COMPENSATION AT MACRO LEVEL

UNIT-II

By: Nimisha Sinha

INTRODUCTION TO LABOR MARKET

The labor market, also known as the job market, refers to the supply of and demand for labor,
for which employees provide the supply and employers provide the demand. It is a major
component of any economy and is intricately linked to markets for capital, goods, and services.

The labor market refers to the supply of and demand for labor, for which employees
provide the supply and employers provide the demand.
The labor market should be viewed at macroeconomic and microeconomic levels
because each offers valuable insight into employment and the economy as a whole.
Unemployment rates and labor productivity rates are two important macroeconomic
gauges. Individual wages and the number of hours worked are two important
microeconomic gauges.

It's important and useful to study both the macroeconomic and the microeconomic views of the
labor market. Each view can inform government and business outlooks, policies, and actions
regarding employment. And the labor market plays a major role in any economy.

At the macroeconomic level, supply and demand are influenced by domestic and international
market dynamics, as well as factors such as immigration, the age of the population, and
education levels. Relevant measures include unemployment, productivity, participation rates,
total income, and gross domestic product (GDP).

At the microeconomic level, individual firms interact with employees, hiring them, firing them,
and raising or cutting wages and hours. The relationship between supply and demand influences
the number of hours employees work and the compensation they receive in wages, salary, and
benefits.

COMPONENTS OF LABOUR MARKET

The labor market comprises four components: the labor force population, applicant population,
applicant pool, and the individuals selected.

1. Labor force population

The labor force population or labor force participation refers to the number of individuals who
are available to work in a labor market. It considers all workers who are offering their skills
and services for employment regardless of the industry they are in.
2. Applicant population

The second component is the applicant population which refers to the people who are applying
for a particular job that suits their expertise and skills. Recruiters look first at the labor market
and then look next for individuals who meet the skills and qualifications set for a particular
job. For example, the people looking for IT, graphics design, and similar jobs belong to the
same applicant population, which is targeted by recruiters looking for this type of professional.

3. Applicant pool

The third component is the applicant pool, which is the actual number of people who initially
signified their interest in applying for a particular job by sending in their resume. It may very
well be considered the first part of the selection process where the recruitment department of a
specific organization receives applications and screens them to determine who advances to the
next round of screening.

4. Individuals selected

The fourth component is the individuals selected, which simply means the individual or
individuals who’ve made it through the screening process and have been hired for the job. Of
course, this is judged based on a number of factors, and the person is screened against a
carefully determined set of qualifications.

UNDERSTANDING LABOR MARKET ANALYSIS

Labor market analysis is an integral part of an organization’s recruitment process because it not
only helps it find the most qualified workers for the jobs that it offers but also ensures that it
provides a competitive compensation package to its workers. This is important in order for an
organization to be able to keep its competent workers and, thus, continue its productivity.

Generally speaking, labor market analysis involves the following processes:

Identifying the various labor markets for a given type of position. It involves looking
at the appropriate labor market based on a specific position.
Checking the market for salaries for a common position. The process involves checking
similar positions in the labor market in order to determine if an organization’s salary
rates are at about the same level.
Determining market trends. This step answers questions as to how other organizations
are compensating their workers, including their pay practices.
Adjusting salary packages or structure of positions. After checking the salary rates of
other organizations and finding out if there is any need for adjustments, the department
then makes recommendations for such adjustments and restructuring of positions in the
company.
Making consultations with management. This process involves sitting down with
management to determine their workforce needs.
LABOUR MARKET IN INDIA

Firstly, between 1951 and 2012, there was a significant shift in the population from agriculture
to manufacturing and services. The recent data shows these changes to be continuing. As a
result of these shifts, productivity in agriculture has fallen sharply. It is in contrast to overall
productivity, while the services have gone up dramatically.

A second important feature of the Indian labour market is the low rate of participation, defined
as the population within the age group of fifteen to sixty-five years (the "working-age"
population) who either work or seek employment.

In particular, the low female participation rate (by international standards), which was between
34 and 37 per cent for fifteen years up to 2005, continued to decline and stabilise at a rate of
27 per cent.

A third salient feature of the Indian labour market is the superiority of migrant workers and the
unorganised sector's dominance in the labour market, which includes companies employing
fewer than ten employees.

A fourth characteristic of the Indian labour market is the presence of rigid labour market laws
that limit employers' rights.

The final characteristic of the Indian labour market is the provision of government jobs to rural
poor under the scheme of the National Rural Employment Guarantee Act (NREGA).

WAGE POLICY

The term “Wage Policy” refers to legislation of government action undertaken to regulate the
level or structure of wages or both for the purpose of achieving specific objectives of social
and economic policy. The social and economic aspects of wage policy are normally inter-
related measure inspired by special considerations; inevitably have economic effects and action
designed to achieve specific economic result has social implications.

Principles which act as guidelines to determine a wage structure are called as wage

policies. In the beginning as an economic issue, it was primarily the concern of the

employer while state was adopting laissez faire policy. But, with the industrial progress

and subsequent industrial balance between employers, employees, wage bargain has

become a matter for three folds concern of the employer, employee and the state.

This policy aims to promote social justice, reduce income inequality, and enhance the

standard of living for workers. Key features of wage policy include the periodic revision
of minimum wage rates, which vary across states and regions, and the involvement of

both central and state governments in setting minimum wages.

Pay commissions are appointed to review and recommend revisions in pay and

allowances, with the Central Pay Commission (CPC) being the most well-known. Wage

policy often involves consultations and negotiations between labor unions, employers,

and the government, with tripartite mechanisms aiming to achieve consensus on wage-

related issues.

Wages may consist of fixed components (basic salary) and variable components

(allowances, incentives). The Indian Constitution enshrines the principle of equal

remuneration for equal work, ensuring that men and women receive the same wages for

similar work. The Minimum Wages Act, 1948, empowers the government to fix and

enforce minimum wages across various employments and sectors. Advocates often

stress the need for a "living wage" that covers basic needs and a decent standard of

living.

Wage policy in India is a crucial aspect of the government's approach to regulating and

setting wage rates across various sectors of the economy. Its primary objective is to

ensure fair and equitable compensation for workers, balancing the interests of

employees and employers.

Challenges in wage policy include maintaining a balance between labor protection and

economic competitiveness, addressing wage disparities, and coping with inflationary

pressures.

The pressures of rising prices have encroached on the living standards of employees;

the demand for higher wages and better working conditions create prices, market and

production problems for the management; and the final burden of finding a solution to

the problems of wage policy ultimately falls on the government.

 Some rational wage policy has to be woven into the socio-economic texture that reflects

the objectives and aspirations of the people of a particular country. It cannot be dealt

with on purely economic considerations in isolation from the social policy and political

culture of that particular community.

Although an organisation can take some guidelines from the public policy, while formulating

its wage policy and subsequent strategy, an organisation has to take care of a number of factors

such as ongoing rates of wages in the market, its ability to pay, internal and external relativities,

controlling of labour costs, motivation of workers and rate of productivity.

In this regard, the major factors that may affect the wage policy of an organisation and which

need to be paid due attention at the time of formulation of organisational wage policy are as

follows:

Internal equity
External equity
Productivity
Cost of living
Motivation level of workers
Pay vis-a-vis performance
National wage policy
Statutory obligations
Labour market conditions
Present rate of attrition of employees.

Wage Policy – 3 Main Concepts: Minimum Wages, Fair Wages and Living Wages

The wage policy of any country should be sound and rational from economic and social point
of view. A sound wage policy maintains industrial peace, satisfies both the employers and the
workers, increases the output of the firm and efficiency of workers, reduces costs and
maximizes profits.
An unsound or irrational wage policy is always condemned from social and humanitarian point
of view. Such a policy leads to the negation of the basic principles of social justice to the
working community. Even from the economic point of view, an unsound wage policy is
condemned because it will affect the efficiency of the workers.

So, it becomes necessary to pay the workers that number of wages which is considered to be
ideal, fair or reasonable. Different concepts of wages have been put forth for the purpose of
framing a sound wage policy.

Concept # 1. Minimum Wages:

It is commonly accepted that workers should be give atleast minimum wages to enable them to
lead a minimum standard of living. Then a question arises – What is a minimum wage? It is
however difficult to define “minimum wage’’. However, it may be defined as a wage which is
just sufficient for the worker to keep his body and soul together.

The committee on fair wages defined the minimum wage as irreducible (minimum) amount
considered necessary for the sustenance of the worker and his family and for the preservation
of his efficiency at work. The Fair Wages Committee considered that “a minimum wage must
provide not merely for the bare subsistence of life but for the preservation of efficiency of the
worker. For this purpose, the minimum wage must also provide for some measure of education,
medical requirements and amenities”.

Concept # 2. Fair Wages:

Fair wage is another important concept used in a wage policy. There are no two opinions for
the payment of wages which are considered as “fair”. But it is very difficult to define and
determine what a fair wage is. The encyclopaedia of Social Science describes a fair wage as
“one equal to that received by workers performing work of equal skill. Difficulty or
unpleasantness”.

According to Pigou, there are two degrees of fairness for deciding fair wage. In a narrow sense.
Trade and in the neighbourhood for similar work. In a broader sense, a wage is fair if it is equal
to the predominant rate for similar work throughout the country and in the generality of trades.

Thus, a fair wage is one which can be fixed only by comparison with an accepted standard of
wages. Such a standard can be determined in relation to those industries where. Such a standard
can be determined in relation to those industries where labour is well organised and is able to
bargain well with employers.

Concept # 3. Living Wages:

Living wage is a step higher than fair wage. It may be defined as the wage that would enable
the worker to provide a measure of comfort for himself and his family, in addition to the
essentials of life. The concept of living wage was first defined by Justice Higgins of the
Australian Commonwealth Court of Conciliation in 1907.

He defined the living wage as “one appropriate for the normal needs of the average employee
regarded as human being living in a civilized community. He further pointed out that living
wage should be sufficient not merely to provide bare necessities of life but also a condition of
frugal comfort estimated by current human standards.”

The Legal Framework of Compensation

The legal framework sets the boundaries within which compensation practices must operate.
Organizations must align their compensation strategies with relevant laws to ensure compliance
and avoid legal pitfalls.

Labor laws in India establish a legal framework for compensation and regulate payment of
wages, minimum wages, bonuses and equal remuneration. Key acts discussed include the
Payment of Wages Act (regulates timely payment of wages), Minimum Wages Act (ensures
basic needs are met), Payment of Bonus Act (mandates bonus for good work) and Equal
Remuneration Act (provides for equal pay for equal work regardless of gender). The acts aim
to prevent exploitation, provide fair wages and improve livelihoods while establishing
employer obligations and penalties for non-compliance.

Key Components of the Legal Framework

1. Minimum Wage Laws

Laws stipulate the minimum wage that employers must pay their employees, ensuring a
baseline level of compensation.

2. Anti-Discrimination Laws

Legislation prohibits discriminatory practices in compensation based on factors such as gender,

race, religion, and disability.

3. Employment Contracts

The legal framework governs the terms and conditions of employment contracts, including
compensation, benefits, and obligations of both parties.

WAGE DETERMINATION

In the realm of compensation and rewards management, understanding the Economic Aspects
of Wage Determination is crucial. Wages, a fundamental aspect of employment, are intricately
linked to economic principles and market dynamics.

Wage determination is, at its core, an interaction between the demand for and supply of labor.
In a competitive labor market, wages are akin to the price of labor, and this price is influenced
by various economic factors.
The Role of Supply and Demand

Labor Supply: The number of individuals willing and able to work at various wage
levels plays a significant role. A larger labor supply relative to demand can lead to lower
wages, while a shortage of skilled labor can drive wages higher.

Labor Demand: Employers’ demand for labor is influenced by business conditions,

industry growth, and technological advancements. When demand for a certain skillset
is high, employers often need to offer higher wages to attract and retain skilled workers.

Inflation and Cost of Living

Inflation has a direct impact on the purchasing power of wages. As prices for goods and
services rise, the value of wages may erode if they do not keep pace. Therefore, cost-of-living
adjustments (COLA) are sometimes incorporated into wage structures to ensure that real
wages (adjusted for inflation) remain relatively stable.

Productivity and Wage Growth

Productivity, or the amount of output produced per unit of input, is a significant determinant
of wage growth. When employees become more productive, their contributions to the
organization increase. As a result, employers may offer wage increases to align with the value
added by their improved productivity.

Collective Bargaining and Minimum Wages

Collective bargaining between labor unions and employers often influences wage levels.
Unions negotiate on behalf of workers to secure favorable wages and working conditions.
Additionally, minimum wage laws set by governments ensure a baseline wage that employers
must adhere to, preventing excessively low wages.

Globalization’s Impact

In a globalized economy, economic aspects of wage determination extend beyond borders.

Outsourcing and offshoring can influence wages as companies seek cost-effective labor
markets. Furthermore, economic disparities between countries can lead to wage differentials
for similar jobs in different regions.

Striking the Balance

Balancing economic aspects of wage determination requires a comprehensive approach:

Market Research: Regularly analyze labor market trends and industry benchmarks to
ensure wages remain competitive.
Incentives for Growth: Reward productivity gains by tying wage increases to
improved employee performance.
Inclusive Decision-Making: In organizations with collective bargaining, involve
employees and unions in wage discussions for equitable outcomes.