Wage Determination Process

Wages can be expressed in two ways. When they are expressed in terms  of money paid to the worker they are called nominal wages. But when they are  expressed in terms of their purchasing power with reference to some base year  they are called real wages. These wages are arrived at by making adjustment in  the nominal wages for the rise or fall in the cost of living.

Wage Determination Process

How do we measure changes in the cost of living, or changes in the  prices that consumers pay? The measuring rod is the consumer price index  number. This index number is intended to show over a period of time the  average percentage change in the prices paid by the consumers belonging to the  population group proposed to be covered by the index for a fixed list of goods  and services consumed by them. The average percentage change, measured by  the index, is calculated month after month with reference to a fixed period. This  fixed period is known as the ‘base period’ of the index; and since the object of  the index is to measure the effect of price changes only, the price changes have  to be determined with reference to a fixed list of goods and services of  consumption which is known as a fixed basket of goods and services.

Important steps in the construction of this index number are as follows:

  1. Selection of representative commodities consumed by the group.
  2. Making arrangements for obtaining their price quotations regularly.
  3. Selecting a base year and converting current prices into price relatives  based on the prices of the base year.
  4. Obtaining a weighted average of the price relative taking the quantities  consumed in the base year as weights.

How are wages determined?

Economists have developed a number of theories which try to explain  how wages are determined on a macro level. The Subsistence Theory of Wages,  for example, states that the real wages of unskilled workers always remain at or  very little above subsistence level. If real wages rise more than enough to  provide a bare subsistence, the population would expand at a greater rate than  the increase of food and other necessaries. The growth of population would  increase the number of workers seeking jobs and the pressure of the big supply  of labor would force wages down again to subsistence level. Thus  improvement in real wages can only be temporary. This theory has considerable  validity in a heavily populated country with high birth rate like India. The  wages of the great majority of workers in our country are still on the subsistence  level and may continue to be so until our development programmes cause our  rate of productivity growth to become considerably greater than the rate of  population growth.

According to the Marginal Productivity Theory of Wages, in every  enterprise there is a point beyond which it will not pay the management to  engage more laborers. At this point the laborer produces just enough to cover  his cost to the employer. All the laborers being assumed to be of the same  quality, they will all receive the same wages, i.e., the wages representing the  product of the marginal laborer. This is also not correct. In actual practice  wages of laborers, even if they are of the same quality, differ.

What then determines the wages of a worker? In actual practice it seems  to be determined by a number of factors such as the philosophy of management  towards wages, region-cum-industry settlements, internal pricing through job  evaluation, employer’s capacity to pay, court judgments, local area going rates,  collective bargaining and government laws.

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