Wage Policy: Meaning, Concepts, Objectives, Considerations and Factors

Everything you need to know about wage policy. The term “Wage Policy” refers to legislation of government action undertaken to regulate the level or structure of wages or both for the purpose of achieving specific objectives of social and economic policy.

The social and economic aspects of wage policy are normally inter-related measure inspired by special considerations; inevitably have economic effects and action designed to achieve specific economic result has social implications.

The wage policy of any country should be sound and rational from economic and social point of view.

A sound wage policy maintains industrial peace, satisfies both the employers and the workers, increases the output of the firm and efficiency of workers, reduces costs and maximizes profits.

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Even from the economic point of view, an unsound wage policy is condemned because it will affect the efficiency of the workers.

Learn about:- 1. Meaning of Wage Policy 2. Concepts of Wage Policy 3. Objectives 4. Considerations 5. Factors Influencing 6. National Commission on Labour 7. Limitations.

Wage Policy: Meaning, Concepts, Objectives, Considerations, Factors Influencing and Limitations

Contents:

Meaning of Wage Policy
Concepts of Wage Policy
Objectives of Wage Policy
Considerations in Wage Policy
Factors Influencing Wage Policy
National Commission on Labour on Wage Policy
Limitations of Wage Policy

Wage Policy – Meaning

The term “Wage Policy” refers to legislation of government action undertaken to regulate the level or structure of wages or both for the purpose of achieving specific objectives of social and economic policy. The social and economic aspects of wage policy are normally inter-related measure inspired by special considerations; inevitably have economic effects and action designed to achieve specific economic result has social implications.

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Principles which act as guidelines to determine a wage structure are called as wage policies. In the beginning as an economic issue it was primarily the concern of the employer while state was adopting laissez faire policy. But, with the industrial progress and subsequent industrial balance between employers, employees, wage bargain has become a matter for three folds concern of the employer, employee and the state.

The pressures of rising prices have encroached on the living standards of employees; the demand for higher wages and better working conditions create prices, market and production problems for the management; and the final burden of finding a solution to the problems of wage policy ultimately falls on the government.

Some rational wage policy has to be woven into the socio-economic texture that reflects the objectives and aspirations of the people of a particular country. It cannot be dealt with on purely economic considerations in isolation from the social policy and political culture of that particular community.

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Although an organisation can take some guidelines from the public policy, while formulating its wage policy and subsequent strategy, an organisation has to take care of a number of factors such as ongoing rates of wages in the market, its ability to pay, internal and external relativities, controlling of labour costs, motivation of workers and rate of productivity.

In this regard, the major factors that may affect the wage policy of an organisation and which need to be paid due attention at the time of formulation of organisational wage policy are as follows –

1. Internal equity

2. External equity

3. Productivity

4. Cost of living

5. Motivation level of workers

6. Pay vis-a-vis performance

7. National wage policy

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8. Statutory obligations

9. Labour market conditions

10. Present rate of attrition of employees.

Obviously, the wage policy may differ from one organisation to another depending on the status and context of the organisation concerned.

Wage Policy – 3 Main Concepts: Minimum Wages, Fair Wages and Living Wages

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The wage policy of any country should be sound and rational from economic and social point of view. A sound wage policy maintains industrial peace, satisfies both the employers and the workers, increases the output of the firm and efficiency of workers, reduces costs and maximizes profits.

An unsound or irrational wage policy is always condemned from social and humanitarian point of view. Such a policy leads to the negation of the basic principles of social justice to the working community. Even from the economic point of view, an unsound wage policy is condemned because it will affect the efficiency of the workers.

So it becomes necessary to pay the workers that amount of wages which is considered to be ideal, fair or reasonable. Different concepts of wages have been put forth for the purpose of framing a sound wage policy.

These concepts of wages have been briefly explained below:

Concept # 1. Minimum Wages:

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It is commonly accepted that workers should be give atleast minimum wages to enable them to lead a minimum standard of living. Then a question arises – What is a minimum wage? It is however difficult to define “minimum wage’’. However, it may be defined as a wage which is just sufficient for the worker to keep his body and soul together.

The committee on fair wages defined the minimum wage as irreducible (minimum) amount considered necessary for the sustenance of the worker and his family and for the preservation of his efficiency at work. The Fair Wages Committee considered that “a minimum wage must provide not merely for the bare subsistence of life but for the preservation of efficiency of the worker. For this purpose, the minimum wage must also provide for some measure of education, medical requirements and amenities”.

Such a minimum wage may be fixed by an agreement between the employer and the workers but it is generally determined by legislation.

The workers generally demand that the minimum wage should be based on the standard of living but the employers argue that it should be based on the productivity of labour and the capacity of the industry to pay. But it should be noted that while fixing the minimum wage, the worker’s family should also be taken into account.

The wage should be sufficient not only to maintain himself but also his family in a reasonable standard of living. Then a question arises – What is the size of the worker’s family? It is now generally accepted that a worker’s family consists of five person – the worker and his wife and three children. The minimum wage must be fixed in such a way that it is sufficient to provide a reasonable standard of living to the worker and his family.

Thus, while fixing the minimum wage, three principles should be taken into account – the living wage, the fair wage and the capacity of the industry to pay. While fixing the minimum wage, the capacity of the industry should be taken into account. If particular industry is not able to pay the minimum wages to its workers, then it has no right to exist in the business.

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The objectives of a minimum wage are as follows:

1. To prevent the sweating of workers in organised or unorganised industries.

2. To prevent the exploitation of workers and to enable them to obtain wages according to their productive capacity.

3. To maintain industrial peace.

In the organised industries where the trade unions are powerful, the employers generally yield to the demands of the workers for fixing a proper wage. But in the unorganised industries where the trade unions are not found, the government interference and legislation become essential to ensure that the labour is not exploited and is paid atleast the minimum wage.

Concept # 2. Fair Wages:

Fair wage is another important concept used in a wage policy. There are no two opinions for the payment of wages which are considered as “fair”. But it is very difficult to define and determine what a fair wage is. The encyclopaedia of Social Science describes a fair wage as “one equal to that received by workers performing work of equal skill. Difficulty or unpleasantness”.

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According to Pigou, there are two degrees of fairness for deciding fair wage. In a narrow sense. Trade and in the neighbourhood for similar work. In a broader sense, a wage is fair if it is equal to the predominant rate for similar work throughout the country and in the generality of trades.

Thus, a fair wage is one which can be fixed only by comparison with an accepted standard of wages. Such a standard can be determined in relation to those industries where. Such a standard can be determined in relation to those industries where labour is well organised and is able to bargain well with employers.

According to the minimum Wages Fixing Machinery of the I.L.O., regard should be primarily given to the rates of wages being paid for similar work in trades where the workers are adequately organised and have concluded effective, collective agreements, or if no such standard of reference is available in the circumstances, to the general level of wages prevailing in the country or in the particular locality.

Wages tend to be unfair in the following circumstances:

1. Where the supply of labour in relation to demand is abundant and it is immobile.

2. Where the workers are ignorant of the rates prevailing in other trades or areas or where they are not so well organised.

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3. Where the employers in a particular locality have entered into an agreement to the effect that they should not compete among themselves for labour.

Therefore the removal of these causes is essential, if fair wages are to be established.

Concept # 3. Living Wages:

Living wage is a step higher than fair wage. It may be defined as the wage that would enable the worker to provide a measure of comfort for himself and his family, in addition to the essentials of life. The concept of living wage was first defined by Justice Higgins of the Australian Commonwealth Court of Conciliation in 1907.

He defined the living wage as “one appropriate for the normal needs of the average employee regarded as human being living in a civilized community. He further pointed out that living wage should be sufficient not merely to provide bare necessities of life but also a condition of frugal comfort estimated by current human standards.”

He further held that, “treating marriage as the usual fate of adult man, a wage, which does not allow of the matrimonial condition and the maintenance of about five persons in a home would not be treated as a living wage”.

The committee on Fair Wages laid down that the living wage should enable the male earner to provide for himself and his family not merely the basic essentials of food. Clothing and shelter but a measure of frugal comfort. The items included in the frugal comfort are such as provision of education to the children. Protection against ill- health, requirements of essential social needs and a measure of insurance against the more important misfortunes like the old age.

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Thus, from the above discussion it is clear that a living wage is a wage – (1) which should provide absolute essential needs like food, clothing and shelter, (2) which should be sufficient for the worker and his family to live in a frugal comfort; (3) which should provide an insurance against future risks, and (4) which should be according to the special skill of the worker, if any.

Now-a-days, the concept of living wage has been widely accepted. If there is any difference of opinion, it is regarding the details of its calculation and not regarding the concept.

Wage Policy – 2 Main Objectives: Economic Objectives and Social Objectives

The main objectives of wage policy are as under:

1. Economic Objectives:

An important objective of an effective wage policy is to achieve maximum economic welfare.

This requires:

(i) Maximised National Income.

(ii) The national income should be divided equally among all the members of the economy.

(iii) There should be a fair amount of stability in the national income.

In general, economic welfare will be maximised in case the highest and most stable standard of living possible for each section of the community is attained.

To secure this, the following must be achieved:

(i) Maximum income security for all sections of the community. The major objectives of wage policy must be priority to attain these conditions.

(ii) Full employment.

(iii) Optimum allocation of all resources.

(iv) The highest degree of economic stability consistent with an optimum rate of economic progress.

2. Social Objectives:

Both the social and economic objectives have close inter-relation. Measures inspired by social considerations inevitably have economic effects, and those designed for the achievement of specific economic results have social implications.

For example, the raising of wages through fixing a statutory minimum wage will normally affect production and employment in the organisation; and if organisations take measures to keep costs of production at a competitive level, it may frustrate the aspirations of the employees.

A wage policy must be instrumental in achievement of the following:

(i) Elimination of exceptionally low wages.

(ii) Establishment of fair labour standards.

(iii) Protection of wage earners from the effects of rising prices.

(iv) Incentive for workers to improve their productive performance.

Wage Policy – Key Considerations

The key to considerations in public policy concerning wages/salaries may be identified as under:

1. End of Exploitation – To end exploitation and provide remuneration to capital and labour such that “while in the interests of the consumers and the primary producers excessive profits should be prevented by suitable measures of taxation and otherwise, both will share the product of their common effort after making provision for payment of fair wages to labour, a fair return on capital employed in the industry and reasonable reserves for the maintenance and expansion of the undertaking” (Industrial Policy Resolution, 1948).

2. Differentials – To provide for wage differentials.

3. Regulation of Wages – To regulate wages and salaries to eliminate/reduce undue disparities.

4. Linking – To link remuneration to productivity.

5. Compensation – To compensate for increasing in cost of living.

6. Fixation of Minimum Wages – To fix a statutory minimum wages in selected industries and promote fair wage agreements in the organised industries (Industrial Policy Resolution, 1948).

7. Equality – To ensure equal pay for equal work (Constitution of India).

8. Determination – To determine fair wages over and above minimum wages with due regard to-

(i) The productivity of labour.

(ii) The prevailing level of wages.

(iii) The level of national income and distribution.

(iv) The place of industry in the economy of the country.

9. Capacity to Pay – However, the Supreme Court ruled that ‘an employer who cannot pay minimum wages has no right to exist’. The capacity to pay becomes a subject of consideration to determine fair wages over and above the minimum wages.

10. Basic Needs – The basic needs of labour.

11. Living Wages – To secure a living wage for workers.

Wage Policy – Factors Influencing Sound Wage Policy: Demand and Supply, Prevailing Wage Rates, Ability to Pay, Productivity, Cost of Living, State Regulation & a Few Others

Important factors to be taken into account while determining a sound wage policy are as follows:

1. Demand for and supply of labour

2. Prevailing wage rates

3. Ability to pay

4. Productivity

5. Cost of living

6. State regulation

7. Job requirements

8. Trade unions

Factor # 1. Demand and Supply:

If the supply of labour is abundant, workers will be ready to work for lower wages. But if the supply of labour is scarce, workers will demand higher wages.

Factor # 2. Prevailing Wage Rates:

Wages paid by one firm generally depend upon the wages paid by other competing firms or by other firms in the same locality or by the industry as a whole for the same type of work.

Factor # 3. Ability to Pay:

The wage level of the organisation largely depends upon the ability of the firm to pay to its workers. The ability to pay, in its turn, depends upon the amount of profits earned by the organisation. Therefore, wages will be generally raised as the firm’s net profitability increases.

If the firm’s earnings increase beyond reasonable level of return on the capital employed, workers claim that they are entitled to participate in the surplus profit. However, it becomes necessary first to determine precisely the fair amount of profit.

Factor # 4. Productivity:

It is argued that wages should be commensurate with the productivity of the workers. Therefore, the higher the productivity, the higher will be the wage level to be paid to the workers.

Factor # 5. Cost of Living:

Wages should depend upon the cost of living. Changes in cost of living therefore lead to changes in the wage-rates. It is therefore desirable to increase wage-levels whenever the cost of living rises. What is important is not the money wage but the real wage which actually satisfies the needs of the workers. Hence money wages should be adjusted to maintain the real wages intact.

Factor # 6. State Regulation:

Since workers’ bargaining power is weak, the State steps in to protect their interest by regulating their wage-rates. The State, by enacting necessary legislation, guarantees minimum or fair wages to workers so as to enable them to lead a decent standard of living.

Factor # 7. Job Requirements:

Jobs differ in their responsibility and authority. Generally jobs requiring higher authority and responsibility are paid higher wages. Similarly, jobs which require highly skilled workers are also highly paid. Again, jobs which are very risky and dangerous (e.g. pilots) are also highly paid.

Factor # 8. Trade Unions:

Workers who are well organised into trade unions are able to get higher wage-rates whereas those who have not formed such unions are not able to get higher wage-rates.

Other Factors:

Wage-rates also depend upon such factors as market conditions, prevalence of competition in the market, bargaining power of workers and such other conditions.

Wage Policy – National Commission on Labour on Wage Policy

According to the NCL, “The main aim of a wage policy, as we envisage it, is to bring wages into conformity with the expectation of the working class and in the process seek to maximum wage employment”.

To achieve this, the NCL’s following observations may be noted:

(a) Wage policy should aim at the progressive increase in real wages. Sustained improvement in real wages can be brought about by increasing productivity.

(b) The wage levels will have to recognize that in India modern capital-intensive, large-scale sector exists side-by-side with the small and traditional labour-intensive sector.

(c) ‘Wage policy’ should therefore foster an appropriate choice of techniques so as to maximize employment at rising levels of productivity and wages.

(d) The incomes and wage policy that may be formulated has to take into account the structural feature of the national economy.

(e) In the unorganized sector adequate governmental or quasi-governmental machinery may be necessary to provide for minimum wage regulation according to conditions in different workers in weak position.

(f) In order to protect real wage from erosion the level of money wages has to be adjusted to price changes.

Objectives of National Wage Policy:

The importance are of wage policy is obvious as it forms a highly sensitive and complex dimension of labour policy and influences employee’s level of motivation, morale, productivity and standard of living. Its importance has been recognized by the Constitution of India. The provisions in the Indian constitution and the policy statements in successive five-year plan documents provide useful insights into the Government’s approach towards wage policy.

The second National Commission on labour recommended the appointment of a high-level committee with technically competent people including economists, trade unionists, entrepreneurs and consumers to formulate a national wage policy.

Despite several theoretical guidelines for the formulation of a wage policy, there are various concrete facts that must be taken into account in designing a wage policy. Accordingly, in view of the realities of the situation, there are several hurdles in the formulation of a wage policy in a developing economy like India’s which adheres in a democratic system. Ideally, wage revision should be higher than the rate of growth in gross domestic product (GDP) and lower than the rate of inflation. This ensures that real wages are maintained.

The term “Wage Policy” refers to the legislation or Government action undertaken to regulate the level or structure of wages or both, for the purpose of achieving specific objectives of social and economic policy. According to ILO, the wage policy means “legislation or government action calculated to affect the level or structure of wages, or both for the purpose of attaining specific objectives of social and economic policy”.

The ILO has enumerated the following objectives of a wage policy in developing countries:

a. To abolish malpractices and abuses in wage payment.

b. To set minimum wages for workers whose bargaining power is weak because they are unorganized or inefficiently organized, accompanied by separate measures to promote the growth of trade unions and collective bargaining.

c. To obtain for the workers adjust share in the fruits of economic development, supplemented by appropriate measures to keep workers’ expenditure on consumption goods in step with available supplies so as to minimize inflationary pressure.

d. To bring about a more efficient allocation and utilization of manpower through wage differentials and, where appropriate, systems of payment by results.

In India, the objectives of a national wage policy may be stated thus:

a. To provide a minimum wages to workers employed in sweated industries.

b. To improve the existing wage-structure.

c. To fix wage ceilings.

d. To accelerate export promotion.

e. To control inflationary tendencies.

f. Other objectives.

a. Provision of Minimum Wages in Sweated Industries:

In a country like India, where in sweated industries employers exploit laborers, the basic need is to provide for “safety net” – wages to prevent their exploitation. According to Turnover, “the protection of workers against exploitation or unduly low wages remains the wage policy’s major pre-occupation in under-developed areas”.

The fixing of a minimum wage is also necessary to boost industrial employment, partly to smooth the flow of labor from the farm to expanding modem industries; and partly to cover the differentials in wage rates so that wages paid to employees doing identical work are rationalized. The wage policy should therefore aim at a minimum wage in sweated occupations as well as a floor for entry to industrial employment.

b. Improvement in Existing Wage Structure:

A rational wage structure facilitates the acquisition of productive skills, serves as an incentive to higher productivity and wage income, and encourages the allocation of labor to the expanding sectors of the economy in which labor is in great demand. Justice and fairness demand that a sound relationship should exists between rates of pay for different groups in similar occupations.

The jobs that are hazardous or demand a higher degree of skill, training, experience, responsibility, mental and physical effort should be paid more than the others. According to Clark Kerr, “Improving worker efficiency and performance, encouraging the acquisition of skills and providing an incentive for labor mobility should be the real purpose of a wage policy in a developing economy”.

c. Fixation of Wage Ceilings:

Ceilings on wages need to be fixed to save employees from the pinch of the inflationary tendencies that flow from uncontrolled price rise. The workers should get a just share in the fruits of economic development and increased productivity. Productivity and efficiency can be boosted by giving incentives to them and by improving the investment capacity of industries, which can be done when they plough back a part of the profits in the industry.

d. Acceleration or Export Promotion:

To get imports of essential capital goods, technical know-how, trained manpower and raw materials, foreign exchange has to be earned by promoting exports through increased productivity of exportable goods and price stability or price reduction, wherever possible. A wage policy should help to accelerate a nation’s developmental process.

e. Control over Inflationary Tendencies:

Controlling inflationary pressures should be an essential element of wage policy, for increasing prices erode workers’ real income, lower their standard of living, and ultimately cause industrial unrest. A wage policy should, therefore, aim at stabilizing prices by tying wage increases to productivity.

Other Objectives:

Other objectives of a wage structure are:

i. To bring social justice to workers and equal opportunities of personal development-through the development of the socialistic pattern of society as laid down in Directive Principles of State Policy in the Constitution.

ii. To maintain industrial peace, which cannot be achieved only through statutory measures and ban on strikes and lock-outs and compulsory arbitration.

iii. To provide guidance to various authorities charged with the task of wage fixation and revision.

iv. To develop the skill of newly-recruited industrial labor and other manpower resources.

v. Giri has said-

A national wage policy must aim at establishing wages “at the highest possible level, which the economic conditions of the country permit, and it also ensures that the wage-earner gets a fair share of the increased prosperity of the country as a whole resulting from economic development.”

Thus, we may say that- “The protection of workers against exploitation or unduly low wages, improving their efficiency and performance, encouraging acquisition of skills, providing an incentive to labor- mobility, stabilizing prices and acceleration of the nation’s development process should be the real purpose of a national wage policy.”

Wage Policy – 8 Major Limitations: Enforcement, Rise in Prices, Wages versus Productivity, Imbalanced Labour, Less Skilled Labour and a Few Others

The limitations of wage policy are as under:

1. Enforcement – Enforcement in unorganised sector.

2. Rise in Prices – Prices rising is almost beyond government’s regulatory capabilities.

3. Wages versus Productivity – Wages lag far behind from the labour productivity.

4. Imbalanced Labour – Lesser number of workers in organised sector takes away bulk of wages than unorganised.

5. Less Skilled Labour – Ever increasing addition to workforce yet death of skilled labour.

6. Shifting of Methods – High wages may force employer to shift towards capital-intensive methods.

7. Reduction in Capital – High wages brings a reduction in the capital for growth.

8. Increased Consumption – The nature of wage incomes are consumption-oriented rather than savings-oriented so increased wages would mean increased consumption. Therefore, economic growth may not be affected directly as it depends upon rate of investment possible with the medium of savings.