The wage conundrum

By Dr Santosh Kumar Mohapatra*

Labour is an important factor of production. If there is no labour to work, all other factors, be it land or capital, will remain idle. Thus, Karl Marx termed labour as the “creator of all value”. A wage is the distribution from an employer of a security (expected return or profits derived solely from others) paid to an employee. Like interest is paid out to an investor on his investments, a wage is paid as earnings to the employee on his invested assets (time, money, labor, resources, and thought). In economics, the price paid to labour for its contribution to the process of production is called wages. 

Wages are part of the expenses that are involved in running a business, and add value to the employee in honor of his principal protected note or net investment. According to Benham, “A wage may be defined as the sum of money paid under contract by an employer to worker for services rendered.” Similarly, according to A.H. Hansen “Wages is the payment to labour for its assistance to production.” According to J.R. Turner, a wage is price; it is the price paid by the employer to the worker on account of labour performed.”. According to Mc Connell, ‘Wage rate is the price paid for the use of labour.”

Payment by wage contrasts with salaried work, in which the employer pays an arranged amount at steady intervals (such as a week or month) regardless of hours worked, with commission which conditions pay on individual performance, and with compensation based on the performance of the company as a whole. Waged employees may also receive tips or gratuity paid directly by clients and employee benefits which are non-monetary forms of compensation.

Since wage labour is the predominant form of work, the term “wage” sometimes refers to all forms (or all monetary forms) of employee compensation. Some examples of wage distributions include compensatory payments such as minimum wage, prevailing wage, and yearly bonuses, and remunerative payments such as prizes and, payouts. Wage is classified as subsistence wage, minimum wage, living wage, justified wage etc.

Subsistence wage is the lowest wage upon which a worker and her family can survive, which refers to a biological minimum. If wages fall below this level, workers would starve. Minimum wages have been defined as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.

A living wage refers to a theoretical income level that allows an individual or family to afford adequate shelter, food, and the other basic necessities. The goal of a living wage is to allow employees to earn enough income for a satisfactory standard of living and to prevent them from falling into poverty.

A justified wage is a fair level of compensation paid to an employee that takes into account both market and non-market factors. A justified wage refers to an income level determined by market dynamics, work experience, education and skill. It is a wage that is often greater than the minimum wage, but which also allows employers to actively seek out and hire workers. The type of work, the skills demanded, experience, job duties, and the general state of the economy all come into play when establishing a justified wage,

A justified wage is the wage level that is high enough to attract workers but low enough to enable employers to offer employment. The divergence between a justified wage and the legal minimum wage may depend on several factors including the state of the economy and level of unemployment. It is justified wage, which is a genuine trade union strives to achive for its members.

In real practice, wages are of also many types such as piece wages, time wage, and cash wages. Piece wages are the wages paid according to the work done by the worker. To calculate the piece wages, the number of units produced by the worker is taken into consideration. If the labourer is paid for his services according to time, it is called as time wages. For example, if the labour is paid Rs. 350 per day, it will be termed as time wage. Cash wages refer to the wages paid to the labour in terms of money.

The salary paid to a worker is an instance of cash wages. When the labourer is paid in terms of goods rather than cash, is called the wage in kind. These types of wages are popular in rural areas. Under this type, the wages are fixed in the beginning for complete work. For instance, if a contractor is told that he will be paid Rs.5,25,000 for the construction of building, it will be termed as contract wages.

Similarly, wage can be classified as nominal wage and real wage. The total amount of money received by the labourer in the process of production is called the money wages or nominal wages. Real wages mean translation of money wages into real terms or in terms of commodities and services that money can buy (i.e, when inflation is factored).

Hence, normally, usually, wages are defined as the amount of money the capitalist pays the worker for a certain period or amount of labour. But according to Karl Marx, this is merely an illusion. What is really purchased is labour power (the capacity for labour) and not labours itself. The labour power has one’s mental and physical energy as well as one’s time.

What the wage laborer makes is commodities, which are comprised of a use value and exchange value. The use value refers to the specific use a product fulfils, for example, coffee meets the need for having more energy. The exchange value refers to the quantitative worth of a product. Expressed in terms of money, the exchange value of a commodity is its cost, for example, a cup of coffee’s price or exchange value is three dollars.

Hence, a wage is the price of labour power. But wages are not shares or percentages of the profits generated from the worker’s labour. The capitalist buys labor power with his already existing capital. The worker’s energy is purchased like any other thing needed for the production of a commodity. Hence, the worker gets a wage, but not a percentage of the profits. If the worker gets a percentage of the profits and when profits increases then wage will increase too.

Capital does not want this to happen because it would shrink its profit. Capitalism is what turned labour power into a commodity to be bought and sold. The commodification of labour power is a defining feature of capitalism. In other words, wage labour is a structure of capital. Though, the workers can quit his job whenever he wants, but this is merely an abstract freedom. Yes, the worker can quit his job and find another one. But can he really choose to quit wage labor itself or the “whole class of buyers”? If he quits wage slavery altogether, then he faces the perils of unemployment, hunger, poverty, low social status, etc.

True freedom would entail not having to sell one’s labor power to any capitalist and still be fine. So while the wage slave is not owned by any capitalist in particular he is, in fact, effectively owned by the capitalist class. Again, wages are the price of the commodity of labor power. The laws that determine the prices of all other commodities also determine the price of labor power.

According to Karl Marx, it is the competition, which determines the price of a commodity. However, competition is threefold: (1) competition between sellers, (2) competition between buyers, (3) competition between sellers and buyers. Price is determined by supply and demand, but it is the cost of the production which determines the relation between supply and demand. The cost of the production of commodity is that through which the relation between supply and demand is measured and determined.

The price of wages (or the price of the labor power of the worker) is determined by the price of the means of subsistence or the means of life (the conditions of keeping the worker in working condition) and by the price of the reproduction of the working class (the cost of having to have the workers procreate and make replacements, i.e., children).

The price of the minimum wage is determined at the general level of the working class — not by the individual workers. This means that many workers do not actually receive the minimum wage. For individual reasons and circumstances, many workers are not able to afford to subsist and reproduce themselves. But the wages for the working class in general do adjust themselves so as to preserve the class of wage slaves.

There are different theories on wages. One is the subsistence theory of wages, advanced by David Ricardo and other classical economists, and was based on the population theory of Thomas Malthus. It held that the market price of labour would always tend toward the minimum required for subsistence. If the supply of labour increases, wages would fall, eventually causing a decrease in the labour supply. If the wage rose above the subsistence level, population would increase until the larger labour force would again force wages down.

This theory argues that no one factor or single combination of factors determines wages and that no one rate of pay necessarily prevails. Instead, there is a range of rates, any of which may exist simultaneously. The upper limit of the range represents the rate beyond which the employer refuses to hire certain workers. This rate can be influenced by many factors, including the productivity of the workers, the competitive situation, the size of the investment, and the employer’s estimate of future business conditions.

The lower limit of the range defines the rate below which the workers will not offer their services to the employer. Influences on this rate include minimum wage legislation, the workers’ standard of living, their appraisal of the employment situation, and their knowledge of rates paid to others. Neither the upper nor the lower limit is fixed, and either may move upward or downward. The rate or rates within the range are determined by relative bargaining power.

Karl Marx accepted Ricardo’s labour theory of value (that the value of a product is based on the quantity of labour that went into producing it), but he subscribed to a subsistence theory of wages for a different reason than that given by the classical economists. In Marx’s estimation, it was not the pressure of population that drove wages to the subsistence level but rather the existence of large numbers of unemployed workers.

Marx blamed unemployment on capitalists. He renewed Ricardo’s belief that the exchange value of any product was determined by the hours of labour necessary to create it. Furthermore, Marx held that, in capitalism, labour was merely a commodity: in exchange for work, a labourer would receive a subsistence wage. Marx speculated, however, that the owner of capital could force the worker to spend more time on the job than was necessary for earning this subsistence income, and the excess product—or surplus value—thus created would be claimed by the owner.

The bargaining theory of wages holds that wages, hours, and working conditions are determined by the relative bargaining strength of the parties to the agreement was developed to a considerable extent by John Davidson. The determination of wages is an extremely complicated process involving numerous influences that interact to establish the relative bargaining strength of the parties.

Smith hinted at such a theory when he noted that employers had greater bargaining strength than employees. Employers were in a better position to unify their opposition to employee demands, and employers were also able to withstand the loss of income for a longer period than the employees. That necessitates a trade union who can jointly strive for decent wage and better wage rise.



*The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]



DISCLAIMER: The views expressed in the article are solely those of the author and do not inany way represent the views of Sambad English




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