LABOUR

COST

LABOUR
COST
=> Meaning.
=> Factors affecting
Labour
Cost.
=> Essentials of a
Good Wage Plan.

INTRODUCTION
Labour constitutes another basic input
for production. Its only labour or
human beings which converts raw
materials into finished goods or
services. Labour can be considered as
the only factor which can give almost
unlimited productivity. Labour is a
very complex and delicate factor and
requires very careful handling. The
main objective is to see that the
labour cost per unit is brought as low

LABOUR COST
The term labour cost represents various payments
made to a worker arising out of hid employment in
the organization. These include :
a]
Monetary or pecuniary benefits in the
form of
i]
ii]
iii]
iv]

Basic Wages
Dearness allowance
Profit bonus
Retirement Gratuity, holiday and vacation pay.

b]
Fringe benefits or non-pecuniary
benefits in the form of
i]
ii]
iii]

Free or subsidised Food housing, water, fuel etc.

Medical facilities.
Expenses incurred on canteen, sports club, etc.

TOTAL LABOUR COST can be broadly classified

into TWO parts :

WAGES

The payment made to labour for its

work is called wages in economics
Wages are the price for the services
of the labour. Generally, by labour, we
mean physical or manual work.
In economics, labour includes not
only the physical work but all types of
work whether it is mental or physical.
In other words, by labour we mean
the work done both by hand and
brain.
So the reward given to workers,
whether mental or physical, are
termed as wages in economics.

Definition of
Wages
According to Benham A wage
may be defined as a sum of
money paid under contract by an
employer to a worker for the
services rendered.
According to Prof. J.L Hanson
Wage is a payment to a labourer
for its assistance to production.

FACTORS AFFECTING
1] ABILITYWAGES
TO PAY
2] DEMAND FOR AND SUPPLY OF
LABOUR
3] PREVAILING WAGE RATE
4] COST OF LIVING
5] COMPETITION
6] JOB REQUIREMENTS
7] MANAGERIAL ATTITUDE
8] GOVERNMENT LEGISLATION
9] LABOUR UNIONS

ESSENTIALS OF A GOOD
1]
UNDERSTANDABLE
It should be easily
WAGE
PLAN
understandable.
2] COMPUTABLE

It should be capable of easy

computation.

3]

MOTIVATIONAL

It should be capable of
motivating
the

effectively
employees.

4]

REMUNERATIVE

remuneration for
as possible.

5]

STABLE

stable and should not

much variation.

6]

ECONOMICAL

should be

7] RATIONAL
on
criteria.

It should provide for

employees as soon
It should be relatively
allow too

The wage plan adopted

economical.
A Good wage plan should be based
certain rational and objective

METHODS OF
WAGES PAYMENT

TIME
RATE
SYSTEM

PIECE
RATE
SYSTEM

TIME RATE
SYSTEM

Under this system, the wages to the workers

are paid on the basis of time spent by them
on work irrespective of the quantum of
production. The wage rate is fixed on the
basis of some unit of time such as Hour, Day,
Week or Month. The formula for the
calculation of wages is :

= Hours Worked x Rate per

Hour

It has few variants :

A] HIGH WAGE PLAN

The rate of wages is fixed to

relatively higher than the fixed rate prevailing in the region. This is
done to attract workers who can achieve pre-determined standards of
efficiency. Such standards of efficiency are generally fixed at higher
levels.

Characteristics :
1] Overtime is not permitted and workers are expected to achieve the
standard output within the regular working hours.
2] This system is helpful in reducing overheads and wage costs per
unit

B] DIFFERENT TIME RATES

Different rates are

fixed for different levels of efficiency. For efficiency upto the standard
level, normal wages are paid and for efficiency beyond the standard
level, the rate is gradually increased .

C] MEASURED [GRADUATED] TIME RATE]Wages are paid at the time rate in which is divided into two parts. One
parts of the wages is fixed and depends on the nature of the job. The

ADVANTAGES of TIME RATE

SYSTEM :
1] Simple to understand and easy to operate.
2] Provides regular and stable income to the
workers.
3] Greater Care and attention to quality and
workmanship.
4]
Beneficial to average and below-average
workers.
5] Ensures quality assurance to workers.

DISADVANTAGES
RATE SYSTEM :

of

1] No incentive for efficient workers.

2] Does not encourage initiative.

TIME

PIECE RATE
SYSTEM

Under this system, the extent or volume of

work done forms the basis of determination
of wages payable to the workers. Wages are
paid at a certain rate per united produced or
job performed or operation completed
irrespective of the duration of time taken by
workers. Wages under this method is
calculated as :

=
No. of Units produced x
Rate per Unit

It has few variants :

A]
PIECE
RATE
GUARANTEED TIME RATE

WITH

Under this
system, workers are paid minimum wages on the basis of
time rates. A piece rate time with guaranteed time may inc.
any of the following :
1] If earnings on the basis of piece rate are less than the
guaranteed minimum wages, the workers are paid on the
basis of time rate. On the other hand, the earnings according
to piece rates are more, the workers get more.
2] Workers get guaranteed wages according to time rate
plus a piece rate payment for units above a required
minimum.
3] Workers are given a fixed dearness allowance or cost of
living bonus plus the wage calculated on piece rate basis.

B] DIFFERENT PIECE RATES

Under
this system, there are more than one piece rate to reward
the efficient and to encourage the less efficient workers to

ADVANTAGES of PIECE RATE

SYSTEM :
1]
Workers are paid according to their
performance.
2] Idle time costs are reduced to minimum.
3] Increases efficiency and reduces costs.
4] Quotations can be easily made as unit cost is
known.

DISADVANTAGES
RATE SYSTEM :

of

PIECE

1] Quality may deteriorate in order to increase

quantity.

A minimum wage is the lowest hourly, daily or monthly

remuneration that employers may legally pay to workers. Equivalently, it
is the lowest wage at which workers may sell their labor. Although
minimum wage laws are in effect in many jurisdictions, differences of
opinion exist about the benefits and drawbacks of a minimum wage.
Supporters of the minimum wage say it increases the standard of living
of workers, reduces poverty, reduces inequality, boosts morale and
forces businesses to be more efficient.[1] In contrast, opponents of the
minimum wage say it increases poverty, increases unemployment
(particularly among unskilled or inexperienced workers) and is damaging
to businesses.

In public policy, a living wage is the minimum income necessary for a worker to
meet their needs that are considered to be basic. This is not necessarily the same
as subsistence, which refers to a biological minimum, though the two terms are
commonly confused. These needs include shelter (housing) and other incidentals
such as clothing and nutrition. In some nations such as the United Kingdom and
Switzerland, this standard generally means that a person working forty hours a
week, with no additional income, should be able to afford the basics for quality of
life, food, utilities, transport, health care, and minimal recreation, one course a year
to upgrade their education and childcare. However, in many cases education,
saving for retirement, and less commonly legal fees and insurance, or taking care of
a sick or elderly family member are not included. It also does not allow for debt
repayment of any kind. In addition to this definition, living wage activists further
define a living wage as the wage equivalent to the poverty line for a family of four.
This is two adults working full-time with one child age 9 and another of age 4.
The living wage differs from the minimum wage in that the latter is set by law and
can fail to meet the requirements to have a basic quality of life and leaves the family
to rely on government programs for additional income. It differs somewhat from
basic needs in that the basic needs model usually measures a minimum level of
consumption, without regard for the source of the income.

Fair WagesA fair wage is something more than the minimum wages. Fair wage is
a mean between the living wage and the minimum wage. While the lower limit of the fair
wage must obviously be the minimum wage, the upper limit is the capacity of the industry
to pay fair wage compares reasonably with the average payment of similar task in other
trades or occupations requiring the same amount of ability. Fair wage depends on the
present economic position as well as on its future prospects. Thus the fair wages depends
upon the following factors :
(1) Minimum Wages
(2) Capacity of the industry to pay
(3) Prevailing rates of wages in the same or similar occupations in the same or
neighbouring localities
(4) Productivity of labour
(5) Level of national income and its distribution.
(6) The place of the industry in the economy of the country.