Economic And Behavioural Theories In Compensation Economics Essay

Economic And Behavioural Theories In Compensation Economics testifyINTRODUCTIONWages argon find out by both the communicate and consume of particular type of sweat. The factors which influence profitoff atomic number 18 try, price, skill, experience, ability, reputation. The final payment theories engage important policy implications and applicable for some of the definite occupations or line of p number 1, n unrivalled of these is adequate as a general supposition having universal applicability. The economic theories of rents fail to provide a drop off explanation of the problem of rent determination. Stu fleets conducted by behavioural scientists to some period fill the gaps in the earlier theories, which have highlighted the importance of psychological and sociological factors on issue. The key issues developed by economic and fashional theorists argon briefly re slanged in this chapter.THEORIES OF COMPENSATIONCompensation theories mainly divided into twain part sEconomic guess appearanceal suppositionEconomic possible action consist the following and houndd as underSUBSISTENCE surmisal (Given by DAVID RICARDO in 1772-1823)David Ricardo, in his famous book Principles of Political Economy and tax revenue propounded the subsistence theory of wages Ricardo states that the price of apprehend depends upon subsistence of get the picture. The theory was based on the assumption that if the workers were gainful more than subsistence wage, their mos of drudge would increase as they would reproduce more and this would make low the localize of fee. If the rate of compensation decreased below the subsistence train, the arrive of workers would reduced as many would die because of lack of food or hunger, increase inability due to scarcity of nutrition, abnormal health conditions, c experient, etc. and many of them could not marry because they degenerate that they could not able to accept the righteousness . This pull up stakes resul t in decreased tire submit, which provide lastly be same bid as the contain for it. Ricardo sop uped that the market price of bear on could not spay from the subsistence level for a abundant prison term. For this reason, the subsistence wage theory was also know as the Iron Law of Wages.THE SURPLUS VALUE THEORY (Given by KARL MARX in 1818-1883)This theory owes its development to Karl Marx. jibe to this theory, the labour was an article of trade, which could be purchased on payment of subsistence price. Marx in many ways is closer to Ricardo in his approach to the question of value for labour top executive. He accepted Ricardos view that the market price of labour power could not for long take up from the value of the subsistence which is required for the maintenance of that labour power. He, however, viewed that it was not the inclination of an orbit of population, which brought wages to the subsistence level, solely it was the tendency in the capitalist system to chro nic un exercisement and the populace of industrial reserve army, which drove wages to the subsistence level. Labour supply cease littlely c bed for the excess of the demand for it of capitalist wage system. The capitalist was in a position to force the worker to spend more magazine of his melodic line than what was necessary to earn his subsistence wage. Product price was set or hardened by the number time necessitate for generating the output by the labour. The price of any product was determined by the labour time needed for producing it. According to Marx, the labour did not receive complete recompense for the time he spent on their work place or crinkle. Marx, however, held the view that the introduction of trade union negotiate and similar interferences could stop the tendency of wages falling to their minimum level and even reverse it.THE remune ration FUND THEORY (Given by ADAM SMITH in 1723-1790)This theory was propounded by Adam Smith. His basic assumption was th at wages argon regress out of money which lay surplus with wealthy persons as a result of savings. It was the size of the gunstock, which determined the demand for labour and the wages paid to them. According to wages fund theory, wages are determined by(a) the wage fund or part of working capital which has been increased for getting the labour work and (b) the number of workers seeking profession. The wage fund was mistaken to be immovable and it does not change. Any change in wage rate, because of increase or decrease in the size of labour getting job opportunity.The wages fund theory based on the productiveness of labour and profitability of any cheek it shows that increased in the savings increased in the wages, it whitethorn change after the fixed tenure. Increase in payment could help to increase the efficiency of labour, it would presumably augment the employers demand for that labour. Hence, a rise in wage level not yet influences the supply conditions of labour but also causes a shift in the demand for labour. This is quite opposite to the assumption make by the theory that the demand for labour is fixed.THE MARGINAL PRODUCTIVITY THEORY (Given by J.B.CLARCK)This theory was propounded by Phillips Henry Wicksteed (England) and John Bates Clark (USA). According to this theory, compensation are based upon an entrepreneurs calculation of the rate that will probably be acquire by the marginal worker. The marginal productivity theory faux that there was a certain quantity of worker received the job and the remuneration value at which this worker could secure employment in a competitive labour market was equal to the addition to total production that resulted from employing the marginal unit of that labour force. It was also pretended that production is carried out under the conditions of diminishing returns to labour. The principle of diminishing marginal productivity postulates that the contribution of each additional unit of labour would be l ess than that of the unit previously hired. Therefore, inspite of the fact that the productivity of the undivided labourer may be high(prenominal)(prenominal) than that of the marginal labourer, he will not be paid more than what the marginal labourer will get.In the ill-judged run wage rate can be both high and lower than the marginal revenue productivity of labourers, but in the long run it gets equalised with the marginal revenue productivity of labourers. If the prevailing wage rate is lower than marginal productivity, it will be profitable for the employers and the resulting aspiration among employers to employ more workers will tend to raise the wages. On the contrary, if the prevailing wage rate is higher than the marginal productivity, the employment of marginal workers will pass on him losses and he would stop employing them. This will result in competition among workers for jobs, which would lower the wages. Thus in the long run the equilibrium wage rate will become equal to the marginal revenue productivity of labour.The marginal productivity theory is considered superior to the earlier theories on wages.THE talk terms THEORY (Given by JOHN DAVIDESON)John Davidson propounded this theory. He argued that the wages and time period of work were ultimately defineds by the relative negotiate power between the employers and the employees.According to this theory, there is a top limit and a lower limit of compensation and the true wage range in between these limits are set or calculated by the bargaining power of the employers and the employees. The upper limit could be the highest wages that the employers would be free to pay beyond which they will incur losses resulting from high labour costs. The lower limit could be any the minimum wages dictate under the statute or the strength of the workers at the necessary remuneration below which they will not be posit for work.DEMAND AND tag on THEORY (Given by MARSHALL)This theory is snap offn by Marshall. He assumed the whole set of factors which govern demand for and supply of labour bear upon the determination of wages. It is therefore necessary to understand the various factors, which influence the demand for and supply of labour. The employers demand for labour is dependent on a number of factors such as the demand for his/her product, availability of other factors of production (the most important being the supply of capital), the level of technological progress, etc. The demand price of labour is determined by the marginal productivity of singular worker.Supply of hands can be state in a number of senses. First, it refers to the number of workers getting job and the workers with no alternative for survival, colligate the labour market for getting the job for wages. Secondly, it may be the number of hours or given time period for which each worker is ready for doing job. Finally, the supply of labour varies with the intensity of work. The supply of labour tends t o increase if the workers work harder than before.Thus, Wage rates are influenced by a number of factors government activity the demand for and supply of labour. The marginal productivity of labour, determines its demand price. It is the standard of maintenance of workers that plays an important role in the determination of supply price of labour. The actual wage rate is determined at that level where the demand for and supply of labour are equal.In real world, however, labour markets are chiefly non-competitive. The wage levels expected to result from the free interaction of demand and supply are often modified by the resistance from workers to accept wages below the subsistence level trade union action, government intervention in wage fixation, and immobility of workers.PURCHASING POWER THEORY (Given by PIGOUN)In the book General Theory of Employment, Interest and Money explained the construct of purchasing power. According to him, wage is not only the cost of production to th e employer but also an income for the labour. The same workers and their families consume a major part of the products of the industry.Hence, if the earning of the labour is high they will have more consuming power, which would help to higher the aggregate demand for goods and also a high level of output. On the other hand, if the wage rates were low, their purchasing power would be less, which would bring about a decrease in the aggregate demand. This will have an indecorous effect on the levels of employment and output. According to Keynes, unemployment and depression will further add to the problem. Therefore, a cut in wage bailiwick income falls it would have an adverse effect on employment rate.According to the Keynesian Theory, fill employment is a function of national income the higher the level of national income the greater the volume of employment and both income and employment are determined by effective demand. Hence, if the national income falls, it would have an adve rse effect on employment.COMPARATIVE ADVANTAGE THEORYEconomists specializing in global trade argued about countries, industries and companies competing on the basis of comparative advantage of crummy labour Employers are known to move to areas where labour is cheap, be it at bottom a country or across countries. Subject to internal and away constraints, labour also tends to show a tendency to move to areas, which pay higher value for their skills and effort. In recent years, however, there is pressure on countries and companies competing on the basis of cheap labour to ensure compliance with minimum core labour standards concerning minimum age, freedom of association, right to collective bargaining forced labour and non-discrimination.LIMITATIONS OF ECONOMIC THEORIES1. According to Subsistence theory, the assumption that the supply of labour is perfectly elastic at the subsistence wage level is incorrect. The theory does not consider wage differentials, which are bound to exist across regions.2. The subsistence theory ignores the importance of the role of the demand for labour and the role of trade unions in wage determination.3. Economic theories either assume that wages and prices are either sufficienty fixed or beaty flexible. The reality lies somewhere in between.4. Most wage theories are based on the assumption of full employment. In most developing countries this is not really the case.5. Labour is not as mobile as capital and products are. Therefore wage rates could be influenced by the changes in the demand for and supply of factors other than labour too.6. Wages and benefits reflect industry characteristics and personal characteristics (including skill differentials) as substantially as societal preferences and prejudices.8. Interference by government and trade unions could sully the influence of the market forces of demand and supply of labour.9. Technology and productivity are major determinants. Low wages may not mean low wage costs. Simila rly high wage rates may not mean high unit labour costs.10. With the growing pressure for linking labour standards with international trade, increasingly it will become difficult (for countries, industries and companies) to compete on the basis of comparative advantage of cheap labour.BEHAVIOURAL THEORIES AND RELEVANT ISSUESBehavior means naturally reaction or movement to the environment and yourself. motive is the process of attempting to influence others to do your work will by dint of the casualty of gain or reward. Remuneration of every worker has a behavioral objective and seeks to fulfill the survival need (physiological or psychological) to fulfill the goals. Luthans argues that penury is a process that starts with a physiological or psychological inadequacy or need that activates behavior or a drive that is aimed at a goal.Compensation policy are targeted at rewarding manpower for their skill, talent, performance, effort, responsibility and working conditions and increa se their morale for efficient performance.Behavioral theories are divided into three categories-Content theories subroutine theories, andContemporary theoriesCONTENT THEORIESThe meaning theories explain what inspires manpower at their jobs. Maslow, Hergberg and Alderfer gives their significant contribution to content theories. These are as follows-1.HIERARCHY OF NEEDSAbraham Maslow proposed the first theory called the pecking order of needfully theory. He proposed quint needs of any people in needs hierarchy physiological or basic need (food, shelter, clothing), safety need (emotional and corporeal safety health insurance, pension), social need (affection and belongingness to society), Self-esteem need (power, achievement, status, etc.), and self- realization (personal growth, realization of potential). Maslow believed that within every individual, there exists a hierarchy of five needs and each level of need must be cheery before an individual pursues the next higher level of need. As an individual progresses trough the various levels of needs, the proceeding needs loose their motivational value.2.TWO component part THEORY OF MOTIVATION Herzberg extended work of Maslow and developed a detail content theory of work motivation. Factors of this motivational theory divided into deuce categoriesIntrinsic cand Extrinsic. Interinsic factors are the motivators (satisfiers) for the workforce and, Exterinsic factorsar the hygiene factors (dissatisfiers). Intrinsic remuneration are motivators or satisfiers work for satisfy workers appertaind to job content. It includes success, identification, responsibility, work enrichment, and whole kit and caboodle enlargement. Extrinsic remuneration are hygiene factors and helps to reduce the dis pleasure on the job. It includes confederacy rules regulation and administration, supervision, co-ordination, salary structure, interpersonal relations, working environment3.ERG THEORY Clayton Alderfer set 3 groups of core ne eds they are- Existence, Relatedness and Growth.(a) The existence needs are concern with survival.(b) The connected needs and the importance of interpersonal and social relationship.(c) The growth needs are concerned with individuals intrinsic desire for personal development. Based on a persons background and social environment, one set of needs may precede over others.The job of Maslow, Hergberg and Alderfer are related to content theories. They give useful theories but have limited implications for policy and practice.PROCESS THEORIESProcess theories were examined by performance of Vroom (on valence and antepast) and Porter and Lawer (performance- gaiety linkage). They look at the related procedingss that go into motivation or effort, particularly the way they relate to one another.EXPECTANCY THEORY Victor Vroom developed expectancy theory under process theory based on the summary of valence, expectancy and instrumentality.Valence states to an individuals orientation for a indi vidual result. For instance, most old employees perceives value benefits against fewer, if any, younger employee in todays knowledge industry, single (unmarried) workers with fewer family responsibility have less or no need for benefits like childrens education, health benefits, leave travel allowance etc. than older, married employees with one or more children.Instrumentality refers that a people would be inspired to give better performance in anticipation of promotion.Expectancy states that the degree of chances accor to a particular activity or process or effort will lead to particular first-level results on the other hand, Instrumentality states to the degree of chances that relates first-level results and in demand(p) second-level results. In simple words, Motivation is a -function of valence and expectancy.According to Vrooms concept it can be interpreted that manpower gives to the organization what it needs from people, higher performance and in exchange they expect promotio n.CONTEMPORARY THEORIESThe contemporary theories describe the modern concept of how people motivates at work. These include Equity and ascription theories. These are explained as follows-1. EQUITY THEORYJ. Stacy Adams, developed by justice theory, and give their views that primary input on job performance and satisfaction on the basis of fairness that people fells in their working conditions. unfairness comes in existence when a manpower feels that the ratio of his or her results to inputs and the ratio of a relevant others results to inputs are im equalizerd.Equity can be stated in two elements. One is internal and other is external. Internal equity states that the imbalance in the remuneration between the several skills or talent and responsibility level among the various manpower. Internal equity is determined through job evaluation.External equity states that when remuneration levels for same skills levels in one organization compare with other workers in any different organiz ation in same industry and geographical region. External equity is determined usually through compensation surveys or interview and compensation satisfaction surveys. Companies, which pay remuneration at lower rate than the market rates, would be in problem to attract, retain and inspire manpower to perform with full efficiency.Our manpower doesnt perceive happiness when they get lower remuneration than what they deserve. When an employee gets remuneration at higher rates than what he/she considers is fair. Now the question is that to tink out what they are receiving, what they deserve and what is fair for our manpower to maintain balance or equity in compensation system.2.ATTRIBUTION THEORYThis theory is contributed by Fritz Heider, Lewin and Festinger. They assume that people are rational and logical in their behavior and that both inter and outer forces get composed additively to conclude behaviour. great deal will behave differently if they realize that their results are contr olled or supervise more internally than externally. This theory has great efficiency for understanding organisational behaviour and contributes deep insights on goal setting, leadership behaviour and canvass causal factors of employee performance.QUESTIONS-1. Explain the importance of the theory of wages.2. What are the different types of theory of wages? Explain in detail.3. Are wages determined only on the basis of the demand and supply of labour?4. Explain the signification of behavioural theories in Wages determination?5. What are the limitations that arise charm wages determination in economic theories?