4.1 concepts of wage

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Concepts of Wage 4.1

For Class Room Use Only/1

Definition of Wage

Wage refers to payment for labor service of monetary remuneration, payable to a worker,computed on hourly, daily, weekly, or piece work basis. A fixed weekly or monthly wage is

usually called a salary.

The wage is the portion of the national product that represents the aggregate pay for all

contributing labor or service as distinguished from the portion retained by management orreinvested in capital goods.

Wages, earnings, total compensation, and incomeThere are a few basic definitions that will be used throughout the discussion of labour

economics. It is very important that you use these terms precisely and not confuse them:

wage = payment per unit of timeearnings = wage x hours (labor payment over an interval of time, typically a week

or a month)total compensation = earnings + fringe benefits

(fringe) benefits1 = payments-in-kind + deferred compensation(where: payments-in-kind include any payments in the form of goods and

services such as the use of a company provided car, or employer-providedmeals, uniforms, health insurance, or similar benefits; and deferredcompensation involves items such as pension plans and other programs that

provide payments at some point in the future.)income = total compensation + unearned income

(in practice, when data on income is reported, income is generally measuredas: income = earnings + unearned income since researchers generally do not

have accurate measures of the value of fringe benefits)

Different Concepts of wage

Subsistence Wage

A subsistence wages is a wage that only meets bare physical needs of a worker and his

family. So it is the lowest wage upon which a worker and his family can only survive.

Minimum wage

The minimum wage is a controversial concept. Advocates claim that some minimum wage isrequired in society because of the imbalance of power between the employer and

employee. This is particularly true in the least developed and developing economy. Byhaving a minimum wage, the country is reducing the dependence of some people on the"safety net" of society and thus lowering the cost of government. Opponents of the

minimum wage claim that it creates unemployment in the lowest level of workers and putsa hard burden on small businesses.

1 Now-a-days, the term fringe benefit is not in regular use, which traditionally indicates to separation/marginalbenefit. In some extent, its textual meaning and practical applications create confusion about its coverage andincludable items. So, as a more general term, it is better to use benefitor allowance instead of fringebenefit.


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Living wage

A living wage is a wage that allows an employee to maintain a decent standard of living. Sothis term used to describe the minimum hourly wage necessary for a person to achieve

some specific standard of living. A living wage is one at which employees can support their

families above the recognized poverty line. In the context of developed countries such asthe United Kingdom or Switzerland, this standard generally means that a person working

forty hours a week, with no additional income, should be able to afford a specified quality orquantity of housing, food, utilities, transport, health care, and recreation. This conceptdiffers from the minimum wage in that the latter is set by law and may fail to meet therequirements of a living wage.Some analysts claim that subscribing, by any company, to a living wage results in the

following benefits: reduces turnover and absenteeism, thereby lowering recruitment and training costs

increases productivity

increases morale and commitment to the company

improves the community

Fair Wage

A general definition of fair wages refer to-Company practices that lead to sustainable wagedevelopments. And an extended definition of fair wages refer to- Wage levels and wage-

fixing mechanisms that provide a living wage floor for workers, while complying withnational wage regulations (such as the minimum wage, payment of wages, overtimepayments, provision of paid holidays and social insurance payments), ensure proper wageadjustments and lead to balanced wage developments in the company (with regard to wage

disparity, skills, individual and collective performance and adequate internal communicationand collective bargaining on wage issues). A fair wages is a wage adjusted according to thelocal market and industry. A fair wage lies between the minimum wage and the living wage

which is the goal. Wages must be paid on an industry wise and region basis having dueregard to the financial capacity of the unit.

Nominal and real wages

If we are to measure changes in wages (or income) over time, it is important that someadjustment be made for the effect of inflation. Nominal wages are not adjusted for inflation

and are said to be expressed in terms of "current dollars" (since they are measured interms of the value of the dollar at that particular time). Real wages are wages that have

been adjusted to take into account the effect of inflation. Real wages are expressed interms of dollars from a given base year and are said to be expressed in "constant dollars."Some form of price index is used to convert nominal wages into real wages. A price index isconstructed using the following formula:

In practice, this price index is often expressed as a percentage by multiplying the formulaabove by 100. The most commonly used price index is the Consumer Price Index (CPI). Thebasket of goods used for the CPI is determined by the mix of goods consumed by a typical

family of 4 in selected Standard Metropolitan Statistical Areas (SMSAs). The specific mix ofgoods is determined from the Consumer Expenditure Survey.


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Suppose the cost of the basket of goods used to compute the CPI is twice as high today asit was in the base year. An inspection of the equation above indicates that the CPI will be 2(or 200 expressed as a percentage). (In the base year, the price index will always be equalto 1, or 100 as a percentage.) Suppose that an individual's current wage is tk. 12 an hour

when prices are, on average, twice as high today as in the base year. A bit of reflection

should convince you that the real wage, as measured in terms of the base year's dollarsequals tk. 6. In general, the real price of an item is measured as:

(Note: that the price index is not measured as a percentage in this calculation.)

In general, economists assume that individual workers and firms respond to changes in realwages and not nominal wages. Workers are concerned with the purchasing power of theirwage over time, not just the number of dollars they receive.

Determinants of real wages

The following factors have to be taken in to consideration contained by determination ofreal wages.

1. Purchasing power of Money: The purchasing power of money fluctuates from time totime. The purchasing power of money has an inverse functional relationship with price of

the commodities. If prices are low and nominal wages are large, then real wages are alsohigh due to increase contained by purchasing power of the money.

2. Fringe Benefits: The fringe benefits are also components of real wages. For example

facility of accommodation, telephone, transport, servant, etc. These benefits increase the

genuine wages.

3. Extra Earning: The opportunity of extra earning increase the real wage of a person. Forexample teacher has higher real wage then other official of the some great working in anoffice due to the opportunities of extra earning like writing books, articles of news papersetc.

4. Working Hours: The number of working hours should be taken into explanation in the

determination of real wages.

5. Tenure of Services: There are two types of employment regarding the tenure ofservices i.e. permanent and temporary. A person employed permanently has higher real

wage then the one who is employed temporarily or seasonal.

6. Social status: The social status of a teacher and of a civil officer in same grade is quite

different in Bangladesh. So that, the real wage of the later is higher then that of the former.

4.1 concepts of wage

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