Contents
What’s it: Wages are irregular payments to workers. Companies may pay them based on the hours worked or their output. It may be paid daily, weekly, monthly, or when the project has been completed. Unlike salary, workers at the same level may receive different payments depending on their contribution.
The money received depends not only on the total hours worked or the total output produced but also on the wage rate. If companies raise wage rates, for example, because of government regulations, employees get paid more even for the same total hours worked or total output as before.
Understanding wage calculations
Wages are usually synonymous with payments to those who work in warehouses or factories. Or those involved in a project. They are usually involved in manual work.
Employers may pay it periodically, for example, every week. But, in fact, for a small and short-duration project, they may give it after the project is complete, and it could be a few days or more than a week.
The nominal received by employees varies depending on their contribution; for example, it is calculated based on the total output they produce or the total hours they work during the week. So, even though the wage rate is the same, each can get a different payment. Then, workers may receive it in cash directly through company staff or transfer it to their bank account.
Now, take a simple example. Say your company pays a worker $30 per hour and pays him weekly. At the end of the week, you calculate the total hours worked is 40 hours. So you spend $1,200 – before taxes – to pay him.
Two types of wages
We divide wages in two based on whether they are calculated per hour worked or per unit of output. They are:
- Time-based wage
- Piece-rate wage
Time-based wage
Companies pay wages based on the total hours workers spend at the workplace. For example, the company pays $20 per hour. So, the longer their working hours, the more they get paid.
If they work extra hours, the company pays them per hour spent, which may be higher than normal hours, say $25 per hour. Thus, the pay received by employees takes into account normal working hours plus overtime hours. Say, they work 9 hours a day, where 8 hours is normal working hours. In this case, they will receive a payout of $185 = ($20 x 8 hours) + ($25 x 1 hour).
Time-based wages are common for service businesses, where the output produced by each worker is difficult to measure. In addition, businesses with differentiated products may also apply this remuneration system. They attach importance to quality as their value proposition. Since workers are paid based on total hours worked, there is no reason to pursue quantity over quality to get paid more. That’s because whatever their output is, it doesn’t affect the dollars they receive.
The advantage of time-based wages is about quality. Employees don’t rush to get work done in pursuit of quantity, so they can ensure quality meets standards.
Meanwhile, the main weakness of this time-based system is that there is no direct relationship between worker productivity and compensation. Thus, those who work hard and are lazy can get the same pay as long as they work the same total number of hours.
Piece-rate wage
Companies pay workers based on the output produced. In other cases, it may be per project, i.e., when the project has been completed.
Unlike time-based wages, the pay received by workers does not depend on the total hours spent working. So, if they are more productive, they can produce more output for less or the same total hours worked as others. But, finally, they can earn more.
Then, if workers produce higher output than targeted, they get paid according to the amount of output produced. Thus, the total pay received equals the total output (including extra output) times the wage rate.
Piece-rate wages are common for manufacturing businesses with standardized products. Thus, quality is not an important consideration because, for example, it has been specified through a computer-aided machine. Thus, workers focus on speed to get the job done.
Adopting piece rates allows companies to directly link productivity with workers’ pay. This is because they receive payment according to the output they produce. Therefore, the more productive they are, the more they get paid.
The piece-rate system is important when companies need higher production to meet increased demand. They can encourage workers to be more productive by, for example, increasing wage rates for each extra output produced.
But, due to too much focus on quantity, quality can deteriorate. That can be dangerous because consumers no longer trust the company’s products. Eventually, sales fell.
In other cases, workers may receive less pay even through no fault of their own. For example, the engine shuts down due to a technical problem. Thus, workers can only produce less output. Finally, they get paid less.
Wages vs. salary: a clear distinction
Wages and salaries are often equated because, indeed, they represent the compensation commonly given by employers to workers. However, the two are different in several aspects.
Wages:
- Payment amount: Varies based on factors like hourly rate, total hours worked, or output produced (e.g., piecework). Workers may receive more for overtime hours, which are typically calculated at a higher rate than standard hours.
- Calculation: More complex due to its dependence on individual factors like hours worked or output. This can make budgeting more challenging, as income may fluctuate depending on these variables.
- Payment frequency: Depending on the employment agreement, payments can be weekly, bi-weekly, or monthly. More frequent payments can be advantageous for cash flow management.
- Job types: Wage-based structures are often associated with manual labor jobs in factories, warehouses, or construction. However, they can also be found in some service industry jobs and even some creative fields, where pay might be tied to project-based work.
Salary:
- Payment amount: A fixed amount is paid per pay period, typically monthly. This provides a predictable income stream, simplifying budgeting and financial planning.
- Calculation: This is simpler as it’s based on a predetermined fixed rate. Negotiation typically revolves around securing a higher fixed salary within a reasonable range for the position and location.
- Payment frequency: Typically paid monthly.
- Job types: Common for non-manual, salaried positions in administrative, office, or professional fields. However, some exceptions exist, with certain skilled trades or sales positions also offering salaries.
Factors affecting wages
Wages in the labor market are not set in stone. They are constantly influenced by a complex interplay of forces, acting as a balancing point between the needs of employers and the skills and qualifications of workers. Here’s a breakdown of some key factors that affect wages:
Supply and demand:
- Demand for labor: When businesses experience high demand for their products or services, they’ll be more willing to offer higher wages to attract and retain skilled workers. Conversely, during economic downturns, demand for labor may fall, leading to wage stagnation or even reductions.
- Supply of labor: The number of qualified workers available for a specific job also plays a crucial role. If there’s a surplus of qualified candidates for a position, wages may be lower as competition for jobs increases. On the other hand, a scarcity of skilled workers can drive wages upwards as employers compete for a limited talent pool.
Education and skills: Workers with specialized skills, higher levels of education, or relevant certifications typically command higher wages. This reflects the increased value and productivity they bring to a company.
Experience: Experience on the job translates to expertise and efficiency. Workers with proven track records and a wealth of experience often find themselves negotiating for higher salaries.
Location: Cost of living plays a significant role in wage determination. Wages tend to be higher in areas with a higher cost of living, as workers need to compensate for expenses like housing and transportation.
Minimum wage: Government-mandated minimum wages set a baseline for wages in an economy. While they can help ensure a certain level of income security for workers, minimum wages can also affect entry-level job opportunities depending on economic conditions.
Unionization: Unions act as collective bargaining agents for workers, negotiating wages, benefits, and working conditions with employers. Strong unions can often secure higher wages for their members through collective bargaining agreements.
Government policies: Government policies, such as tax breaks or subsidies for specific industries, can indirectly affect wages by influencing the demand for labor in those sectors.
Productivity: In ideal circumstances, rising worker productivity allows businesses to offer higher wages while maintaining profitability. This creates a virtuous cycle where increased wages incentivize skill development and further productivity gains.Technological advancements: Technology can disrupt the labor market by automating certain jobs and creating new ones. While automation may lead to job losses in some sectors, it can also create demand for new skill sets, potentially impacting wage structures in different areas of the economy.
