Macro Economics Assignment II

Wage Determination in India

Deepak Prasad PGP/14/210 Section D

Macro Economics Assignment II

How wages are determined in India? Is it through collective bargaining (union and firms) or by the employer or by bargaining between employer and individual employee or take-it or-leave itbasis or through any other mechanism.
According to the minimum wages act the definition of wages is means all remuneration, capable of being expressed in terms of money, which would, if the terms of the contract of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment . Some of the major factors t hat affect the level of wages are: 1. 3. 5. 7. 9. Organizations Ability to Pay Prevailing Market Rate Productivity Level of Skill Managerial Attitudes 2. Supply & Demand of Labour 4. Cost of living 6. Trade Unions bargaining power 8. Job Requirements 10. Living Wage

In India nearly 93% of the total workforce works in the informal or the unorganized sector. The workers in the unorganized sector, work in different employments such as (i) contract labour, (ii) construction worker (78 per cent are unorganised workers), (iii) casua l labour, (iv) workers in small units -handloom, power -loom, beedi making, tanneries etc. (75 per cent of workers in manufacturing are unorganised workers), (v) sweepers and scavengers, (vi) employees in shops and (vii) workers in agriculture . The workers in informal sector are distinguished from the w orkers in formal sectors in the following way: a) in the organised sector activities are regulated by legislation, while that in unorganised sector are not well regulated and b) workers in the organised secto r are covered under social security legislations, while they do not cover the unorganised sector. The organized sector enjoys better conditions of work, protection under labor laws, is better unionized and most enjoy collective bargaining rights when compared to their unorganized sector counter parts. Unorganized sector have limited level of protection & trade union rights but varies across regions depending on the political climate in the state.
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Government workers enjoy high level of job protection, trade union representation without collective bargaining rights. Public Sector workers enjoy trade union and collective bargaining rights. Private sector workers enjoy trade union and colle ctive bargaining rights like public sector. Current trend is to move to non -union workplaces.

A brief history of the various legislation that has been enacted in India with regards to wages is documented in the table below.

Dee Prasad PGP/14/210 Sec D

Macro Economics Assignment II

Table 1: Labour legislations influencing wages in the informal sector in India Type of intervention To provide minimum compensation for work. Workers in scheduled employment to be paid minimum wage. To enable workers of a number of small units to form unions, who can bargain wages and other condition of work. To enable unions to raise industrial disputes on wages and the conciliation machinery to inte rvene. Assure equal wage to women for same or similar work.

Labour legislation The Minimum wage Act, 1948 The trade Union Act, 1926 The Industrial Dispute Act, 1947 The Equal remuneration Act, 1976 The Payment of wages Act, 1936

To regulate the manner of payment of wages and their realisation in case of non -payment. y Source: Das, K.S. (1998), Wage Policy Issues in the Informal Sector , The Indian Journal Of Labour Economics , V 41(4), p 896 .

Frame work for wage calculation: Organized Sector: The `day, `week and `month are the basic units for wages calculation - used in combination. Normal working week is five days (for government) five half days/ six days. `Hour is generally not a unit for wage calculation. (In newer sectors like IT, ITES hour is becoming a standard). Wage payment is made monthly. Unorganized sector: `Day is the common unit of calculation. In certain cases piece rate wages is in vogue, as well as hourly wages. Agencies that are involved in collecting wage data in India. Government: Central Statistical Organisation. National Sample Survey Organisation Labour Bureau under Ministry of Labour, GOI. Ministry of Agriculture Agricultural Survey. Private: Consulting companies keep track of executive remuneration.

METHODS OF WAGE DETERMINATION IN INDIA:

The present day wages are determined by the below mentioned 1) Recommendation of various committees and boards appointed by the central and state governments The institution of wage boards has come to be widely accepted in India as a viable wage determination mechanism. The boards have been successful in fulfilling their primary object

Dee ak Prasad PGP/14/210 Section D

Macro Economics Assignment II

of promoting industry-wise negotiations and active participation by the parties in determination of wages and other conditions of employment. Wage boards are set up by the Government, but it is not involved as much in the selection of the members of the wage board. Members of the wage board are appointed by the consent of the employers and employees. The members are usually nominees appointed by the employers and the labor union organizations. The boards are chaired by Government appointed persons who represent the public. The wage boards in India can be classified into two types A) Statutory Wage Board: Helps in establishing the minimum wages and other standards of employment which are legally enforceable. B) Tripartite Wage Board: A body setup by discussions between the employers, workers and the government to negotiate on wages, working hours and related conditions. Wage board decisions are not final and are subjected to either executive or judicious review or reconsideration by other authority or tribunals. The powers and procedure of wage boards are same as industrial tribunals instituted under the ID act 1947 2) Pay Commissions: First pay commission was appointed by GOI in 1946 to enquire in to the conditions of service of central government employees. This commission in its report said that in no case should they pay less than a living wage. The 2 nd pay commission was appointed in August 1957; it examined the norms for fixing a need based minimum wage setup. GOI appointed the 3 rd pay commission in the 1970s which in its report expressed support for a system in which adjustments of pay will occur automatically with upward movement in consumer price index. The 4th pay commission came in 1983 to examine the structure of all central government employees, including those of union territories, officers belonging to the armed forces and all India service. Commission submitted a report that recommended drastic cha nges in pay scale. The 5thpay commission 1996 made certain recommendation regarding restricting of pay scales. The 6th pay commission was established in 2006 which submitted a report suggesting revision of Pay scales of employees of Autonomous bodies. 3) Collective Bargaining: Collective bargaining relates to those arrangements under which wages and conditions of employments are generally decided by agreements negotiated between the parties. . One of the parties is generally the Union of workers. The union s main agenda would generally be the general level of wage rates, structure of wage rates and bonus, incentives etc. Broadly speaking the following factors affect the wage determination by collective bargaining process:
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Alternate choices and demands Institutional necessities The right and capacity to strike

In a modern democratic society wages are determined by collective bargaining in contrast to individual bargaining by working. In the matter of wage bargaining, unions are primarily concerned with:

Dee ak Prasad PGP/14/210 Section D

Macro Economics Assignment II

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General level of wages Structure of wage rates (differential among occupations) Bonus, incentives and fringe benefits, administration of wages

4) The capacity of the industry to pay and afford wage increases: This basically relates the wages with the cost of production of the industry and at the same time the threat that an increase in wage might pose to the revenue and profits of the industry. 5) Regional Wages prevalent in the region: This is one of the most important factors effecting the wage determina tion, especially the minimum wages. This is as per the recommendations by the National Commission on Labour. 6) Prices and Productivity: For any industry the cost of production, its productivity level determines the revenue and profits that it earns. Thi s in turn affects the capacity of the industry to pay wages. 7) Preserving Real Income: This principle basically involves changes in wages following the inflation changes in the country. Further this also includes the concept of Basic Minimum Wages an d comparative wage justice. 8) The capacity of the economy: This basically deals with the macroeconomic impacts on inflation, competitiveness, other parameters affecting internal and external balance as well as the affect on business profits and investments resulting from the changes in the wages. 9) Time to time Judicial Pronouncements : The Supreme Court interferes from time to time and puts in various conditions that need to be taken care of for setting wages.

References :
http://www.scribd.com/doc/31537418/Wage-Determination-in-India
Report Of The National Commission On Labour Wage Determination in a Labor Surplus Economy: The Case of India

Dee ak Prasad PGP/14/210 Section D