into consideration for minimum wages.
  3. 18 yards per year of clothing need, as per capita consumption, must be considered. This yardstick is considered for a family of four people on an average, which makes the total of 72 yards of clothing.
  4. In the case of housing, the accommodation provided by the government, in any area; under the scheme of subsidy for low income groups, should have a norm of charging minimum real. 
  5. 20 per cent of the total minimum wages must consist of expenses on fuel, lighting, and other miscellaneous items.

2) Fair Wage

Fair wage is a wage which is above the minimum wage. It can be studied in two senses, wiz, narrow and broad sense. In narrow sense, wage can be considered fair, if it is equal to present market rate in the same industry and in the surrounding industries, performing same type of work. In a broad sense, fair wage is that wags which is equal to the principal rate for same type of work throughout the country, when the labors a organised systematically and they have power to bargain.

According to Professor Pigou,
"A wage rate is fair in the narrower when it is equal to the rate current for similar workmen in the same trade and neighborhood and fair in the wider sense when it is equal to the predominant case for similar work throughout the country and in the generality of trades".

According to The Indian National Trade Union Congress, 
"A fair wage is a step towards the progressive realization of a living wage".

The committee on Fair Wages announces that the fair wage is a wage, which lies in between a least wage and a sustainable wage.

Diverse features of fair wage are as follows :
  1. Fair wage is determined and fixed by owner of the organisation.
  2. Fair wages in greater than the minimum wage hon lower than the living wage. 
  3. The amount of fair wages differs from industry to industry.
  4. The fixation of fair wage is done by the employer.
  5. It is linked to a fair load of work and the ability to earn.
  6. Fair wage helps the employee to live a standard life, provide his family with food, cloth, shelter, basic education to children, primary health cars, etc.

3) Living Wage

Laving wage can be described as an earning which is higher than the amount of a fair wags Living wage enables a wage earner not only to afford the minimum requirements of life like food, clothing, shelter, basic education and health needs, but also the need of luxuries which include higher and better health and ea facilities for family and children, fulfilling societal desires, ensuring safe and insured future, and thus, procuring a comfort life at present.
To determine the living wage, the gross economic condition of the nation should be taken into consideration because living wage differs from nation to nation. In developed countries, living wage itself is the basis for determining minimum wage. In India, minimum wage is dependent on sweated industries which come under Minimum Wage Act, 1948.

Living wage is necessary to ensure economic equality. The living wage is decided by following principles :

1) Full time employees should be able to sustain their family beyond the line of poverty.

2) Employers should be given living wage by the employer so that both employees and employers can derive following benefits :
  1. A raise in the tax base, procures more money for the government to provide better services.
  2. Facilitates to increase purchasing power of people thereby increasing standard of organisation and society as a whole.
  3. Reduces attrition rate of low-wage jobs, which in turn minimizes the recruitment, selection, training cost of employers and enhances the service quality to customers.
  4. Increases healthy competition between the employers those who give good wages and those who are paying only fair wages. 
  5. Enables the employed people to give support to their family members with a single job, and spend quality time in their social life.

4) Real Wage

Real wages are the wages which are attuned with inflation, Real wages can be represented as follows :

Wr  =  ------

Wr = real wages
Wn = nominal or money wages
P= the general price level

According to Adam Smith,
"The real wages of labour may be said to consist of the quantity of necessaries and conveniences of life that are given for its nominal wages, in the quantity of money. The laborer is rich or poor, is well or rewarded in proportion to the real, not the nominal wages of his labour".

Wage Theories

Most wage theories reflect overemphasis on one or another of the elements determining wages. Theories of wages can be broadly classified into two groups which are as follows :

Wags Theories

Economic Theories 

Economic theories of wage provide guidance in formulation of wage policies. All economic theories are founded on assumptions about the relationships between the owners of land, labour and capital which are known as the factors of production. Economic theories of wages can he broadly classified as follows : 

1) Macro Theories : 
Macro theories are essentially macro in nature because each attempts, in some way, to describe or account for the broad economic influences of society that affect the level of compensation of workers Various macro theories are as follows :

i) Subsistence Theory :
David Ricardo developed the subsistence theory of wage. It is also known as the Iron Law of Wages or the Brazen Law of Wages. This theory states that: "The laborers are paid to enable them to subsist and perpetuate the race without increase or diminution". The theory was based on the assumption that if the workers were paid more than subsistence wage, their numbers would increase as they would procreate more, resulting in spurt in supply of labor and this would bring-down the rate of wages. If the wages fall below the subsistence level, the number of workers would decrease -as many would die of hunger, malnutrition, disease, cold, etc., and many would not marry, when that happened the wage rates would go-up.

ii) Wage Fund Theory : 
Adam Smith developed this theory. His basic assumption was that wages are paid out of a predetermined fund of wealth which lay surplus with wealthy persons - as a result of organisation savings. This fund could be utilized for employing labourers 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 by them were determined by the size of the fund Francis A. Walker attacked the wage fund theory. He argued that wages were paid out of the product of labor and not from some previously accumulated capital. It is production that furnishes true measure of wages. This theory is further explained by John Stuart Mill According to him, wages depend upon two quantities :
  • Wage fund or the circulating capital set aside for the purchase of services of laborers.
  • The number of laborers seeking employment.

iii) Supply and Demand Theory : 
This theory in economics relates to the laws of supply and demand. In essence this assumes that employers pay enough to recruit and retain employees, but avoid paying too much since that adds unnecessarily to labour costs and may make a business noncompetitive in the marketplace.
Supply and demand theory, however, is based on the premises that "other things are equal" and that a "perfect market: for labour exists. In the real world, of course, other things are never equal and there is no such thing as a universally perfect market, i.e., one in which everyone knows what the going rate is there is free movement of labor within the market and there are no monopolistic or other forces interfering with the normal processes of supply and demand. The existence of internal markets means that individual firms exercise a good deal of discretion about how much they pay and how much attention they give to external market pressures.

iv) Residual Claimant Theory : 
The residual claimant theory is a version of wage fund theory. It has been advanced by the American economist Francis A. Walker. He hypothesized that the wage was derived not from previous year's operations, but simply from residue of the total revenues after deducting all other legitimate expenses of business operations, such as, rent, taxes, interest, and profits. According to this theory, after all other factors of production have received compensation for their contribution to the process, the amount of capital left over will go to the remaining factor. Following this through to its logical conclusion, if the "other expenses" consumed all of the revenue, labour, being the "residual claimant", would receive no wages and presumably would not be entitled to them.

v) National Income Theory: 
In the 1930, John Maynard Keynes developed the national income theory. It is also known as Full Employment Wage Theory. This theory states that full employment is a function of national income. National income in turn, is equal to the total of consumption plus private or public investment. If the national income falls below a level that commands full employment, it is the responsibility of the Federal Government to manipulate any or all of the three variables to increase national income and return to full employment.

vi) Neo-Keynesian Distribution Theory : 
It is a modified version of the national income theory. It explains how full employment conditions can be achieved without conflicting with general living standards or with stable prices. It also recognizes the fact that entrepreneurial decisions can determine the general level of sages in the shout-run. Money wage rates, with limits, are determined by bargaining between the capitalist and the employee. This theory acknowledges that economic forces alone do not determine the wage level.

vii) Consumption/Purchasing Power Theory : 
The wage theories got closely associated with the employment practices. It concerns the relation between wages and employment and the business cycle. According to this theory, wage increases are desirable because they raise labour income, thereby stimulating consumption. Since wage earners spend a very large proportion of their incomes, it is held that higher wages will result in a rise in consumer spending and thus act to sustain or to stimulate the economy.

viii) Investment Theory : 
This theory proposed that labour markets vary in the scope of worker investment required for their particular industry. Generally, the wider the labour market is, the higher the wages are. The individual worker's 'investments consist of the education, training, and experience that the worker has invested in a lifetime of work. Individual workers vary in their desire to maximize income, just as employing organisations vary in their worker investment requirements.

2) Micro Theories : 
Following theories have been termed "micro" because they treat the wage structure within a given industry or even a given company, directly involving the bargain and the exchange between employer and employee. Various micro theories are as follows :

i) Human Capital Theory : 
Concepts of human capital are significant to reward managers since the focus is switched from viewing pay and benefits as costs to be minimized to one in which the organisation is seen to invest in the employee. Hence, it is in the interests of both employee and employer to increase skill levels and to retain these in the business. In an analysis based on the 1998 Workplace Employee Relations Survey, Forth and Mill-ward find some evidence that pay increases are larger when there is evidence of some form of up-skilling of the workforce. However, the evidence is not clear-cut.

Human capital theory as stated by Ehrenberg and Smith, "Conceptualizes workers as embodying a set of skills which can be rented-out' to employers. The knowledge and skills a worker has - which come from education and training, including the training that experience brings-generate a certain stock of productive capital".
For an employee, the returns on human capital investment are a higher level of earnings, greater job satisfaction and, at one time, if less so now, the belief that security of employment is assured. For the employer the return on investment in human capital is improved performance, productivity, flexibility, and the capacity to innovate resulting from an enlarged-skill base and increasing levels of competence. 

ii) Bargaining Theory : 
According to this theory, 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 organisation and the trade union. The bargaining theory of wages holds that wages, hours, and working conditions are determined by the relative bargaining strength of the parties to the agreement. Smith hinted at such a theory when he noted that employers had greater bargaining strength than employees. Employers were in a better possible to unify their opposition to employee demands, and employers were also able to withstand the loss of income for a longer period than could the employees. This idea was developed to a considerable extent by John Davidson, who proposed in The Bargain Theory of Wages that the determination of wages is an extremely complicated process involving numerous influences that interact to establish he relative bargaining strength of the parties. This theory is applicable whether wages are being set by collective agreement or otherwise, i.e. Individually.

iii) Marginal Productivity Theory : 
The theory has been propounded by economists like Philips Henry and J.B. Clark, who argued that a business firm would be willing to pay a productive agent only what he adds to the firm’s well-being or utility; that it is clearly unprofitable to buy, for example, a man-hour of labour if it adds less to its buyer’s income than what it costs. This marginal yield of a productive input came to be called the value of its marginal product, and the resulting theory of distribution states that every type of input will be paid the value of its marginal product. According to this theory, wages are based upon an entrepreneur's estimate of the value that will probably be produced by the last or marginal worker.

iv) Productive Efficiency Theory : 
This is an refinement, of the marginal productivity theory in that each worker is provided the opportunity to increase his or her wages by increasing his or her productive efficiency. This theory provides the basis for an array of monetary motivational tools, such as, incentives systems, bonuses and profit-sharing plans. Many economists feel that because of its realistic application, the productivity theory is the most constructive of recent wage theories.

Behavioural Theories

Behavioural theories revolve around the concept that organisations offer better compensation to deter undesirable behavior by making a job too good to lose. Prominent behavioral theories are as follows :

1) Employer's Acceptance of a Wage Level : 
This type of thinking takes into consideration the factors, which may induce an employee to stay on with a company. The size and prestige of the company, the power of the union, the wages, and benefits that the employee receives in proportion to the contribution made by him all have their impact. Thus, compensation is viewed as more than providing for livelihood and includes other inducements to accept or continue employment.

2) Internal Wage Structure : 
Social norms, traditions, customs prevalent in the organisation and psychological pressures on the management, the prestige attached certain of social status, the need to maintain internal consistency in wages at the higher levels, the ratio of the maximum and minimum wage differentials, and the norms of span of control, and demand for specialized labour, all affect. the internal wage structure of an organisation. Thus, this theory implies that compensation is an internal structural issue of the organisation which is influenced by market and social factors.

3) Wage and Motivators : 
Money often is looked upon as means of fulfilling the most basic needs of man. Food, clothing, shelter, transportation, insurance, pension plans, education, and other physical maintenance and security factors are made available through the purchasing power provided by monetary income. Thus, performance-based rewards such as merit increases, bonuses, commissions, stock options, etc., are required to motivate employees.

4) Tournament Theory : 
This model was developed by Lazear and Rosen and it focuses on an organisation's hierarchy as an incentive instrument. This model compares life in an organisation to a sporting match, for example, a golf tournament. Each round in the tournament represents a competition for a position at a higher job level. All contestants are ranked based on their performance. The winners will go on to the next round. The advantage of tournaments to an employer is that it is often easier to observe relative performance than absolute performance. Additionally, it may be in the interests of the organisation to structure pay so that the winner makes very large sums as a way of spurting on those lower in the hierarchy as well as giving the CEO himself the incentive to perform well. The ultimate carrot and reward in tournament theory is the possibility of becoming the Chief Executive Officer (CEO). Thus, tournament theory provide one possible explanation for the high compensation of employees and more generally, compensation differential within organisations. It helps organisations to limit costly labour turnover and distinguishing poor from employees.

Wage Policy in India

Wage policies determine the wage structure of the organisation. Being a financial issue, initially it was the concern of management while the Indian government was following a laissez faire policy. But, with the industrial development, wage determination and fixation have become a concern for the employer, employee and the government as well. Aims of wage policy are as follows : 
  1. To bring to an end the mismanagement and unfair practices of wage payment.
  2. To ensure that the unorganized, inefficient or weak workers, who are not in the position of bargaining, get the minimum wages along with the expansion of trade unions as well as collective bargaining.
  3. To ensure that the employees are getting their justified share of profits. 
  4. To ensure that the expenses on utilization of goods is in contrast with accessible materials so that the inflation pressure could be minimized.
  5. To ensure proper utilization of human resources by the way of incentives, bonus, etc.
The issues of wage policy are very important for the workers, management, and the government. The rising prices directly affect upon the living standards of workers; the demand of high wages and improved working conditions create problems for the management but the load of solving the problems related to wage policy rests on the shoulders of the government only.
Indian economy till date has not designed any standardized and complete wage policy for all sectors. Labour exploitation is a serious problem in unorganized sector due to lack of literacy. ineffective bargaining power. Usually Central and State Governments decides the minimum wage in the scheduled employments which falls under Minimum Wages Act, 1948 regardless of any jurisdiction.

Difference Between Salary and Wages

Differences between wages and salaries are as follows :



1) Wages are paid according to the number of hours worked by the employee. In other words, the employee needs to be physically present and working in terms of hours to earn wages.

1) Salary is paid to the employee irrespective of hours worked by him. The amount is fixed and is paid monthly.


2) The recipients of wages are not permanent.

2) Only permanent employees are paid salary.

3) Employees who are paid wages are called non-exempt employees.

3) The other name for salary-based employees is exempt employees.

4) Overtime is paid to wage-based employees.

4) The chances of getting overtime are very less for salary based employees.

5) The amount paid to wage-based employees is deducted if they take leaves.

5) No deduction in salary takes place for salary-based employees or leaves or time-offs.

6) Calculation of wages is done on hourly or daily basis.

6) Annual calculation is done in case of salary.

7) Wage-based workers are not entitled to paid holidays, sick leaves, casual leaves, etc.

7) Salary-based employees enjoy the entitlement to paid holidays, sick leaves, etc.

8) No benefits or perks are given to wage earners.

8) A wide range of benefits, perks, and rewards are received by salary-based employees.

9) A relatively high employee turnover is noticed among-st wage-based employees.

9) The positions which face lesser employee turnover are taken up by salary-based employees.

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