SUMMER INSTITUTE ON LABOUR ECONOMICS AND INDUSTRIAL

RELATIONS, DEPARTMENT OF LABOUR & SOCIAL WELFARE,

PATNA UNIVERSITY, PATNA-5
THE STRUCTURE OF WAGES
BY
Dr. G.P. Sinha, Ph.D. (Cornell),
University Professor and Head,
Department of Labour & Social Welfare,
Patna University, Patna
Introduction
There are two sources of income in society : property and labour. Labour here is
used in its widest connotation ranging from the labour of the unskilled to the labour
of engineers or other most highly skilled and talented groups of people. When the
question of the division of the national income between these two sources is discussed,
theories of distributive shares arise, i.e., the theories of interest, rent and profit as
theories of income from property and theories of wages as theories of income from
labour. Students of economics are familiar with these theories--their history and critical
evaluation. Economists mostly agree that the operation of the market forces
supplemented by institutional arrangement determines the level of wages and the
share of wage in the national income. We are also aware of the controversies centring
round the theories and principles determining the level of wages in the economy as a
whole, whatever meaning the term level of wages may have in the context of thousands
of diverse jobs, job-rates and occupations in which the total labour of society is
distributed.
Actual Process of Wage Determination
The owner of a firm of its manager even though completely ignorant of the theories
of wages agitating the minds of economists has to take decision regarding the wage
rates that he is going to pay his employees. He does this unilaterally or jointly with
the union or in many cases he merely accepts the decisions of a governmental agency
or a tribunal. But he is confronted with the task of finalisling the wage rates of hundreds
of jobs with varying job-contents and varying degree of skill and talent required to
perform them. How does he decide how much to pay for the different jobs, i.e., what
should be the internal relationship between the wages and salaries for the different
jobs, that is, his internal wage structure.
1
The Meaning of Wage Structure
Therefore, one aspect of the wage structure is the internal relationship, i.e., the
relationship between the wages of different jobs within a firm. This is the internal
wage structure of a firm.
This internal wage structure is expected to bear a relationship with the wage
structure of his competitors in the product market as also with his competitors in the
labour market. These relationships are external to the firm. Influences constantly flow
in and out of a firm affecting the wage structure of competing firms. Thus arises, what
may be called, industrial wage structure, area or regional wage structure, combining
all these three one can talk of a national wage structure.1
As the structure consists of a series of inter-relationship and therefore, of wage
relativities, it becomes a matter of great significance in union-managment relations,
for both managements and unions are interested not only in absolute rates of wage
increases but also in the relativities.
Types of Wage Differentials
Even a cursory glance at any aspect of the wage structure as mentioned earlier
with bring to notice a bewildering diversity in wage rates, not in the wages for different
jobs but also in the wages for the same job. These differentials can be grouped to
facilitate comprehension under the following heads :
(i) occuptional/skill wage differentials
(ii) industrial wage differentials,
(iii) area or geographical wage differentials,
(iv) interplant/intra-plant wage differentials,
(v) sex wage differentials,
(vi) Race/caste/religion wage differentials,
(vii) Union/non-union wage differentials,
(viii) Age/seniority wage differentials.
These are some the types of wage differentials and one could expand the list by
adding many more. However, one sould be cautious enough in any discussion on
wage differentials to take note of the overlapping nature of some of these differentials.
1. See Tables 1 & 2 at the end of the paper to have an idea of industrial wage structure of India and
State dispersals.

2
How are the Differentials shaped ?
Under the competitive model with perfect competition, perfect knowledge and
free mobility of labour and capital, it was assumed that most of these differentials
would disapper except for those which were related to the differences in the basic
nature of job or occupational requirements. In respect of even those differentials, i.e.,
differentials between occupations, it was siad that they contained an element of
equalising and compensating differential, i.e., the net advantage of different occupations
tended to be the same. Therefore, invariably all discussions on wage differentials begin
with statement of Adam Smith advancing five explanations of occupational wage
differentials. The are :
1. Wages will vary with the ease or hardship, the cleanliness or distiness, the
honourableness, or dishonourableness of the employment.
2. Wages will vary with the easiness and cheapness, or the difficulty and expense
of learning a trade.
3. Wages in different occuptions will vary with the regularity or irregularity of
employment.
4. Wages will vary with the degree of trust reposed in an occupation.
5. Wages will vary according to the probability of success in the occupation.
In this statement Adam Smith refers to the innet differences in the nature of
occupations and also to the compensating factors. That is, even when the knowledge
of the market conditions is perfect and entry and exit, of labour is free, differnces in
wages will persits in order to invoke the supply of the relevant quality and quantity of
labour required for different jobs. This means, he treated and we all treat such
differentials as rational and economically necessary. From this point of view wage
differentials, necessary to attract sufficient labour of requisite quality according to the
needs of the occupation, industry and region, are rational and economically justified.
Looking from another angle, it can be said that the market forces are constantly
evaluating and revaluating the value and worth of the different jobs and therefore,
determining their compensation or reward accordingly. Hence, the holder of a job or
an occupation gets rewarded according to the value of his contribution to the economic
process. The money rewards together with non-monetary advantages or disadvantages
are indication of the value of the services performed, that is, the market/mechanism
tends to reward every one according to his worth.

3
Rationality of the Wage Structure
Applying this criterion of the economic worth and the value of different occuptions
and jobs determining their relative differentials in compensation, which of the
differentials mentioned earlier can be called rational and as being economically
necessary. Barbara Wootton in her book ‘The Social Foundations of Wage Policy’ has
subjected the existing wage structure and the wage differentional in Great Britain to
scathing criticism. This is what she has to say in this regard:
Classical wage theory thus appears insufficient by it self
to explain a number of the characteristic features of one
wage and salary structure. The actual picture is very
different from what the text books would lead us to
expect, in the sense that its most striking features are
just those which this theory dismisses as incidentals.
Wages and salaries are extremely unequal; and the spread
from top to bottom far exceeds the range of differences
that can credibly be ascribed to variations in inborn
aptitudes. It is also greater than can be accounted for by
the cost of acquiring the necessary training. Nor is it
possible to discover any sign at all of an inverse
relationship between the monetary and the non-monetary
attractions of different jobs. If the entire structure of
earned incomes is treated as a single whole, it is apparent
that the more agreeable and more responsible posts win
on every count. They are generally better paid than those
that carry less responibility, though less so than formerly,
and with some exceptions2.
It is apparent from the statement that she is both surprised and pained at the element
of irrationality in the existing British wage structure.
Source of Irrationality
It is clear from what has been said earlier in this article that differentials arising
from the operation of economic forces in an economy where people are free to choose

2. Barbara Wootton, The Social Foundation of Wage Policy, p. 66.

4
on the basis of their skill and talents between occupations and jobs, industry, employers
and places of employment without any barrier so as to maximise their job satisfcation,
certain differentials in wages will arise and tend to persist. The differentials will be in
constant flux in a dynamic society where new technology, new products, tastes and
fashions are emerging everyday. But apart from the economic forces, certain social
and political institutions are of no less importance in the determination of the operation
of these differentials. It is the operation of these social and political forces that lends
a degree of irrationality to the wage structure and distorts it when seen from the angle
of vision of an economist.
The Role of Customs and Traditions
Reverting back to Adam Smith explanation of the occupational wage differentials,
can one explain the existing wage differentials in India between the wages of a
municipal scavenger and the salaries of the top most civil servant purely in terms of
the requirements of their respective occuptions ?, that is, in terms of the relative ease
or hardship, cleanliness or dirtiness, honourableness or dishonourableness of the two
employment; easiness and cheapness, of the difficulty and expense in learning their
trades and the relative degree of trust and responsibility. I do not know if we can come
to any definitive conclusion as to the relative worth of the two occupations under
reference. But one thing is clear : the task of cleaning latxines and carrying night soil
on the head is so dirty and so dishnonourable that we would not have got adequate
supply of scavengers and sweepers but for the fact that we have traditionally condemned
a group of people belonging to a particular caste to carry on the task of scavenger and
sealing all exits from this lowly status. The role of social factors dominating economic
forces in the matter of wage determination is evident again in sex wage differentials,
when women are paid less wages for the same job. Many more such evidences can be
found out when the existing wage differentials in our economy are scrutinised and
surveyed. Racial prejudices in the U.S.A. or caste or religious prejudices in India can
be traced in many wage situation, 'The rational economic man' was only an economist's
model, after all.
More important is the influence of the hierarchical division of the society in terms
of social status and economic possession. The extremely unequal division of income
wealth and resources in the society prevents most of the poorer people from acquiring
the skill and the training necessary for the better paid positions and occupations. The
result is that these people are virtually excluded from competing for the better paid
jobs and professions and the traditionally privileged groups of people continue to
5
maintain their monopolistic, control over the superior jobs created by the modern
industrialisation. In any society characterised by better distribution of economic
resources and availability of opportunities for education and advancement, wage
differentials would tend to become narrow. The older and the more persistent the
features of the feudal society, the greater are the wage differentials. To quote Barbara
Wootton again : "The broad similarity between the social and the wage hierarchy
needs no elaborate demostration".3 If this be true of a modernised society like that of
the Great Britian, one can not only imagine but see around, the existence of extremely
wide wage differentials not warranted by the requirements of the jobs or the
occupations. Except for the top jobs in the civil service for which competitive
examinations are held most of the top most jobs in the country in industry, trade and
commerce and professional services continued to be the monopoly of a small group
of people which has become 'non-competing' in every sense of the term. How much of
flabbiness or excess flesh many of these differentials have come to acquire is apparent
from the fact that even serious reduction in these differentials neither affects the
efficiency nor the supply of labour in the occupations concerned. We shall revert to it
a little later.
What is happening to differentials ?
A study of the wage differentials over the course of last 50 years will show that
many of traditional differentials are tending to become narrower and narrower and
many others are disppearing altogether. Not only that the differentials based on sex,
race, religion or caste are being condemned everywhere and are being legislated against.
Even the differentials based on skill have become narrow. Regarding the trend in the
differentials based on skill in the U.S.A. it has been said :
There is evidence, however, that over the long run differentials in earnings
among occupational groups have been narrowing. During the first decade of
this century skilled workers in manufacturing had median earnings double those
of unskilled workers, but by the 1050s their median earnings were less than 40
per cent higher. Similarly, in that period the earnings of full professors in colleges
and universities had declined from three and one-half times average wages in
manufacturing to about one and three-quarters times, and college instructors,
who had earned almost 50 per cent more than the average manufacturing wage
were, by the 1050s, actually earning about 10 per cent less.

3. Barbara Wotton, op.cit., p.70

6
 This heavy reduction in the wage differentials based on skill has not had adverse
effect on the supply of skilled, educated and trained personnel to man the superior
jobs and positions in the society. I.L.O. studies have shown this tendency to be common
to all industrialised countries.
Factors Responsible For this Trend
The most important and all pervasive influence in this regard has been the spread
of modern education, bringing within the reach of ever-expanding groups of people
the opportunities for educational and mental advancement. The ever-expanding role
of the State in this regard and the public exchequer accounting for an ever increasing
proportion of the cost of the education and training facilities shifted a considerable
part of the burden of educational expenses from the individual family to the State.
This has resulted in the larger supply of skilled personnel, reducing the monetary
compensation for skilled occupations. The educated people of India today look with
nostalgia upon the past when their number was so small and they enjoyed both prestige
and economic rewards out of all proportion to the economic importance of their jobs.
They have extracted scarcity value from the society for quite long and whatever the
personal feelings in this regard there is going to be a further deterioration in their
relative position in terms of monetary rewards.
The next important factor in this connection has been the spread of egalitarian
and socialist ideas which, in the process of seeking to eliminate the extremes of
concentration of the wealth and property, are undermining not only income from
property but also the differentials in the incomes earned from work.
Another polent factor has been the persistent inflationary trend all over the world
since the end of the Second World War and the methods devised to compensate the
employees for the increasing cost of living. The concept of the payment of dearness
allowance not linked so much to the salaries in terms of a fixed percentage but in
terms of social justice has resulted in the reduction in the wage differentials in the
hierarchy of wages. The idea that the people in the higher wage brackets can afford to
bear the increase in the cost of living without any adverse effect on their health and
efficiency and that the adverse effects of rising cost of living should be neutralised
cent percent in the case of lower income brackets has reduce the difference between
the lowest and the highest salaries in the state service and to a considerable extent in
the private employment also.
7
 As a result of the operation of the factors mentioned above and many others the
range between the lowest and the highest in the wage structure has been considerably
narrowed down over the course of last 25 years in India and is going to be still further
narrowed down. In addition to the element of economics, which has been to a large
extent over-powered by sociological and traditional factors, an element of equity is
also being built in the income structure of the different societies today though the
speed of this process might not be fast enough to be to the liking of many people.
Impact of Trade Unionism on Wage Differentials
Trade Unions' policies in respect of wage differentials are of diverse nature. While
agitating against many of the differentials trade unions patiently cling to the
maintenance of many others. All workers want to secure absolute improvement in
their positions and no group likes the undermining of its relative position. The craft
unions, of course, seek to maintain and improve, if possible, their relative position in
the wage hiereachy. Industrial Unions, on the other hand, dominated numerically as
they are by workers at the bottom of the wage hierarchy, seek to improve not only the
absolute but also the relative position of their membership. Thus, in industries
dominated by industrial unions skill differentials particularly dwindle much faster.
Similary, when the unions develop the practice of industry wide collective
bargaining or when industry wide wage boards and adjudication tribunals function
the inter-plant and regional differentials tend to disappear. This has been the common
experience in India.
When the trade unions intend to take labour out of competition, i.e., prevent
employers from competing at the cost of labour in the product market, it is but natural
for them to organise all competitors and equalise the labour cost for them. In this
process, the inter-plant differentials tend to disappear. But if on the other hand, it is
customary to have the plant as the unit of collective bargaining and different plants
organised by different unions inter-plant differentials in an industry tend to get
entrenched and even magnified depending upon the paying capacity of the plant and
bargaining power of the union. The existence of inter-firm or inter-plant differentials
in an industry even in the same locality is a common experience, wage rates varying
directly with the size of the firm, whether having common rates for the same industry
irrespective of the size, position and profitability of the different concerns will be
more gainful for the workers or whether adjusting wage rates according to the paying
capacity of each firm and also being the bargaining power of the union will be more

8
advantageous-- is a question, the answer to which differ from industry to industry. But
the trade unions have found it politically expedient in most cases to go in for uniform
wage rates in an industry.
The influence of trade unions on sex racial or caste prejudices has been against
their continuance.
As regards industrial wage differentials, the bargaining power of the trade unions
has been of crucial importance. In some sectors of the Indian economy, particularly
the large organised sector, trade unions have made full use of their/bargaining power
and consequently many industrial wage differentials have become wider and have
also become a source of heart burning to other employees. The banking, insurance
and air transport have become examples for others to emulate.
In respect of union and non-union wage differentials there are conflicting evidences
in the industrially advanced countries. However, many economists support the thesis
that the unionised workers receive 10 to 15 per cent higher pay than unorganised
workers5. In India, as has been said earlier unionisation has exerted a much more
pervasive influence pushing up wage rates in those sectors and industries where union
power is great. How the section of the organised workers, or any other group can
improve its relative economic position by the exercise of economic and monopolistic
power has been shown above. There is a considerable scope for empirical research to
test the significance of the statement made here. I would urge my friends present here
to undertake this task of conducting surveys and studies in the structure of wages in
India.
Influence of Personnel Practices on the Wage Structure
The development in the field of Personnel Administration, particularly in the area
of wage and salary administration, have also influenced the occupational wage structure
specially of the production workers in order to meet the pressure from the unions for
modifying wage relativities and also to give the internal wage structure semblance of
scientific objectivity, the wage and salary administrators have evolved different
techniques of job evaluation to determine the relative worth of different jobs and
occupations in terms of job requirements. Relying heavily on the factors mentioned
by Adam Smith they evaluate the jobs in terms of their basic characteristics such as
education, training, physical effort, dexterity, mental effort, responsibility, working
conditions and safety. As a first step in job evaluation according to this method, they
assign the relative weights to these factors and then award money values to these
5. Ibid., p. 270.

9
weights on the basic of market surveys regarding prevailing wage rates : Thus; they
come out with appropriate money rewards for different jobs and occupations purely in
objective terms without being influenced by personal factors or other prejudics which
are supposed to distort the wage structure. The relative money valuation is, of course,
influenced by the factors of demand and supply where it is found that the wage structure
worked out on the basis of job evaluation results in excess or short supply of labour in
particular occupation. Trade unions, in early days of the evolution of the job evaluation
methods, looked with suspicion upon the so called scientific objectivity of the job
evaluation techniques, but as they grew in strength and became sure of their position
they accepted these techniques and rectified any inequities in the bargaining process.
In spite of the plenty of fanfare about the scientific objectivity of the job evaluation
techniqe, the resulting wage structure is the resultant of evaluation by wage and salary
administrators, market forces and collective bargaining.
Though the wage structure emerging from the processes described above is internal
to the plant, it has its influence on the wage structure in other plants also, particularly
when the plant happens to be a big one or a leading one in the industry or the locality.
From what has been said above it is apparent that the area of wage determination
is increasing every day even in the traditional market economics, not to speak of the
socialist economies where, of course, the wage level or wage structure are cautiously
planned. The human agencies are the trade unions working through collective
bargaining, the wage boards, the adjudicators, the boards concerned with the
implementation of the national income and prices policies, the personnel departments
and other wage fixing authorities. In India there is hardly any organised sector of the
economy where the wage structure is not the result of a cautious deliberate decisions
either of a wage board or an adjusticating tribunal or collective bargaining. Therefore,
the scope has improved for shaping a wage structure consistent with the national
goals and aspirations. Thus, the factors that guide or should guide the deliberations of
these agencies become matters of crucial importance in the distribution of the national
income.
The two economic functions of wage differentials in an economy where individuals
have the freedom to choose between various jobs, occupations and places of
employment according to their best judgements are :
(a) allocation of labour between different occupations, industries and places of
employment according to the respective demands for labour; and

10
 (b) provision of incentive for individual advancement, learning skills,
managerial and technical.
Whenever any human agency sits down to work out a wage structure these
considerations would be upper most in its mind. Jobs, occupations and places of
employment will have to be evaluated either in terms of Adam Smith's formulation or
in some other terms. To base payments on the value of the jobs as distinguished from
the persons who perform the job is said to be one of the contributions of the modernising
process. But when the payments are based on the relative worth of the job and therefore,
the worth of the individuals performing them. I apprehend payments are going to be
highly unequal between individuals. Payments based on individual merits and
attainments, even in those societies where opportunities for advancement are more or
less equalised, are again going to be extremely uneven. Therefore, the differentials
which appear to be very just and fair looked at from the point of view of occupational
requirements, appear to be inequitus when looked at from the point of view of social
equity and justice. Sharing of the national income according to the quality and quantity
of work done as is said to be the guiding principle of solialist distribution, the
distribution of the capitalist system claiming to pay no less regard to this principle,
may lead to very uneven distribution of the national income. Therefore, a search has
to be made for those principles of wage determination which not only satisfy the
cannons of occupational requirements and the value of the quality and quantity of
work done but also the cannons of social equity and justice, remembering full well
that there is a world of difference between equality and equity.

11
 Table – 1
Per Capita Annual Earnings of Workers in Selected Manufacturing Industries
Average Percen- Rank Average Rank
Industries Earnigs tage of earn
for ing in
1
(1956-64) (1970)2
1 2 3 4 5 6
1. Products of Petroleum & Coal 1910 100.00 I 3,777 II
2. Ship Building & Repairing 1670 87.4 II 3,915 I
3. Cement 1591 83.3 III 3,185 IV
4. Cotton Mills 1570 82.2 IV 2,938 VIII
5. Electricity, gas & steam 1564 81.9 V 3,106 V
6. Basic Metal Industries 1553 81.3 VI 2,873 IX
7. Transport Equipment 1529 80.1 VII 3,058 VI
8. Electrical Machinery 1462 76.5 VIII 3,313 III
9. Rubber & Rubber Products 1456 76.2 IX 2,849 X
10. Footwear, other Appratus ect. 1393 72.9 X 2,419 XVIII
11. Machinery (except electrical) 1294 67.7 XI 2,748 XI
12. Printing, Publishing & allied 1293 67.7 XII 2,716 XII
13. Silk Mills 1289 67.5 XIII 2,466 XV
14. Paper & Paper Products 1274 66.7 XVI 2,685 XIII
15. Metal Products 1259 65.9 XV 2,447 XVI
16. Paper 1257 65.8 XVI 3,009 VII
17. Recreation Services 1232 64.5 XVII 2,421 XVII
18. Water & Sanitary Services 1209 63.3 XVIII 2,560 XIV
19. Jute Mills 1124 58.8 XIX 2,353 XIX

1. Figures in col. 2 relate to the average annual earings of the employees earing less than Rs. 200
per months.
Source:– National Commission on Labour, p. 192.
2. Figures in col. 5 relate to the average annual earnings of the employees earning less than Rs. 400
per month.
Source:– Pocket Book of Labour Statistics, 1974, Table 4.2 (a), pp. 33-35.

12
 Table – 2
Range of Variations in Per Capita Annual Earnings of Employees (1958-64) in
Seclected Industries
Range of All India Range x 100
Industries Variation Average Average
(1964)
1 2 3 4
1. Textiles 866 1649 52.52
2. Footwear/other wearing apparels & made up
textile goods 1,133 1541 73.52
3. Paper & Paper Products 538 1413 38.07
4. Printing, Publishing & Allied Industries 528 1443 36.59
5. Leather & Leather Products (except footwear) 1,008 1466 68.76
6. Chemical & Chemical Products 1,032 1497 68.94
7. Products & Petroleum & Coal 630 1728 36.46
8. Non-metalic Mineral Products (except No.7) 547 1065 51.36
9. Basic Metal Industries 973 1514 64.27
10. Metal Products (except Machinery & Transport
Equipment) 682 1318 51.74
11. Machinery (except electrical machinery) 1,003 1428 70.24
12. Electrical Machinery Apparatus 1,115 1558 71.57
13. Transport Equipment 631 1731 36.45
14. Electricity, Gas & Steam 684 1517 45.09
15. Water and Sanitary 882 1277 69.07

Source:– Report of the National Commission on Labour, p. 193.

13