[2]

SUBJECT – H.R.

SUBJECT CODE – 55

UNIT - X

9935977317

0522-4006074

3

Wages

CONTENTS OF UNIT X

1 Concept of Wages

2 Fixation of Wages

3 Theory of Wages and Wage Differentials

4 Labour Market

5 Demand and Supply of Labour

4

Wages

CHAPTER 1

CONCEPT OF WAGES

As a welfare state, India is committed to secure for its working population, social and

economic justice which can be achieved through the formulation of a sound national wage policy in

consonance with the directive Principles of State Policy enunciated in the Constitution India. Article

39, of the Constitution of provides the principle of equal pay for equal work for both men and

women, and Art.43 provides as a directive principle of state policy that the state must endeavour to

secure for all workers a living wage and conditions of work which ensure a decent standard of life

as well as full enjoyment of leisure and social and cultural opportunities.

Wages: It may be defined as the aggregate earnings of an employee for a given period of time such as

a day or a week or a month. Wages are basically the price paid for the services of labour in the

process of production. They are composed of two parts – the basic wage and other allowances. The

allowances include dearness allowance, city compensatory allowance, overtime pay, medical

allowance, etc.

Salary: It is compensation to an employee for services rendered on a weekly, monthly or annual basis.

It is usually associated with office staff, supervisors, researchers, managers, etc, whose performance

can’t be measured directly.

Wages vs. Salary: It is compensation to the employees for services rendered to the organisation. In case the

quantum of services rendered is difficult to measure, then the payment is called salary. Sometimes,

the wage period is shorter than the salary period.

The Concepts of Minimum, Living and Fair Wages

Minimum Wage It may be defined as that wage which is sufficient to-cover the bare physical needs of a

worker and his family. Many people consider that a minimum wage should also provide for other

essential requirements such as a minimum of education, medical facilities and other amenities. Thus,

a reasonable standard of living should be permitted to the worker from the stand-point of his health,

efficiency and well-being. Statutory minimum wage is fixed from this point of view.

Statutory Minimum Wage

This is a wage which has got to be paid to the worker irrespective of the capacity of the

industry to pay. If an industrial organisation is unable to pay to its workers at least a bare minimum, it

has no right to exist.

Fair Wage

It is something more than the minimum wage providing mere necessities. While the

lower limit of the fair wage must obviously be the minimum wages, the upper limit is set by what may

broadly be called the capacity of the industry to pay. Fear wage compares reasonably with the

average payment for similar task in other trades or occupations requiring the same degree of ability.

Living Wage The Most popular definition of the living wage is that of Justice Higgins of the Australian

Commonwealth Court of Conciliation in the Harvester case. He defined the living wage as one

appropriate for “the normal needs of the average employee, regarded as human being in a

civilized community”.

5

Wages

According to the Fair Wage Committee Report, “The living wage should enable the male

earner to provide for himself and his family not merely the bare essentials of food, clothing and

shelter, but also a measure of frugal comfort including education for children, protection against ill

health, requirements of essential social needs and a measure of insurance against the more important

misfortunes including old age.

In short living wage is the target in all developing countries. Fair wage is a step toward living

wage. It is definitely more than the minimum wages, but is usually lower than the living wage. Fair

wage fluctuates between (a) lower limit set by minimum wage, and (b) higher limit determined by

firm’s capacity to pay.

Minimum wage < Fair Wage < Living Wage

Need Based Minimum Wage (Indian Labour Conference, 1957)

In its 15th session held in July, 1957, suggested that the minimum wage fixation should be ‘need

based’, and should ensure the satisfaction of minimum needs of the industrial worker. For calculating

the minimum wage, the Conference accepted the following normal and recommended that they should

guide all wage fixing authorities, including minimum wage committee, wage boards and adjudicators,

etc. of need-based minimum wage. The important points of the Resolution of the Conference are as

under:

(i) In calculating the minimum wage, the standard working class family should be taken to

consist of 3 consumption units for the one earner, and the earnings of women, children and

adolescent should be disregarded.

(ii) Minimum food requirements should be calculated on the basis of a net intake of 2,700

calories, as recommended by Dr. Aykroyed for an average Indian adult of moderate activity.

(iii) The annual requirement of cloth per member should be taken as 18 yards. That means a

family of four members require 72 yards of cloth.

(iv) The workers should get minimum rent as per guidelines fixed by the Government in the

industrial housing policy.

(v) The provision for expenditure on fuel, light, etc. should be 20% of the minimum wage.

Factors Affecting Wages:

The wages to be paid to the different categories of workers depend upon the following factors:

(i) Demand for and Supply of Labour: The primary result of the operation of the law of supply and demand is the creation of the

“going – wage rate”. In general, if anything works to decrease the supply of labour such as

restriction by a particular labour union, there will be a tendency to increase the wage. If

anything works to increase the employer’s demand for labour, there will be a tendency to

increase the wage. The reverse of each situation is likely to result in a decrease in employee

wage, provided other factors, such as those discussed below, do not intervene.

(ii) Ability to Pay: Employer’s ability to pay is an important factor affecting wages not only for the individual

firm, but also for the entire industry. This depends upon the financial position and

profitability of the firm. If the firm is marginal and cannot afford to pay competitive rates, its

employees will generally leave it for better paying jobs in other organisations. But, this

adjustment is neither immediate nor perfect because of problems of labour immobility and

lack of perfect knowledge of alternatives.

(iii) Cost of living: Another important factor affecting the wage is the cost of living adjustment of wages. This

tends to vary money wage depending upon the variations in the cost of living index following

rise or fall in the general price level and consumer price index.

(iv) Productivity of Workers: To achieve the best results from the worker and to motivate him to increase his efficiency,

wages have to be productivity based. There has been a trend towards gearing wage increase

6

Wages

to productivity increases. Productivity is the key factor in the operations of a company. High

wages and low costs are possible only when productivity increases appreciably.

(v) Labour Unions: Organised labour is able to ensure better wages than the unorganised one. Higher wages may

have to be paid by the firm to its workers under the pressure of trade unions. If the trade

unions fall in their attempt to raise the wage and other allowances through collective

bargaining, they resort to strike and other methods whereby the supply of labour is restricted.

(vi) Government: To protect the working class from the exploitation of powerful employers, the Government

has enacted several laws. Laws on minimum wages, hours of work, equal pay for equal work,

payment of dearness and other allowances, payment of bonus, etc, have been enacted and

enforced to bring about a measure of fairness in compensating the working class.

(vii) Prevailing Wage Rates: Wages in a firm are influenced by the general wage level or the wages paid for similar

occupations in the industry, region and the economy as a whole. External alignment of wages

is essential because if wages paid by a firm are lower than those paid by other firms, the firm

will not be able to attract and retain efficient employees.

State Regulation of Wages Wage payments in India are governed by the following legislations:

1. Payment of Wages Act, 1936 and Payment of Wages Act (Amendment), 2005

2. Minimum Wages Act, 1948

3. Payment of Bonus Act, 1965

4. Equal Remuneration Act, 1976

1. Payment of Wages Act, 1936: The Payment of Wages Act, 1936 regulates the payment of wages of certain classes of

employed persons. It was enacted to ensure that employees are not exploited through delayed

wage payments and illegal deductions. It extends to the entire country.

Provisions The following are the main provisions under this Act.

1. Responsibility for Payment of Wages: The employer is responsible for the payment of wages to all employees employed in the

establishment. The Amendment (2005) further clarified that the responsibility of wage payment

of employees could also be delegated to representatives of the employer like the Factory Manager,

person responsible to the employer for the supervision and control of the establishment, person

nominated by the employer in case of railway administration, or person designated by the

contractor as the case may be.

2. Wage Period: The wage period would be fixed by the person responsible for disbursing the wages. Further the

wage period shall not exceed one month.

3. Time of Payment of Wages: The Act specifies that the wages shall be paid:

a. Before the end of the seventh day in case the establishment employed less than 1000 workers.

b. Before the end of the tenth day in other cases

c. Relaxations may be made in the case of docks, wharfs, jetty or mines and in case of payment

to employees whose employment is terminated.

7

Wages

CHAPTER 2

FIXATION OF WAGES

Systems of Wage Payment:

Wage payment is important to employers also as their profit is affected by the total wage bill.

An employer, in general, is interested in paying lower wages. However, low wages are not

necessarily economical. In fact, they may prove to be too costly to the employer. An employer has a

moral and social responsibility to pay fair wages to the workers as they are the partners in the

productive process. He should introduce an incentive wage system which will give benefits to both.

There are two principal systems of wage payments:

(i) Time wage System

(ii) Piece Rate System

Other systems called premium plans or incentive schemes are used with either of these two

systems to remunerate the employees and to provide them incentive wages for increased productivity.

Incentive plans meant for increasing the productivity of the workers:

Time Wage System

Under this system, the worker is paid for the amount of time spent on the job. This is the

oldest and most common system and the wages are based on a certain period of time during the course

of work. The period of time may be an hour, a day, a week, a fortnight or a month and the wage rate

will depend upon the period of time. It must be remembered here that wages are paid after the time

fixed for work is completed irrespective of output or completion of the work. Thus, it is a non-

variable method of wage payment under which wages are paid on the basis of time worked.

Wages can be determined by the following formula:

Wages = Number of Hours worked X Rate per hour

8

Wages

Piece-Wage System

Under this system, the output of work is the basis of wage payment. A worker is paid

according to the amount of work completed or the number of units turned out irrespective of

time taken. The rate of wages is determined as so much per unit of output and is fixed in advance.

Though the time is not of essence in this system, it is assumed that the worker depend upon the speed

of his work and his own skill and efficiency. As against time wage, under this system, wages vary

according to the number of units produced. An efficient worker would earn higher wages as

compared to an inefficient worker.

Wages may be calculated by following the simple formula:

Wages = Number of units produced X Rate per unit

Incentive Wage Plans

“Incentive wages relate earnings to productivity and may use premiums, bonuses or a variety

of rates to compensate for superior performance”. Thus, the incentive plans offer an attraction of

extra payment for efficiency or more production. Incentive wage plans are popular all over the world

and are used extensively for raising productivity. They provide for variable payment based on either

individual output or group output.

Kinds of Incentive Plans

Broadly speaking, the various incentive plans can be classified into two groups:

(a) Individual incentive plans

(b) Group incentive Plans

Individual incentive plans may be either time based or production based. Under time based

incentive plans, a standard time is determined for doing a job. A standard time serves as the basis of

giving bonus to the workers if they meet or exceed the standard. A worker is said to be efficient if he

completes his job in less than the standard time. In order to reward him for his efficiency, he may be

given bonus under an appropriate incentive plan. The important time based incentive plans are:

(i) Halsey Plan

(ii) Rowan Plan

(iii) Emerson Plan

(iv) Bedeaux Plan

Under the production based incentive plans, a standard of output is determined on scientific basis,

and payment of wages is made on the basis of number of units produced by a worker. A higher rate

per unit is paid to the efficient worker. Production based incentive plans include the following:

(i) Taylor’s Differential Piece Rate Plan

(ii) Merrick’s Multiple Piece Rate Plan

(iii) Gantt’s Task and Bonus Wage Plan.

i. Halsey Premium Plan:

It is a simple combination of time and speed bases of payment. Under this plan, a minimum time

wage is guaranteed to every worker. A standard time is fixed for the completion of a job. If a

worker performs his job in less than the standard time, he is given bonus. But there is no penalty

for performing the job in more than the standard time fixed. The slow worker is paid the time

wages and the efficient worker is paid some bonus in addition to the time wages. The bonus is in

proportion of the wages which he could have earned during the time saved.

9

Wages

ii. Rowan Plan:

The Rowan Plan is a modification of the Halsey Plan. It also guarantees the minimum time wages

and does not penalise a slow worker. A standard time is fixed for completion of a job and bonus is

paid to a worker on the basis of time saved. Here, the bonus is that proportion of the wages for the

time taken which the time saved bears to the standard time. Efficiency is thus measured as,

As the time saved increases, time taken will be reduced and as such the bonus would increase at a

diminishing rate. This will check over-speeding and overcome the major drawback of Halsey

Plan.

iii. Emerson’s Efficiency Plan:

In his plan, Emerson suggested guaranteed wage payment to all workers on time rate basis. In

addition, bonus or extra payment was suggested to those who prove to be efficient. For

determining efficiency, standard output per unit of time or standard time for the job is determined.

Efficiency is to be measured on the basis of comparison of actual performance with the standard

fixed. Thus, efficiency is graded properly, and the efficient worker will be rewarded at an

increasing rate with increase in saving of time.

iv. Bedeaux Point Plan:

In this plan, the minute is the time unit described as the standard minute and accounted as

Bedeaux point B. In determining the Bs, the time of operation and the time of rest are taken

into account. Thus, B may be defined as a fraction of a minute of effort plus a fraction of a

compensating rest always aggregating unity. The standard time for each job is fixed after

undertaking time and motion study and expressed in terms of B. The standard time for a job is

the number of Bs allowed to complete it.

The workers who are not able to or just able to complete the work within standard time are

paid at the normal time rate. Those who are able to complete their work earlier are paid bonus

equal to the wages for time saved as indicated by the excess of B points over the actual time

taken.

Taylor’s Differential Piece Rate System

In 1906, F.W. Taylor introduced Differential Piece Rate System under which two different

wage rates are prescribed – higher and lower. The higher piece rate is meant for efficient workers and

the lower for inefficient workers who produce less than the standard quota. Taylor used differential

piece rate plan as an incentive plan which has been discussed later. However, workers prefer straight

piece rate system which does not penalize the inefficient workers.

The advantages of Taylor’s Plan are as under:

(i) Taylor’s plan makes distinction between efficient and inefficient workers. Moreover, it

gives special reward to efficient workers and punishment to those who are inefficient.

(ii) It encourages workers to be efficient because there is no guarantee of minimum wage

payment to workers. In addition, due to different rates, workers try to be efficient in order

to get wage payment at the higher rate.

(iii) It helps in removing inefficient workers from the industrial unit.

(iv) This system of wage payment is popular among efficient workers as they draw more

wages under it.

Taylor’s plan is often criticized by the workers and trade unions on the following grounds:

(i) In Taylor’s plan, there is no guarantee of minimum wage payment to workers.

(ii) It is rather harsh even to workers who are little below the average.

(iii) It treats workers not as human beings but a machines.

10

Wages

Merrick’s Multiple Piece Rate Plan:

This plan, offers three grade piece rates rather than two offered by the Taylor’s plan. The

workers who produce less than 83% of standard output are paid at a basic piece rate. Those producing

from 83% to 100% of the standard output are paid 110% of basic piece rate. Lastly, the workers

producing more than 110% of standard output are paid 120% of basic piece rate. Thus, this system is

an improvement over the Taylor’s plan as it reduces the severity of the Taylor’s plan.

Gantt’s Task and Bonus Wage Plan:

Unlike Taylor’s and Merrick’s plans, minimum time wage is guaranteed to every worker

under Gantt’s task and bonus wage plan. A definite task representing first class performance is fixed

as a standard after careful time and motion studies. If a worker achieves or excels it, he gets extra

wages varying between 25% to 50% of the hourly rate for the time allowed for the task. But if a

worker fails to complete the task within the standard time, he receives only the wages for actual time

spent at the specified rate.

Employee Stock Option

Employee stock ownership plans had their beginning in the U.S.A. around 1910. But in

India, employee Stock Option plans are not popular as the Companies Act did not have any provision

for the constitution of such plans. It was in 1998 that the Government allowed the launching of stock

option plans by the software companies.

Employee stock option plans are basically for the executives. Under stock option plan, the

eligible executives are allotted company’s shares (known as sweat equity) below the market

price. They stand to gain if the performance of the company over the years is good and the market

value of the shares goes up. The companies which offer such a plan are able to attract talented

executives and also hold them over a long time. The executives who are offered shares under the

Employee Stock Option Plan (ESOP) feel committed to the company and work for the growth of the

company. Because of possibility of gains in future, their motivational level is also increased.

Features of Employee Stock Option Plan:

1. Employee stock option plan is voluntary in nature

2. It offers an option to purchase a certain amount of stock or shares in the future at a stated

price or in the present at a price lower than the market price.

3. It is intended to procure and hold talented professional employees.

4. It makes the employee a part-owner of the company where he is working.

5. Mutuality of interest is created between the individual and the company.

6. Stocks are held in trust until employee chooses to withdraw from the plan or leave the

company.

Advantages of Merits of Employee Stock Option: The advantages of employee stock option are as under:

(i) It promotes mutuality of interest between the employees and the employer. The

employee is encouraged to consider the view-point of a shareholder.

(ii) The employees get an opportunity to attend the meetings of the shareholders and have

detailed information about the progress and future plans of the company.

(iii) It promotes thrift, efficiency and security on the part of employees. The employees feel

that they are not merely servants but masters also.

(iv) The management also gains because of better cooperation, lesser supervision, reduced

labour turnover, improved industrial relations, better understanding on the part of

workers, and elimination of waste and enhancement of efficiency.

11

Wages

CHAPTER 3

THEORY OF WAGES AND WAGE DIFFERENTIALS

Wage Theories

Different writers and thinkers have suggested several theories for determination of wages. These

theories are discussed below:

1. Subsistence Theory / Iron Law of Wages :

This theory propounded by the economist in the 18th century was later elaborated by David

Ricardo. Lassale called this theory as the iron law wages. This theory is based on two

assumptions, namely,

i. The law of diminishing return applies to industry.

ii. There is a rapid increase in the population.

The subsistence theory laid down that ‘the workers are paid to enable them to subsist and

perpetuate the race without increase. If the workers were paid more than subsistence wage, their

numbers would increase as they would procreate more; 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.

2. Wages Fund Theory:

This theory was developed by Adam Smith and further expounded by J.S. Mill. The basis

assumption is that wages are paid out of a pre-determined fund of wealth which lay surplus with

wealthy persons- as a result of savings. This fund could be utilized for employing laborers for the

work. If the fund is large, wages would be high; if it is small, wages would be reduced to the

subsistence level. The demand for labour and the wages that could be paid are determined by the

size of the fund.

3. Surplus Value Theory:

This theory was evolved by Karl Marx. According to this theory, the labour is an article of

commerce which could be purchased on the payment of ‘subsistence price’. The price of any

product is determined by the labour time needed for producing it. The labourer is not aid in

proportion to the time spent on work, but much less, and the surplus goes to be utilized for paying

other expenses.

4. Residual Claimant Theory:

12

Wages

It was Francis A. Walker who propounded this theory. According, to him there are four factors

of production, viz., land, labour, capital and entrepreneurship. Wages represent the amount of

value created in the production which remains after payment has been made for all three factors of

production, namely, land, capital and entrepreneur. In other words, labour is residual claimant.

The wages are equal to the whole production minus rent, interest, and profit.

5. Marginal Productivity Theory:

This theory was developed by Phillips Henry Wicksteed (England) and John Bates Clark

(USA). 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. In other words, it assumes that

wages depend upon the demand for, and supply of labour. Consequently, workers are paid

what they are economically worth.

According to this theory, wages are determined by the marginal productivity of labour. A firm

may gainfully employ more labour until the marginal productivity is equal to the wages paid.

6. Bargaining Theory:

John Davidson Propounded this theory. Under this theory, wages are determined by the relative

bargaining power of workers or their union 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 employers and the trade union.

7. Behavioural Theory:

It has been found that the wages are determined by such factors as: size and prestige of the

company, strength of the union, the employer’s concern to maintain the workers, contribution

by different kinds of workers, etc.

Wage differentials are explained by social norms, traditions, customs prevalent in the

organization, psychological pressures on the management, prestige attached to certain jobs in

terms of social status, need to maintain internal consistency in wages at the higher levels, the

wages paid for similar jobs in other form’s etc.

13

Wages

CHAPTER – 4

LABOUR MARKET

Meaning of Labour Market: The term ‘Labour Market’ can be defined in different ways depending upon the aspects,

problems etc. pertaining to labour. The services of human labour are bought and sold in a labour

market. Workers sell their services to their employers or to the entrepreneurs in order to each their

livelihood. Workers can called wage earners as they receive wages as the reward for their labour

services used in the productive process. Their wage rates are determined in a labour market. From

this point of view, a labour market can be defined as the market for hiring and supplying labour to

perform certain jobs at a wage rate. Purely from the theoretical point to view a labour market can be

defined as a process by which supplies of a particular type of labour and demands for that type of

labour balance or seek to obtain a balance. This definition implies that a labour market is a process

for sorting out workers with varying skills among the multitude of different jobs in an economy.

It includes both physical and mental work undertaken for some monetary reward. In this way,

workers working in factories, services of doctors, advocates, ministers, officers and teachers are all

included in labour.

Any physical or mental work which is not undertaken for getting income, but simply to attain

pleasure or happiness, is not labour.

According to S.E. Thomas, “Labour connotes all human efforts of body or mind which are

undertaken in the expectation of reward.”

Characteristics of Labour: It includes both physical and mental work undertaken for some monetary reward. In this way,

workers working in factories, services of doctors, advocates, ministers, officers and teachers are all

included in labour.

Any physical or mental work which is not undertaken for getting income, but simply to attain

pleasure or happiness, is not labour.

Labour has the following peculiarities which are explained as under:

1. Labour is Perishable:

Labour is more perishable than other factors of production. It means labour cannot be stored. The

labour of an unemployed worker is lost forever for that day when he does not work. Labour can

neither be postponed nor accumulated for the next day. It will perish. Once time is lost, it is lost

forever.

2. Labour cannot be separated from the Labourer:

Land and capital can be separated from their owner, but labour cannot he separated from a

labourer. Labour and labourer are indispensable for each other. For example, it is not possible to

bring the ability of a teacher to teach in the school, leaving the teacher at home. The labour of a

teacher can work only if he himself is present in the class. Therefore, labour and labourer cannot

be separated from each other.

3. Less Mobility of Labour:

14

Wages

As compared to capital and other goods, labour is less mobile. Capital can be easily transported

from one place to other, but labour cannot be transported easily from its present place to other

places. A labourer is not ready to go too far off places leaving his native place. Therefore, labour

has less mobility.

4. Weak Bargaining Power of Labour:

The ability of the buyer to purchase goods at the lowest price and the ability of the seller to sell

his goods at the highest possible price is called the bargaining power. A labourer sells his labour

for wages and an employer purchases labour by paying wages. Labourers have a very weak

bargaining power, because their labour cannot be stored and they are poor, ignorant and less

organised.

Moreover, labour as a class does not have reserves to fall back upon when either there is no work

or the wage rate is so low that it is not worth working. Poor labourers have to work for their

subsistence. Therefore, the labourers have a weak bargaining power as compared to the

employers.

5. Inelastic Supply of labour:

The supply of labour is inelastic in a country at a particular time. It means their supply can neither

be increased nor decreased if the need demands so. For example, if a country has a scarcity of a

particular type of workers, their supply cannot be increased within a day, month or year.

Labourers cannot be ‘made to order’ like other goods.

The supply of labour can be increased to a limited extent by importing labour from other countries

in the short period. The supply of labour depends upon the size of population. Population cannot

be increased or decreased quickly. Therefore, the supply of labour is inelastic to a great extent. It

cannot be increased or decreased immediately.

6. Labourer is a Human being and not a Machine:

Every labourer has his own tastes, habits and feelings. Therefore, labourers cannot be made to

work like machines. Labourers cannot work round the clock like machines. After continuous

work for a few hours, leisure is essential for them.

7. A Labourer sells his Labour and not Himself:

A labourer sells his labour for wages and not himself. ‘The worker sells work but he himself

remains his own property’. For example, when we purchase an animal, we become owners of the

services as well as the body of that animal. But we cannot become the owner of a labourer in this

sense.

8. Increase in Wages may reduce the Supply of Labour:

The supply of goods increases, when their prices increase, but the supply of labourers decreases,

when their wages are increased. For example, when wages are low, all men, women and children

in a labourer’s family have to work to earn their livelihood. But when wage rates are increased,

the labourer may work alone and his wife and children may stop working. In this way, the

increase in wage rates decreases the supply of labourers. Labourers also work for less hours when

they are paid more and hence again their supply decreases.

9. Labour is both the Beginning and the End of Production:

The presence of land and capital alone cannot make production. Production can be started only

with the help of labour. It means labour is the beginning of production. Goods are produced to

satisfy human wants. When we consume them, production comes to an end. Therefore, labour is

both the beginning and the end of production.

15

Wages

10. Differences in the Efficiency of Labour:

Labourer differs in efficiency. Some labourers are more efficient due to their ability, training and

skill, whereas others are less efficient on account of their illiteracy, ignorance, etc.

11. Indirect Demand for Labour:

The consumer goods like bread, vegetables, fruit, milk, etc. have direct demand as they satisfy our

wants directly. But the demand for labourers is not direct, it is indirect. They are demanded so as

to produce other goods, which satisfy our wants. So the demand for labourers depends upon the

demand for goods which they help to produce. Therefore, the demand for labourers arises because

of their productive capacity to produce other goods.

12. Difficult to find out the Cost of Production of Labour:

We can easily calculate the cost of production of a machine. But it is not easy to calculate the cost

of production of a labourer i.e., of an advocate, teacher, doctor, etc. If a person becomes an

engineer at the age of twenty, it is difficult to find out the total cost on his education, food,

clothes, etc. Therefore, it is difficult to calculate the cost of production of a labourer.

13. Labour creates Capital:

Capital, which is considered as a separate factor of production is, in fact, the result of the reward

for labour. Labour earns wealth by way of production. We know that capital is that portion of

wealth which is used to earn income. Therefore, capital is formulated and accumulated by labour.

It is evident that labour is more important in the process of production than capital because capital

is the result of the working of labour.

14. Labour is an Active Factor of Production:

Land and capital are considered as the passive factors of production, because they alone cannot

start the production process. Production from land and capital starts only when a man makes

efforts. Production begins with the active participation of man. Therefore, labour is an active

factor of production.

The different Characteristics of labour markets are as follows:

1. A commodity market refers to a physical place where buyers and sellers of a particular

commodity gather for engaging in transactions while a labour market is viewed as a process

by which supplies of a particular type of labour and demands for that type of labour are

balanced, is an abstraction.

2. Secondly, unlike a commodity market, the relationship between a seller and a buyer in a

labour market is not temporary and as such personal factors, which can be ignored in a

commodity market, become important in a labour market.

3. Thirdly, unlike a commodity market, in a labour market there is a lack of perfect mobility

which gives rise to a diversity of wage rates for the same type of work and we do not find a

normal wage rate to which the market rate naturally tends. In other words, labour market is

essentially an imperfect market.

4. Fourthly, wage fixing is an essential characteristic of the labour market, where (in the absence

of unions) the buyer of labour normally sets the price but in the commodity market, it is

normally the seller who sets the price.

16

Wages

In labour market the price that is set tends to be fixed for some length of time. Employers do

not want wage rates to fluctuate with every change in demand and supply conditions.

5. Fifthly, the labour market is far more complex than the commodity market. It makes little

difference whether a potato is sold in Calcutta or in Bombay to the seller.

But this is not true of a human being. Whatever is the occupation or monetary reward of a

person, each individual feels that he is entitled to a decent treatment and that the dignity of his

person must be respected.

6. The sixth essential characteristic of the labour market of an expanding economy is that the

vast majority of individuals are employees while relatively small minorities function either as

employing persons or as employed managers of employing units. As the vast majorities are

labours, they are interested in short-run wage-levels, working hours and working conditions.

As a result of industrialisation the average employing unit has become larger in size, its

bargaining power has expanded while at the same time, the bargaining power of the

individual worker has shrinked and become almost meaningless for all practical purposes.

Therefore, the individual worker loses control over the determination of factors quite basic to

him, such as wages, his working hours etc. Thus, industrialisation is producing divergent

trends in the bargaining power of buyers and sellers within the labour markets.

7. Lastly, another development within the labour markets, in part attributable to

industrialisation, has been what Prof. Kerr has termed as ‘Balkanisation’ (i.e., degree of

isolation) of the markets. It refers to the development of institutional rules within the labour

markets.

Institutional rules such as the membership and seniority rules of labour unions etc., tend to

have certain indeterminate effects upon labour markets, such as the slowing down of labour

mobility and the strengthening of the barriers between the non-competing groups in the labour

markets.

The overall effect of ‘balkanisation’ is to contribute to the growing imperfections of

competition within labour markets.

It should be noted that the labour market seems to perform more adequately during periods of

full employment than during periods of depression.

This is so because in periods of full employment more jobs are open than it is during the

periods of widespread unemployment. This provides an explanation for the narrowing of wage

differentials during periods of full employment.

Recent empirical studies undertaken in the USA indicate that in the absence of collective

bargaining, employers will continue indefinitely to pay diverse rates for the same grade of labour in

the same locality under strictly comparable conditions.

Thus, the labour market is not characterised by a norm of perfect competition. There is no

wage which will regularise the market.

17

Wages

The labour market is characterised by stability and lack of fluidity and diversity of rates for

similar jobs. A rise in the price of labour offered by a particular employer does not cause employees

of other firms receiving fewer wages to leave their jobs and go to high wage employer.

We have noted that a labour market may be viewed as definite geographic area. But it is not

easy to define the boundaries of labour markets.

The labour market for some workers is national in scope (even international) while mobility

of some workers is highly restricted. The extent of a market depends in part upon the worker’s

education and skill.

Highly trained professionals like engineers and doctors are likely to find suitable employment

in many different localities. Such workers are likely to move to another job which pays better.

Workers without specialised skill clerks, unskilled workers, etc. find it difficult to get

employment in various areas. The boundaries of their labour markets are likely to be restricted to

home area.

Age is also an important factor in the mobility of labour. In general, young workers tend to be

more mobile than their older counterparts in the labour force.

Important Classification of Labour Market suggested by Clark Ker is

explained below:

1. The perfect market

This kind of market is made up of a large number of relatively small and undifferentiated

buyers and sellers.

There is a complete freedom of entry and exit, complete knowledge and complete mobility of

all resources within the market area. Under such circumstances, the single price prevails and

the market is regularised.

2. The neo-classical market The neo-classical market recognises the existence of ‘imperfections.’ The supply of skilled

workers cannot be expanded suddenly because it takes time for a worker to acquire skill. In spite

of the imperfections, it is assumed that wages will tend towards equality for workers in a given

skill classification.

3. The natural market

In the natural market, the typical worker has a very limited knowledge of the market as a whole

and unless he is unemployed or just entering the labour force, he is not ‘actively in the market.’

The workers’ knowledge of the labour market may be limited to his own office jobs about which

he has general information.

Workers do not regularly weigh the advantages of the jobs they hold against other alternatives.

They also do not grudge against the employers not constantly hiring and firing workers in an

effort to find the greatest bargains in the labour market.

4. The institutional market

The institutional market is one in which the policies of unions, employers and the government

have more to do with wage movements than free competitive forces. Indeed, the objective of

policies developed by all three unions, employers and the government is to limit the free operation

of the forces of demand and supply.

Institutional policies, rather than the market, set the upper and lower limits of wages and these

clearly reduce the mobility of labour. Uniform wages are often found for a given grade of workers

18

Wages

in the institutions markets but this is because of the influence of institutions and not a result of the

interaction of demand and supply.

5. The management market

The management market, like the perfect market, does not exist in the real world. The

objective of management market would be to tie the wage setting and labour movement more

closely together than they are in the natural market. This would proceed along with the

imposition of state controls on wage setting and on allocation of labour.

The long run trend in India has been towards the institutional labour^ market where the

influence of demand and supply is considerably curtailed by policies of unions, employers

and the government.

19

Wages

CHAPTER - 5

DEMAND AND SUPPLY OF LABOUR

Demand for labour

The demand for labour is a derived demand. It means that the demand for labour is linked

with the products or services they produce. If the demand for those commodities rises the demand for

labour also rises.

Economic theory suggests demand for labour depends on the marginal revenue product of a

worker.

Marginal Revenue Product of Labour (MRP) This is the extra revenue a firm gains from employing an extra worker. It depends on a

workers’ productivity (PPP) and the Marginal Revenue (MR) of last good sold.

Marginal Physical Product (MPP) This is the extra output that an extra worker produces.

Due to the law of diminishing returns, in the short run, there is usually a diminishing marginal

product when increasing the number of workers.

Marginal Revenue (MR) This is the revenue that a firm gains from selling the last unit of output. It is closely related to

the price of the good sold.

Therefore the Demand for Labour depends upon

1. The productivity of labour (MPP)

2. The demand for the good – which determines the price and Marginal Revenue of last good

sold.

3. The wage rate, strictly this is the MC

Wage Determination in Competitive Labour Markets

The industry wage is determined by supply and demand.

An individual firm in a perfectly competitive labour market is a wage taker. Therefore, its

supply curve is elastic.

20

Wages

The firm maximises profits where MRP of workers equals the Marginal cost of employing

them.

Factors affecting the demand for labour 1) Derived demand

The demand for labour is always derived from the demand for the good or service it produces.

Thus if the demand for a particular goods or service increase it will lead to a rise in demand for

labour used to produce those commodities. Recently there has been an increased demand for

software professionals due to the increased demand for IT products.

2) Wage rates

A fall in wages will cause an extension in the demand for labour while a rise in wages paid to

works will cause a contraction in demand.

3) Technology used

In industries where there is improved technology can be used, the demand for labour will tend to

fall as producers will replace labour with sophisticated machinery.

Supply of Labour Higher wages usually will encourage a worker to supply more labour because work is more attractive

compared to leisure. Supply of labour increases with the rise in wage rate. The supply curve of labour

normally slopes upward to the right.

Therefore the Supply curve for Labour tends to be upwardly sloping because of following factors:

1) Substitution effect of a rise in wages:

Workers will tend to substitute income for leisure as leisure now has a higher opportunity cost.

This effect leads to more hours being worked as wages rise

2) Income effect of a rise in wages:

This occurs when an increase in wages causes workers to work fewer hours.

This is because workers can get a higher income by working fewer hours. Therefore they may

work less.