Wage Determination

Procedure & Practices for Wage Determination- Setting wage rates is a key process in any compensation management system. Organizations need to understand how much they will need to pay their employees, as this expense is typically the largest portion of business expenses. How then is wage determined?

The Market Theory of Wage Determination assumes that wages are determined by supply and demand. All other considerations such as skill level of labor or location of open jobs are secondary to the basic equation of available labor versus demand for that labor in the market. Market Theory argues that wages will eventually be agreed upon by employers and employees based on all of the above factors. In addition, any change in labor or demand will affect wages proportionately, i.e. scarcity of labor will increase wages and vice versa.

However, this theory ignores the fact that in real market conditions there may be a gross imbalance of bargaining power between employers and employees leading to wage rates that do not meet even subsistence standards for workers. This is where wage policy becomes important.

In the Indian context, the Minimum Wages Act, 1948 was passed to lay down norms and procedures for fixing wages by the government. A tripartite committee on fair wages was set up in 1949 to determine principles for the promotion of wages, and wage Policy was introduced in the First Five Year Plan to ensure full employment & optimum allocation of resources.

In India, wages and salaries are determined through several different procedures:

• Collective Bargaining: The negotiation between organized workers and their employer or employers to determine wages, hours, rules, and working conditions constitutes Collective Bargaining. Trade Unions influence the general level and structure of wages under collective bargaining. Workers have the right and capacity to strike, thus promoting democracy. Several laws influence Collective Bargaining efforts. Some of these are the Factories Act, 1948, Industrial Disputes Act, 1947 etc.
• Industrial Wage Boards: Industrial Wage Boards consist of an equal representation of employers and employees as well as an independent Chairman. India has a statutory wage board and a Tripartite wage board. Wage Boards were set up so that industrial disputes could be referred to them without the need to move a Court of Law. The decisions of a Wage Board are binding on the parties.
• Pay Commissions: The Pay Commission is an administrative system/mechanism that the government of India set up in 1956 to determine the salaries of government employees. It was proposed that in no circumstance could the wage of any worker be less than the Living Wage. Since then, there have been 6 Pay Commissions. 
• Adjudication: Courts and Tribunals intend to deal with the settlement of industrial disputes concerning wages and salaries.

Go back to Tutorial                                                                                Go to Home Page