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Factors Determining Real Wages

Updated on June 1, 2014


Wages are the reward for labor. There are two main kinds of wages: (1) Nominal wages and (2) Real wages. The term ‘nominal wages’ refers to money wages. But the term ‘real wages’ refers to the commodities and services that the money wages command. The standard of living of workers depends on real wages and not on money wages. Real wages depend on many things like the purchasing power of money, additional benefits the workers get such as free boarding and lodging, regularity of employment, working conditions and so on. Real wage do not always increase with the money wages. Sometimes, the money wages in a country will increase. But the real wages may not increase. In spite of an increase in money wages, workers may be worse off if prices rise faster than money wages. So we cannot say that workers in a particular country are well off merely by looking into their money wages. But, generally when we refer to wages, we mean money wages.

Factors Determining Real Wages

  1. Real wages depend upon the purchasing power of money. The purchasing power of money in turn depends upon the level of price. It changes with changes in the price level. For instance, money wages of almost all classes of labor in India increased since independence. But there has not been any considerable increase in their real wages because most of the prices have gone up. Prices have increased faster than money wages.
  2. The form of payment is another factor that influences real wages. For instance, an agricultural worker might be paid very low wages in money. But he may get other things besides money wages. He might be getting free boarding and lodging. Once in a year on a festival day, he may receive some clothes from his employer. Similarly, railway employees may get a free pass to travel. These things should be taken into account while considering real wages.
  3. While considering real wages, we have to look into the nature of the job and the regularity of employment. We have to see whether the job is permanent or not. In some occupations, employment is only seasonal. Agriculture in India provides only seasonal employment. We may say that a person who has a regular job enjoys more real wages than one who has seasonal employment.
  4. In some occupations, there is possibility for earning extra income. For example, a doctor may have private practice or a teacher may undertake some private tuition to supplement his income.
  5. The nature of work and also the conditions of work should be taken into consideration in any discussion on real wages. Some jobs are pleasant and some are unpleasant and dangerous. Further, some jobs enjoy social prestige. For example, a lecturer in a college may not get more income than a clerk in some private firm. But the latter generally may not enjoy the same amount of social prestige as that of a college lecturer. Though wages are low in the teaching profession, many prefer it because they can enjoy long holidays.
  6. Lastly, the scope for promotion and prospects of a higher wage in the future may induce a man to work for a low wage in the beginning. Thus, many factors govern real wages.

Causes for Wage Differences

Wages differ from one trade to another and within the same trade too sometimes, wages may differ from one worker to another. There are many causes for differences in wages.

  1. Wages differ according to the conditions of supply. Where the supply of labor is relatively abundant, wages tend to be low.
  2. Sometimes because of ignorance, workers may fail to move from ill-paid jobs to better jobs.
  3. Wages differ according to the agreeableness or disagreeableness of work. People who are employed to do dangerous jobs and unpleasant work have to be paid more than those who do pleasant work. Spies, for example, are paid high wages. But sometimes people who do the most unpleasant jobs are badly paid.
  4. The cost of training in some occupations is so high that only a few can enter into them. Such persons get high wages. For example, doctors and engineers get higher wages than typists do.
  5. Wages in those occupations where trade unionism is strong will be higher than in those occupations where trade unionism is weak.
  6. Even within the same trade, wages may differ because men differ in their ability. Some workers will earn more. For example, there are doctors. Only a few doctors earn very large incomes. That is sometimes described as “rent of ability”.
  7. Lastly, wages also differ because of the immobility of labor. Even though workers in a particular trade will get better wages if they go to another place, they will not do so for many reasons. “Of all forms of luggage, labor is the most difficult to transport.

© 2013 Sundaram Ponnusamy


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