Concepts of Minimum Wage, Fair Wage and Living Wage

According to economic theory, wages are defined broadly as any economic compensation paid by the employer to his laborers under some contract for the services rendered by them. In its actual sense which is prevalent in the practice, wages are paid to workers which include basic wages and other allowances which are linked with the wages like dearness allowances, etc. Traditionally, in the absence of any bargaining power possessed by laborers, they did not have any say in the determination of wages paid to them.

In the Indian context, soon after the independence, Government of India set up a Committee on Fair Wages in 1948 which has defined various concepts of wages which govern the wage structure in the country specially in those sectors which can be termed as underpaid and where workers do not have bargaining power through unions. These concepts are: minimum wage, living wage, and fair wage. Later, the concept of need-based minimum wage was added. Let us have a brief look at these concepts.

Minimum Wage

A minimum wage is one which has to be paid by an employer to his workers irrespective of his ability to pay. According to the above committee,

“Minimum wage is the wage which must provide not only for the bare sustenance of life, but for the preservation of the efficiency of the workers. For this purpose, minimum wage must provide some measure of education, medical requirements and amenities. “

Subsequent to the committee’s report, Government enacted legal provisions regarding minimum wages under the Minimum Wages Act. 1948. This Act does not define the concept of minimum wages but empowers the Central Government as well as State Governments to fix minimum wages from time to time. Wherever this Act applies, the payment of minimum wages is mandatory. In 1957, Indian Labour Conference elaborated the concept of fixation of minimum wars which were termed as need-based minimum wages. For the calculation of wages, the Conference suggested the following guidelines:

  1. The standard working class family should be taken to consist of three consumption units for the earner; the earnings of women, children and adolescents should be disregarded.
  2. The minimum food requirements should be calculated on the basis of the net intake of 2.700 calories per adult.
  3. The clothing requirements should be estimated at a per capita consumption of 18 yards per annum per person.
  4. In respect of housing. the norms should be the minimum rent charged by the Government in any area for houses provided under subsidized housing scheme for low-income groups.
  5. Fuel, lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total minimum wage.

Fair Wage

The concept of fair wage is linked with the capacity of the industry to pay. The Committee has defined fair wage as follows:

“Fair wage is the wage which is above the minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity of the industry to pay. “

Thus, fair wage depends on different variables affecting wage determination. Such factors are labour productivity prevailing wage rates, the level of national income and its distribution and the capacity of industry to pay. At present, the concept of fair wages is followed by the most business organisations.

Living Wage

Along with the minimum wage the Committee on Fair Wages has given the concept of living wage which has been defined as follows:

“A living wage is one which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort including education for his children, protection against ill-health, requirements of essential social needs and a measure of insurance against the more important misfortunes including old age. “

Living wage is more than the concept of minimum wage. Such a wage is determined keeping in view the national income and paying capacity of industrial sector. The Committee also observed that since the national income did not support the payment of living wage. It should be implemented in three phases. In the initial stage the wages to be paid to the entire working class were to be established and stabilized. In the second phase fair wages were to be established in the community and industry. In the final phase the working class was to be paid the living wage.

Credit:  Compensation Management-CU

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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