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What is Wage?

Meaning of Wages

Meaning of Wages

The term, ‘wages’ meant payment made for the services of labour. According to Benhaim, “A wage may be defined as a sum of money paid under contract by an employer to a worker for services rendered.” In other words it is a sum of money paid under contract. By one employer to a worker in exchange for the service rendered.

Kinds of wages

Different kinds of wages are as follows-

  1. Money or nominal wages –

    Remuneration paid to a worker for his services in cash during a certain period is called money wages or nominal wages. For example – A salary to a manager is Rs. 5000/- P.M. this is a money wages.

  2. Real wages –

    All goods and services which a worker gets directly or indirectly for the services rendered by him are known as real wages. Thus, all the facilities, concessions and advantages received by the workers except goods and services purchasable by money are included in real wages. In other words, real wage includes all the facilities that are provided by an employer to a worker in addition to the money wage.

Thus, Real wages = Money wages + other facilities provided by employer.

Causes of difference in wages

The following are the causes which create difference in wages in different employment professions and localities.

  1. Differences in efficiency –

    Different person possess different capabilities and work efficiency these may be due to different inborn qualities, education and conditions under which work is performed. When efficiencies are different, wages must be different.

  2. Difference in training-

    Many jobs require long trainings which involve a heavy expenditure. For example – The training period of an engineer is five years. The job which calls for expensive training offers higher wages than others.

  3. Difference in the nature of work –

    All work is not equal some are more attractive and comfortable than others. A person would like to do the job in which he feels more comfortable even if he is paid less.

  4. Regularity of employment –

    People generally prefer to work at lower wages where employment is regular rather than to work at higher wages where the employment is unstable and irregular.

  5. Lack of mobility-

    All persons working in an occupation will get equal wages only when they are equally mobile. However in actual practice, there are many constraints on the mobility of labourers, because of which they stick to the same job and place even when they can get higher wages else where.

  6. Difference in risk –

    Different jobs involve different degrees of risk. Hazardous and dangerous occupations generally offer higher emoluments. For example – Military jobs of mines are very risky and full of danger as compared to desk jobs.

  7. Differences in responsibility –

    Some jobs involve more responsibility than others. If the work involves trust or responsibility the worker must be paid more.

  8. Difficult of learning a trade-

    The number of those who can master difficult trades is small. Their supply is less than demand for them and their wages are higher.

The Marginal Productivity Theory of Wages

This theory states that wages tend to equal the value of the marginal product of labour, i.e., the additional product which is obtained by adding one more unit of labour. This theory is analogous to the marginal utility theory of value.

Suppose a firm employs 500 labourers. After keeping other factors unchanged, if it employs one more worker the output increases by 5 units. Suppose that the price of product is Rs. 10 each which makes the value of marginal product Rs. 50. So long as the market rate of wages is less than Rs.50, it is profitable for the firm to engage additional workers. However, an increase in the number of workers will reduce the marginal product because of the operation of diminishing returns. Therefore, as employment is increased, a time comes when the value of the marginal product will just be equal to the value of the marginal product of labour. In the example given above we have assumed perfect competition.


The marginal productivity of wages is based on the following assumptions:

  • Perfect competition,
  • perfect mobility of labour and capital,
  • Units of the factors of production are homogeneous and
  • All the factors, of production are fully employed.

The marginal productivity theory of wages has been criticised on the following ground:

  1. The theory assumes perfect competition in the labour market. In actual life the labour market is imperfect. Labour is not so mobile as the theory assumes. The assumption that units of labour are homogenous is not true.
  2. According to Maurice Dobb, the demand for labour does not depend on productivity but on the willingness of capitalists to save which depends on the previous profits and on previous wage bargains.
  3. The most scathing criticism against the marginal productivity theory is the that it dose not take into account the forces governing the supply of labour. The marginal productivity determines the demand for labour, it cannot by itself determine the equilibrium rate of wages.

Wages determination under perfect competition

Wages rate is determined by the industry. The wages rates are determined by the industry each and every firm which forms part of that industry will accept it. In perfect competition the price of the product will be equal to the average cost and Marginal cost in the long period of time.

Wages rate remains the same in perfect competition, therefore, the average wage and marginal wage coincide and both of them tend to be equal to average revenue productivity and marginal revenue productivity in the long run. In the short run of firm can have normal profit or loss.

OW is the wage rate which is determined by industry as per total demand -and supply of labour. All firms follow this rate of wages point out which MRP and wage rate is equal, the firms will be in the equilibrium state. It is E point. Wage determination is based upon certain assumptions as follows –

  • There are a large number of firms.
  • Firms are fully independent.
  • Workers are equally competent.
  • Workers are perfectly mobile.
  • Perfect competition is found.

Difference between Wages and Salaries

In ordinary usage a distinction is often made between wages and salaries. Wages are said to be payments for manual work, while salaries are paid for non-manual work. Other differences between them are said to be that-

Wages are paid weekly, but salaries are paid at longer intervals;

Wages are paid for a definite amount of work measured by time or piece with the provision of proportionate deduction if less than full work is done, but salaried workers are subjects to no such deductions.

Economically there is no clear line of distinction between wages and salaries. But the second distinction has some economic importance. Wage are a variable cost which varies with output. Salaries are, in the short period, a fixed cost and do not vary with output. Salaries are, in the short period, a fixed only, the distinction between wages and salaries has some importance, otherwise the two are not to be differentiated but to be used in the same sense for the share of labour in the national income.

Difference between Nominal or Money Wages and Real Wages

Nominal wages, also called money received per hour, per day, per week and so forth. In comparing wages at different periods of time it is not sufficient to know that in 1955 few workers received more than Rs. 25 per week; that their average earnings were Rs. 35 per week in 1965, Rs. 50 in 1975 Rs. 150 in 1985 and Rs.250 in 1995. Such statements are made and on their basis we generally infer that the economic position of workers had improved 10 times between 1955 and 1995. Wages are wanted only for what they buy and in this sense real wages are a better term that should be used because such wages are wages in terms of the quantity of goods and services which a worker can obtain with his money wages. Thus real wages are purchasing power of money wages. Whether the economic condition of labour was better or worse in 1995 compared to 1955 can be stated by comparing is real wages. As Adam Smith says, “The labourer is rich or poor, is well or ill rewarded, in proportion to the real, not to the nominal price of his labour.”

Real wages depend upon the money wages and the prices of goods and services bought with money wages. Real wage is calculated by dividing or deflating money wage by an index number of the overall price level. Real wage can be expressed as W/P, where W-money wage and P-index of price level. If money wage rose by 5 per cent while the price level rose by 10 per cent, the real wage would be lower. It means that less volume of goods and services can be bought now with the new money wage. In our example, money wage rises but real wage declines because product prices rise more rapidly than does the money wage. Thus money wages and real wages need not move together.

Besides money wage and the purchasing power of money (i.e., the price level), other factors influencing real wages are payments made in kind as free quarters, cheap rations, free uniform, etc., possibility of supplementary income as private practice by a doctor, income from books, etc., hours of work, regularity of employment, nature of job, future prospects and so forth.

Determination of wages under monopoly

The monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitute.

Two points should be noted in regard to this definition, first, there must be single producer, if there is to be a monopoly. Single producer may be an individual owner or a group of partners or a Joint Stock Company or any other combination of-producers. Hence there must be a sole producer or seller in the market, if it is to be called a monopoly. Since there is only one, firm under monopoly that single firm constitutes the whole industry. Secondly, the commodity produced by the producer must have no closely competing substitutes.

In the condition of monopoly, a single producer is the sole purchaser of labour whereas labour occurs when a big employer employs proportionately a very large number of given employees so that he is in a position to influence wages rate.

Hence, wages in monopoly are lower because the produce is the bead to decide the wages. To minimise the cost of production and maximise the profit, the producer always fixes the wages at the lowest cost.

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