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.
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
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.

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.

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
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
 Living Wages
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.
Minimum Wages:
It is commonly accepted that workers should be given at least 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.
The objectives of a minimum wage are as follows:
1. To prevent the sweating of workers in organized or unorganized 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 organized 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 unorganized 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 at least the minimum wage.
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 encyclopedia of Social Science describes a fair wage as “one equal to
that received by workers performing work of equal skill. Difficulty or unpleasantness”.
According to Pigou, there are two degrees of fairness for deciding fair wage. In a narrow sense.
Trade and in the neighborhood 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 organized 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 organized 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 organized.
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.
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.
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.
Objectives of wage policy:
Economic Objectives:
An important objective of an effective wage policy is to achieve maximum economic welfare.
This requires:
(i) Maximized 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 maximized 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.
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 organizations 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 – Factors Influencing Sound Wage Policy:
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
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.
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.
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.
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.
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.

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.
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.
Trade Unions:
Workers who are well organized 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 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 wage 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.
Limitations of wage policy:
1. Enforcement – Enforcement in unorganized 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 organized sector takes away bulk of
wages than unorganized.
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 is 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.