Wage & Salary Administration It presents the analytical a nalytical framework framework for reward systems the company level which includes financial & nonnon -financial -financial rewards , employee e mployee benefits, benefits, incentives & their link with productivity. productivi ty. It summarizes the key issues in the wage system from the point of view of the key actors in the industrial relations system ± ± worke workers, rs, unions, unions, mana manageme managements gements nts & the government.
Theories There
of Wage
are mainly t hree types of t heories of wage:
Economic Theories: These theories can be broadly classified into two categories: The t heories
that explain wages predominantly in terms of factors that influence the supply price of labour.
The t heories
that consider wages as being determined primarily by factors which influence the demand price of labour.
Theories
of Wage (cont)
Economic Theories (Cont)
Though the wage
theories important policy implications some relevance for certain occupations or in certain regions , none of them are adequate as general theory having universal applicabili applicability. ty.
Theories
of Wage (cont)
Subsistence Theory This
theory is based on assumption that labour, like any other commodity is purchased & sold in the market, & in the long lon g run, the value of labour trends to be equal to the th e cost of production. equa l to the amount which is necessary for the The labour cost is equal maintenance of the worker & his family family at the subsistence level. Conversely, if the wages fall below the subsistence level, children will die or some workers might decide to have fewer children, would eventually bring down the birth b irth rate. This would result in decreased labour supply, which would ultimately be equal to the demand for it. Therefore, in the long run, the wage rate gets adjusted at the subsistence level. This
theory is also known as Iron Law of Wages.
Theories The
This
of Wage (cont)
Surplus Value Theory
theory is associated with Karl Marx. According to
his view, the supply of labour always tended to be kept in excess of the demand for for it by a special feature of the capitalist wage system. system. Also, the worker did not get full compensation for the time spent on the job. The rate of surplus value , which is the ratio of surplus labour to necessary labour, labour, is also referred as a s ³rate of exploitation exploitation´´ under the capitalist for of production.
Theories The
of Wage (cont)
Wages-Fund Wages-Fund Theory
John
Stuart Mill tried to explain the movement movement of wages in a changing world. He observed that there was changing ³natural ³natural rate´ defined by the changing ratio of capital to population population.. Thus, according to this theory, wages are determined by:
1.
The
wage fund which has been expended for obtaining the services of labour.
2.
The
number of workers seeking employment. employment.
It was assumed that a wagewage -fund -fund is fixed & does not change. Any change in the wage rate, therefore, would be due to a change in the number of workers seeking employment.
The
Wages-Fund Wages-Fund Theory
This
theory was rigid in its own way. It demonstrated that bargaining power or trade union cannot raise the wage level & that efforts to discourage the accumulation accumulation of capital the wages were bound to lower wages by reducing them the wageswages-fund. -fund. This
theory showed that productivity of labour was determined by the level of wages. If the rise in wages could augment the efficiency of labour as well, stimulating to set out more funds in the purchase of labour.
The
Marginal Productivity Theory
J.B Clark was the first to develop this theory. Later on, Marshall had made some amendments in the shape of refinements added added to this theory. According to this theory, both demand & supply together determine the factor price, which in a perfectly competitive market, market, is equal to the marginal revenue productivity productivity of the factor. This
theory assumed that there was a certain quantity of labour seeking employment employment & the wage rate at which this labour could secure employment in a competitive labour labour market was equal to the addition to total production that resulted from employing the marginal unit of the labour force. It was also assumed that production was carried out under the conditions conditions of diminishing returns to labour.
The
Bargaining Theory
John Davidson, an American economist, was the first exponent of the Bargaining Theory of Wages. He argued that the wages & hours of work were ultimately determined by the relative bargaining strength of the employers & the workers.
According to this theory, there is an upper limit limit & a lower limit on wage rates & the actual rates between these limits are determined by the bargaining power of the employers & the workers. The upper limit marks the highest wages the employers would be willing to pay, whereas, the lower limit indicates the minimum wages prescribed under the strength of resistance of the workers at the subsistence wages below which they will not available for work.
Demand & Supply Theory expone nt to this theory, explained the Alfred Marshall , the chief exponent complexity of the economic world tried to provide a less rigid & deterministic theory. According to him, the determination of wages is affected by the whole set of actors which govern demand for & supply su pply of labour. The demand price of labour, however, determined by the marginal productivity of the individual worker. The
term ³supply & labour´ can be expressed in a number of senses. First, it refers to the number of workers worke rs seeking employment; employment; these are the workers who have no alternative livelihood & join the labour market seeking employment for wages. Secondly, supply & labour´ may refer to the number of hours each worker is available for work. The supply of labour in this sense increases with any increase in the number of working hours. ³
The
Purchasing Power Theory
Keynes applied a new theory to the economy as a whole & not to an individual firm or industry. According to him, wages are not only the cost of production for an employer but also incomes for the wage earners who constitute a majority in the total working population. A major part of the products of an industry is consumed c onsumed by the same workers & their families. Hence, if the wage rates are high they will have more purchasing power, which would increase the aggregate demand for for goods & the level of output. Conversely, if the wage rates are low, their purchasing power power would be less, which would bring about a fail in the aggregate demand. demand. Therefore, according according to him, a cut in the wage rate instead of removing unemployment & depression will further add to the problem.
Behavioural Theories of Motivation Equity Theory Equity
can be external or external. Internal Int I nter erna nall equity equit equ ityy refers to the pay differential between & among the various skills & levels of responsibility. External equity refers to concerns regarding how wage levels for similar skill levels in one firm compare with those in other o ther firms in similar or the same industry & location. Expectancy t heory
It suggests that motivation depends on individuals¶ expectations about their ability to perform tasks & receive the desired rewards. An employer¶s responsibility is to help employees meet their needs &, at the same time, attain organizational organization al goals. Employers must try to find out match between employees¶ skills & abilities & the job demands.
