Wages and Its Types

WAGES AND ITS TYPES
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WAGES
A payment earned for work, labor or services, typically given to blue collar
workers.
 A payment usually of money for labor or services usually according to contract
and on an hourly, daily, or piecework basis.
It is different from salary, which is a fixed regular payment, typically paid on a
monthly basis but often expressed as an annual sum given to a professional,
office staff or a white-collar worker.
Wages are paid according to a certain rate; while salary is a predefined fixed
amount.
Different concepts of wages
There are two concepts of wages: Nominal wages and Real wages. These
concepts when considered together are time based concepts and depend
upon change in the value of money.
Nominal wages: Also called money wages, they are the payments done to
workers in money form and do not take account of inflation rates and any
other market conditions. The basic determinants of the nominal wages
would be the government regulations and the organization’s
compensation policy.
• Real wages: Real wages define the purchasing power an individual
has and the amount of goods and services the individual can buy. Real
wages take into consideration the inflation rates. Real wages help one
determine the change in purchasing power by determining exactly
what goods and services can be purchased with the wages paid. Real
wages indirectly affect nominal wages. As the real wage increases,
employees can easily demand for more money wages. Real wages can
be a guide to indicate the changes in living standards. They are
determined by a formula,
where, C.P.I. = Consumer Price Index

Example 1: If the actual wages were increased by 4% and the inflation in
the region was 4%, this would mean purchasing power of the wage is the
same. However, if the actual wage increased by 3% and the inflation was at
4%, the purchasing power of the same amount will not be the same, your
real wage is at -1%
Example 2: Suppose a person makes on average Rs.450 per day. This rate
has been constant for over a year, but in the same time, the prices of the
goods and services the person buys have inflated by 4% . This inflation
would have been compensated if the nominal wages would have increased
by 4% to Rs.468 per day. But since the nominal wages have been the same,
purchasing power has decreased and the person is in net loss.
There are 3 other concepts of wages: Minimum wages, Fair wages and
Living wages
Minimum wages:
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 Fair Wage Committee, minimum wage must provide some
measure of education, medical requirements and amenities.
Minimum wages can be set by central or state government, labour courts,
wage council, etc.
The Minimum Wage Act, 1947 provides enforcement of minimum wages to
prevent exploitation of labour through payment of low wages.
Fair wages:
Fair wage is the wage which is above the minimum wage but below the living
wage
It’s lower limit is the minimum wages, and the upper limit is to be set by the
capacity of the industry to pay.
It depends upon:
 Minimum Wages
 Capacity of the industry to pay
 Prevailing rates of wages in the same or similar occupations in the same
or neighbouring localities
 Productivity of labour
 Level of national income and its distribution
 The place of the industry in the economy of the country
Living wages:
According to the Fair wage committee, the person who earns living wages,
should not only be able to provide family with basic necessities, but also
comfort, some amount of luxury, education, protection against ill health.
They represent highest level of wages and includes all amenities which a
citizen living in a modern civilized society is to expect.
They also represent standard of living in a city, state, country.
Need based wages: The Indian Labour Conference at its 15th session held at New
Delhi in July, 1957 suggested that minimum wage fixation should be need based.
In the absence of any criteria stipulated for fixing the minimum wage in the
Minimum Wages Act, the Indian Labour Conference in 1957 had said that the
following norms should be taken into account while fixing the minimum wage:
• Three consumption units per earner,
• Minimum food requirement of 2,700 calories per average Indian adult,
• Cloth requirement of 72 yards per annum per family,
• Rent corresponding to the minimum area provided under the Government’s
Industrial Housing Scheme and
• Fuel, lighting and other miscellaneous items of expenditure to constitute 20 per
cent of the total minimum wage
• Children education, medical requirement, minimum recreation including
festivals/ ceremonies and provision for old age, marriage, etc. should further
constitute 25% of the total minimum wage.
Different Types of Wages
Wages are generally classified into 5 types depending upon how the
wages are calculated and the form of wages earnt:
 Piece rate wages

Time wages
Cash wages
Wages in kind
Contract wages
Piece Rate Wages:
 Wages are paid according to the quantity of pieces or products; or the
amount of work done by the worker.
 Time spent by the worker is not considered.
 They are calculated according to a fixed rate i.e. fixed amount of money per
piece produced.
 Generally used when quantity of product is of more priority than it’s quality.
 Different piece rates are determined for different jobs.
 Generally used where bulk quantity of products is required in less amount of
time.
 It is given by the formula:
Total wages earned = Total units of output * Piece rate
Advantages:
 More no. of jobs produced
 Wages link to efforts
 Less supervision required
Disadvantages:
 Poor quality of goods
 Not suitable for beginners
Example: This system is used in machining workshops where a product in bulk
quantity is to be produced.
Time wages:
 Wages are paid according to time spent by worker.
 Wage rates are fixed for generally an hour. It also may be per day or per week.
 Quantity of product is not considered.
 Generally used when quality of product is of more priority than it’s quantity.
 It is given by the formula:
Total wages earned = Time spent by worker * R
where, R = Fixed amount of money per unit time (minutes or hours)
Advantages:
 Better care taken and more attention is given to achieve better quality
 Better labor-management relations
Disadvantages:
 More supervision required
 Lack of incentive
 Workers may slack
Example: VMC machining of a complex object or part which requires precision
and very high quality and surface finishes, etc.
Cash wages:
 Wages paid to the labor in terms of money
 Compensation for employees that come in the form of spendable money. It
may be direct cash, cheque, money order, etc.
 Most of the employment compensation is given in the form of cash wages.
Wages in kind:
 Payment-in-kind wages is compensation provided in the form of goods and
services of value, rather than in cash format.
 Generally, this type of payment was practiced by the farmers to their
employees in the form of farm commodities, such as livestock or food, instead
of cash wages.
Contract wages:
 Wages are fixed in the beginning for complete work.
 For instance, if a contractor is told that he will be paid Rs. 25,000 for the
construction of building, it will be termed as contract wages.
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where, C.P.I. = Consumer Price Index

 Piece rate wages

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