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SUMMER INSTITUTE ON LABOUR ECONOMICS AND INDUSTRIAL RELATIONS, DEPARTMENT OF LABOUR & SOCIAL WELFARE, PATNA UNIVERSITY, PATNA-5

THE STRUCTURE OF WAGES
BY Dr. G.P. Sinha, Ph.D. (Cornell), University Professor and Head, Department of Labour & Social Welfare, Patna University, Patna

Introduction
There are two sources of income in society : property and labour. Labour here is used in its widest connotation ranging from the labour of the unskilled to the labour of engineers or other most highly skilled and talented groups of people. When the question of the division of the national income between these two sources is discussed, theories of distributive shares arise, i.e., the theories of interest, rent and profit as theories of income from property and theories of wages as theories of income from labour. Students of economics are familiar with these theories--their history and critical evaluation. Economists mostly agree that the operation of the market forces supplemented by institutional arrangement determines the level of wages and the share of wage in the national income. We are also aware of the controversies centring round the theories and principles determining the level of wages in the economy as a whole, whatever meaning the term level of wages may have in the context of thousands of diverse jobs, job-rates and occupations in which the total labour of society is distributed. Actual Process of Wage Determination The owner of a firm of its manager even though completely ignorant of the theories of wages agitating the minds of economists has to take decision regarding the wage rates that he is going to pay his employees. He does this unilaterally or jointly with the union or in many cases he merely accepts the decisions of a governmental agency or a tribunal. But he is confronted with the task of finalisling the wage rates of hundreds of jobs with varying job-contents and varying degree of skill and talent required to perform them. How does he decide how much to pay for the different jobs, i.e., what should be the internal relationship between the wages and salaries for the different jobs, that is, his internal wage structure.
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industrial wage structure. of wage relativities. one aspect of the wage structure is the internal relationship. what may be called.. for both managements and unions are interested not only in absolute rates of wage increases but also in the relativities. interplant/intra-plant wage differentials. Types of Wage Differentials Even a cursory glance at any aspect of the wage structure as mentioned earlier with bring to notice a bewildering diversity in wage rates. not in the wages for different jobs but also in the wages for the same job. These are some the types of wage differentials and one could expand the list by adding many more. This internal wage structure is expected to bear a relationship with the wage structure of his competitors in the product market as also with his competitors in the labour market. 1.e. Influences constantly flow in and out of a firm affecting the wage structure of competing firms.1 As the structure consists of a series of inter-relationship and therefore. Race/caste/religion wage differentials. These differentials can be grouped to facilitate comprehension under the following heads : (i) (ii) (iii) (iv) (v) (vi) (vii) occuptional/skill wage differentials industrial wage differentials. Union/non-union wage differentials. i. These relationships are external to the firm. (viii) Age/seniority wage differentials. area or geographical wage differentials. sex wage differentials. one sould be cautious enough in any discussion on wage differentials to take note of the overlapping nature of some of these differentials. it becomes a matter of great significance in union-managment relations. area or regional wage structure. the relationship between the wages of different jobs within a firm. 2 . Thus arises. combining all these three one can talk of a national wage structure. This is the internal wage structure of a firm.The Meaning of Wage Structure Therefore. However. See Tables 1 & 2 at the end of the paper to have an idea of industrial wage structure of India and State dispersals.

e. it was assumed that most of these differentials would disapper except for those which were related to the differences in the basic nature of job or occupational requirements. even when the knowledge of the market conditions is perfect and entry and exit. In this statement Adam Smith refers to the innet differences in the nature of occupations and also to the compensating factors. or dishonourableness of the employment. 4. That is. Wages in different occuptions will vary with the regularity or irregularity of employment.How are the Differentials shaped ? Under the competitive model with perfect competition. it can be said that the market forces are constantly evaluating and revaluating the value and worth of the different jobs and therefore. Looking from another angle.. i. differentials between occupations. 5. that is. determining their compensation or reward accordingly. are rational and economically justified. differnces in wages will persits in order to invoke the supply of the relevant quality and quantity of labour required for different jobs. the cleanliness or distiness. necessary to attract sufficient labour of requisite quality according to the needs of the occupation. it was siad that they contained an element of equalising and compensating differential. This means. the holder of a job or an occupation gets rewarded according to the value of his contribution to the economic process. i. From this point of view wage differentials. Wages will vary with the ease or hardship. the net advantage of different occupations tended to be the same. of labour is free. 3 . The money rewards together with non-monetary advantages or disadvantages are indication of the value of the services performed. the honourableness.e. The are : 1. Therefore. Wages will vary with the degree of trust reposed in an occupation. Wages will vary with the easiness and cheapness. 2. Hence. 3. he treated and we all treat such differentials as rational and economically necessary.. invariably all discussions on wage differentials begin with statement of Adam Smith advancing five explanations of occupational wage differentials. In respect of even those differentials. the market/mechanism tends to reward every one according to his worth. perfect knowledge and free mobility of labour and capital. Wages will vary according to the probability of success in the occupation. or the difficulty and expense of learning a trade. industry and region.

in the sense that its most striking features are just those which this theory dismisses as incidentals. If the entire structure of earned incomes is treated as a single whole. though less so than formerly. it is apparent that the more agreeable and more responsible posts win on every count. Wages and salaries are extremely unequal.Rationality of the Wage Structure Applying this criterion of the economic worth and the value of different occuptions and jobs determining their relative differentials in compensation. It is apparent from the statement that she is both surprised and pained at the element of irrationality in the existing British wage structure. This is what she has to say in this regard: Classical wage theory thus appears insufficient by it self to explain a number of the characteristic features of one wage and salary structure. The actual picture is very different from what the text books would lead us to expect. Barbara Wootton in her book ‘The Social Foundations of Wage Policy’ has subjected the existing wage structure and the wage differentional in Great Britain to scathing criticism. Nor is it possible to discover any sign at all of an inverse relationship between the monetary and the non-monetary attractions of different jobs. 66. It is also greater than can be accounted for by the cost of acquiring the necessary training. 4 . The Social Foundation of Wage Policy. and with some exceptions2. which of the differentials mentioned earlier can be called rational and as being economically necessary. p. They are generally better paid than those that carry less responibility. and the spread from top to bottom far exceeds the range of differences that can credibly be ascribed to variations in inborn aptitudes. Barbara Wootton. Source of Irrationality It is clear from what has been said earlier in this article that differentials arising from the operation of economic forces in an economy where people are free to choose 2.

after all. 'The rational economic man' was only an economist's model. Many more such evidences can be found out when the existing wage differentials in our economy are scrutinised and surveyed. employers and places of employment without any barrier so as to maximise their job satisfcation. that is. But one thing is clear : the task of cleaning latxines and carrying night soil on the head is so dirty and so dishnonourable that we would not have got adequate supply of scavengers and sweepers but for the fact that we have traditionally condemned a group of people belonging to a particular caste to carry on the task of scavenger and sealing all exits from this lowly status. industry. certain differentials in wages will arise and tend to persist. The Role of Customs and Traditions Reverting back to Adam Smith explanation of the occupational wage differentials. easiness and cheapness. It is the operation of these social and political forces that lends a degree of irrationality to the wage structure and distorts it when seen from the angle of vision of an economist. Racial prejudices in the U. The extremely unequal division of income wealth and resources in the society prevents most of the poorer people from acquiring the skill and the training necessary for the better paid positions and occupations. honourableness or dishonourableness of the two employment. of the difficulty and expense in learning their trades and the relative degree of trust and responsibility. The result is that these people are virtually excluded from competing for the better paid jobs and professions and the traditionally privileged groups of people continue to 5 . or caste or religious prejudices in India can be traced in many wage situation.A.S. new products. More important is the influence of the hierarchical division of the society in terms of social status and economic possession. cleanliness or dirtiness. can one explain the existing wage differentials in India between the wages of a municipal scavenger and the salaries of the top most civil servant purely in terms of the requirements of their respective occuptions ?. The role of social factors dominating economic forces in the matter of wage determination is evident again in sex wage differentials.on the basis of their skill and talents between occupations and jobs. The differentials will be in constant flux in a dynamic society where new technology. in terms of the relative ease or hardship. certain social and political institutions are of no less importance in the determination of the operation of these differentials. I do not know if we can come to any definitive conclusion as to the relative worth of the two occupations under reference. when women are paid less wages for the same job. But apart from the economic forces. tastes and fashions are emerging everyday.

70 6 . Even the differentials based on skill have become narrow. p. We shall revert to it a little later. one can not only imagine but see around. Regarding the trend in the differentials based on skill in the U. op. the greater are the wage differentials. During the first decade of this century skilled workers in manufacturing had median earnings double those of unskilled workers. trade and commerce and professional services continued to be the monopoly of a small group of people which has become 'non-competing' in every sense of the term. In any society characterised by better distribution of economic resources and availability of opportunities for education and advancement. To quote Barbara Wootton again : "The broad similarity between the social and the wage hierarchy needs no elaborate demostration". the existence of extremely wide wage differentials not warranted by the requirements of the jobs or the occupations. Barbara Wotton. by the 1050s. What is happening to differentials ? A study of the wage differentials over the course of last 50 years will show that many of traditional differentials are tending to become narrower and narrower and many others are disppearing altogether.cit.3 If this be true of a modernised society like that of the Great Britian. How much of flabbiness or excess flesh many of these differentials have come to acquire is apparent from the fact that even serious reduction in these differentials neither affects the efficiency nor the supply of labour in the occupations concerned.A. 3. that over the long run differentials in earnings among occupational groups have been narrowing. control over the superior jobs created by the modern industrialisation.maintain their monopolistic. it has been said : There is evidence. however. actually earning about 10 per cent less. Similarly.. Except for the top jobs in the civil service for which competitive examinations are held most of the top most jobs in the country in industry. Not only that the differentials based on sex. but by the 1050s their median earnings were less than 40 per cent higher. race. in that period the earnings of full professors in colleges and universities had declined from three and one-half times average wages in manufacturing to about one and three-quarters times. The older and the more persistent the features of the feudal society.S. and college instructors. religion or caste are being condemned everywhere and are being legislated against. who had earned almost 50 per cent more than the average manufacturing wage were. wage differentials would tend to become narrow.

The concept of the payment of dearness allowance not linked so much to the salaries in terms of a fixed percentage but in terms of social justice has resulted in the reduction in the wage differentials in the hierarchy of wages. Another polent factor has been the persistent inflationary trend all over the world since the end of the Second World War and the methods devised to compensate the employees for the increasing cost of living. This has resulted in the larger supply of skilled personnel. They have extracted scarcity value from the society for quite long and whatever the personal feelings in this regard there is going to be a further deterioration in their relative position in terms of monetary rewards. studies have shown this tendency to be common to all industrialised countries. The idea that the people in the higher wage brackets can afford to bear the increase in the cost of living without any adverse effect on their health and efficiency and that the adverse effects of rising cost of living should be neutralised cent percent in the case of lower income brackets has reduce the difference between the lowest and the highest salaries in the state service and to a considerable extent in the private employment also. The ever-expanding role of the State in this regard and the public exchequer accounting for an ever increasing proportion of the cost of the education and training facilities shifted a considerable part of the burden of educational expenses from the individual family to the State. I. are undermining not only income from property but also the differentials in the incomes earned from work. bringing within the reach of ever-expanding groups of people the opportunities for educational and mental advancement. Factors Responsible For this Trend The most important and all pervasive influence in this regard has been the spread of modern education.This heavy reduction in the wage differentials based on skill has not had adverse effect on the supply of skilled.O. The educated people of India today look with nostalgia upon the past when their number was so small and they enjoyed both prestige and economic rewards out of all proportion to the economic importance of their jobs. in the process of seeking to eliminate the extremes of concentration of the wealth and property. educated and trained personnel to man the superior jobs and positions in the society. The next important factor in this connection has been the spread of egalitarian and socialist ideas which. reducing the monetary compensation for skilled occupations.L. 7 .

position and profitability of the different concerns will be more gainful for the workers or whether adjusting wage rates according to the paying capacity of each firm and also being the bargaining power of the union will be more 8 . prevent employers from competing at the cost of labour in the product market. when the unions develop the practice of industry wide collective bargaining or when industry wide wage boards and adjudication tribunals function the inter-plant and regional differentials tend to disappear. seek to maintain and improve. The craft unions. seek to improve not only the absolute but also the relative position of their membership. Industrial Unions. an element of equity is also being built in the income structure of the different societies today though the speed of this process might not be fast enough to be to the liking of many people. In this process. it is but natural for them to organise all competitors and equalise the labour cost for them. When the trade unions intend to take labour out of competition. it is customary to have the plant as the unit of collective bargaining and different plants organised by different unions inter-plant differentials in an industry tend to get entrenched and even magnified depending upon the paying capacity of the plant and bargaining power of the union. Thus. if possible. Similary. In addition to the element of economics. on the other hand. dominated numerically as they are by workers at the bottom of the wage hierarchy. the inter-plant differentials tend to disappear. i. which has been to a large extent over-powered by sociological and traditional factors.e. in industries dominated by industrial unions skill differentials particularly dwindle much faster. of course.. whether having common rates for the same industry irrespective of the size. their relative position in the wage hiereachy. The existence of inter-firm or inter-plant differentials in an industry even in the same locality is a common experience. This has been the common experience in India. While agitating against many of the differentials trade unions patiently cling to the maintenance of many others. Impact of Trade Unionism on Wage Differentials Trade Unions' policies in respect of wage differentials are of diverse nature.As a result of the operation of the factors mentioned above and many others the range between the lowest and the highest in the wage structure has been considerably narrowed down over the course of last 25 years in India and is going to be still further narrowed down. wage rates varying directly with the size of the firm. But if on the other hand. All workers want to secure absolute improvement in their positions and no group likes the undermining of its relative position.

have also influenced the occupational wage structure specially of the production workers in order to meet the pressure from the unions for modifying wage relativities and also to give the internal wage structure semblance of scientific objectivity. physical effort. But the trade unions have found it politically expedient in most cases to go in for uniform wage rates in an industry. the answer to which differ from industry to industry. the wage and salary administrators have evolved different techniques of job evaluation to determine the relative worth of different jobs and occupations in terms of job requirements.is a question. mental effort. they assign the relative weights to these factors and then award money values to these 5. The influence of trade unions on sex racial or caste prejudices has been against their continuance. many economists support the thesis that the unionised workers receive 10 to 15 per cent higher pay than unorganised workers5. training. In some sectors of the Indian economy. However.. In India. There is a considerable scope for empirical research to test the significance of the statement made here. dexterity. Ibid. In respect of union and non-union wage differentials there are conflicting evidences in the industrially advanced countries. trade unions have made full use of their/bargaining power and consequently many industrial wage differentials have become wider and have also become a source of heart burning to other employees. p. As regards industrial wage differentials. particularly the large organised sector.advantageous-. working conditions and safety. Relying heavily on the factors mentioned by Adam Smith they evaluate the jobs in terms of their basic characteristics such as education. Influence of Personnel Practices on the Wage Structure The development in the field of Personnel Administration. insurance and air transport have become examples for others to emulate. or any other group can improve its relative economic position by the exercise of economic and monopolistic power has been shown above. I would urge my friends present here to undertake this task of conducting surveys and studies in the structure of wages in India. 270. as has been said earlier unionisation has exerted a much more pervasive influence pushing up wage rates in those sectors and industries where union power is great. As a first step in job evaluation according to this method. the bargaining power of the trade unions has been of crucial importance. 9 . How the section of the organised workers. The banking. responsibility. particularly in the area of wage and salary administration.

but as they grew in strength and became sure of their position they accepted these techniques and rectified any inequities in the bargaining process. they come out with appropriate money rewards for different jobs and occupations purely in objective terms without being influenced by personal factors or other prejudics which are supposed to distort the wage structure. Trade unions. looked with suspicion upon the so called scientific objectivity of the job evaluation techniques. The human agencies are the trade unions working through collective bargaining. it has its influence on the wage structure in other plants also. industries and places of employment according to the respective demands for labour. influenced by the factors of demand and supply where it is found that the wage structure worked out on the basis of job evaluation results in excess or short supply of labour in particular occupation. and 10 . In India there is hardly any organised sector of the economy where the wage structure is not the result of a cautious deliberate decisions either of a wage board or an adjusticating tribunal or collective bargaining. in early days of the evolution of the job evaluation methods. From what has been said above it is apparent that the area of wage determination is increasing every day even in the traditional market economics. the factors that guide or should guide the deliberations of these agencies become matters of crucial importance in the distribution of the national income. the boards concerned with the implementation of the national income and prices policies. particularly when the plant happens to be a big one or a leading one in the industry or the locality. the wage level or wage structure are cautiously planned. the resulting wage structure is the resultant of evaluation by wage and salary administrators. Thus. Though the wage structure emerging from the processes described above is internal to the plant. not to speak of the socialist economies where. Therefore. The relative money valuation is. of course. occupations and places of employment according to their best judgements are : (a) allocation of labour between different occupations.weights on the basic of market surveys regarding prevailing wage rates : Thus. of course. the scope has improved for shaping a wage structure consistent with the national goals and aspirations. the adjudicators. market forces and collective bargaining. In spite of the plenty of fanfare about the scientific objectivity of the job evaluation techniqe. The two economic functions of wage differentials in an economy where individuals have the freedom to choose between various jobs. the wage boards. the personnel departments and other wage fixing authorities.

I apprehend payments are going to be highly unequal between individuals. appear to be inequitus when looked at from the point of view of social equity and justice. even in those societies where opportunities for advancement are more or less equalised. are again going to be extremely uneven. 11 . the differentials which appear to be very just and fair looked at from the point of view of occupational requirements.(b) provision of incentive for individual advancement. Payments based on individual merits and attainments. To base payments on the value of the jobs as distinguished from the persons who perform the job is said to be one of the contributions of the modernising process. managerial and technical. occupations and places of employment will have to be evaluated either in terms of Adam Smith's formulation or in some other terms. Therefore. Whenever any human agency sits down to work out a wage structure these considerations would be upper most in its mind. Jobs. But when the payments are based on the relative worth of the job and therefore. the worth of the individuals performing them. the distribution of the capitalist system claiming to pay no less regard to this principle. Sharing of the national income according to the quality and quantity of work done as is said to be the guiding principle of solialist distribution. Therefore. learning skills. remembering full well that there is a world of difference between equality and equity. may lead to very uneven distribution of the national income. a search has to be made for those principles of wage determination which not only satisfy the cannons of occupational requirements and the value of the quality and quantity of work done but also the cannons of social equity and justice.

Electrical Machinery 9.777 3. Electricity.419 2.466 2. Recreation Services 18.748 2. other Appratus ect.7 67.447 3. Figures in col.Table – 1 Per Capita Annual Earnings of Workers in Selected Manufacturing Industries Average Industries Earnigs for (1956-64) 1 1. Silk Mills 14.009 2.1 76.058 3.560 2. 33-35. Figures in col. 11.849 2.938 3. 2. Publishing & allied 13. Footwear. Products of Petroleum & Coal 2. Ship Building & Repairing 3. pp.5 76.421 2.106 2.3 80. gas & steam 6. Paper 17.4 83. Table 4.915 3.3 58. Transport Equipment 8.5 66.8 64.353 6 II I IV VIII V IX VI III X XVIII XI XII XV XIII XVI VII XVII XIV XIX III IV V VI VII VIII IX X XI XII XIII XVI XV XVI XVII XVIII XIX 1. Metal Products 16. 192. Printing.7 67. 5 relate to the average annual earnings of the employees earning less than Rs. Rubber & Rubber Products 10.9 67.185 2. Water & Sanitary Services 19.00 87.5 63.313 2. Cement 4.2 (a). Source:– Pocket Book of Labour Statistics. 12 . p.685 2. Paper & Paper Products 15. 1974.2 81.873 3.7 65. Cotton Mills 5. 200 per months.716 2. Machinery (except electrical) 12.9 81.8 I II 4 5 3.2 72. Jute Mills 2 1910 1670 1591 1570 1564 1553 1529 1462 1456 1393 1294 1293 1289 1274 1259 1257 1232 1209 1124 1 Percentage Rank Average of earn ing in (1970)2 Rank 3 100. Basic Metal Industries 7. Source:– National Commission on Labour.9 65.3 82. 400 per month. 2 relate to the average annual earings of the employees earing less than Rs.

36 64.07 1. Machinery (except electrical machinery) 12. Textiles 2. Footwear/other wearing apparels & made up textile goods 3. p. 13 . Products & Petroleum & Coal 8. Leather & Leather Products (except footwear) 6. 193. Electricity.27 Variation 2 866 Average (1964) 3 1649 4 52.76 68. Electrical Machinery Apparatus 13.24 71.46 51. Metal Products (except Machinery & Transport Equipment) 11.07 36.59 68.74 70.52 38. Publishing & Allied Industries 5.003 1. Non-metalic Mineral Products (except No. Chemical & Chemical Products 7.133 538 528 1. Printing. Basic Metal Industries 10.Table – 2 Range of Variations in Per Capita Annual Earnings of Employees (1958-64) in Seclected Industries Range of All India Range x 100 Industries 1 1. Water and Sanitary 682 1.09 69. Transport Equipment 14.008 1.57 36.7) 9. Gas & Steam 15.45 45. Paper & Paper Products 4.115 631 684 882 1318 1428 1558 1731 1517 1277 51.52 Average Source:– Report of the National Commission on Labour.032 630 547 973 1541 1413 1443 1466 1497 1728 1065 1514 73.94 36.