LABOUR COST by : Dr Kamlesh Khosla, M. Com., M.A. Economics, Ph.D.

1. LABOUR COST by : Dr Kamlesh Khosla, M. Com., M.A. Economics, Ph.D. Associate Professor, GCG-11, Chd.

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

3. 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 as possible.

4. 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] Basic Wages ii] Dearness allowance iii] Profit bonus iv] Retirement Gratuity, holiday and vacation pay. b] Fringe benefits or non-pecuniary benefits in the form of i] Free or subsidised Food housing, water, fuel etc. ii] Medical facilities. iii] Expenses incurred on canteen, sports club, etc. TOTAL LABOUR COST can be broadly classified into TWO parts : A] DIRECT LABOUR COST B] INDIRECT LABOUR COST

5. 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.

6. 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”.

7. FACTORS AFFECTING WAGES 1] ABILITY 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

8. ESSENTIALS OF A GOOD WAGE PLAN 1] UNDERSTANDABLE – It should be easily understandable. 2] COMPUTABLE – It should be capable of easy computation. 3] MOTIVATIONAL – It should be capable of effectively motivating the employees. 4] REMUNERATIVE – It should provide for remuneration for employees as soon as possible. 5] STABLE – It should be relatively stable and should not allow too much variation. 6] ECONOMICAL – The wage plan adopted should be economical. 7] RATIONAL – A Good wage plan should be based on certain rational and objective criteria. 8] FLEXIBLE – The wage plan adopted should be flexible enough and allow adjustments. 9] PARTICIPATIVE – Worker’s participation in profits is considered a strong pillar of a good wage plan

9. METHODS OF WAGES PAYMENT TIME RATE SYSTEM PIECE RATE SYSTEM

10. 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

11. 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 other part is variable and varies with the changes in the cost of living index.

12. 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 of TIME RATE SYSTEM : 1] No incentive for efficient workers. 2] Does not encourage initiative. 3] Production may decrease. 4] Requires close supervision. 5] Labour cost may rise due to decrease in productivity.

13. 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

14. It has few variants : A] PIECE RATE WITH GUARANTEED TIME RATE – 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 improve. Thus, earning vary at different stages in the range of output.

15. 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 of PIECE RATE SYSTEM : 1] Quality may deteriorate in order to increase quantity. 2] Inefficient workers may envy the efficient ones. 3] There is no guarantee of minimum wages. 4] A uniform rate is paid regardless of the quality of work. 5] Over-straining may cause frequent absenteeism and bad health.