How do external factors affect wages?

The wage payment is an important factor affecting the labor management relations. Workers are very much concerned with the rates of wages as their standard of living is linked to the amount of remuneration they get. Managements, however, do not come forward to pay higher wages because cost of production goes up and profits decrease to that extent. A number of factors, thus, influence the remuneration payable to the employees. The factors influencing Wage and Salary Administration  can be categorized into (i) External Factors and (ii) Internal Factors.

1. External factors influencing Wage and Salary Administration

• Demand and supply : The labor market conditions or demand and supply forces operate at the national and local levels and determine organizational wage structure. When the demand of a particular type of labor is more and supply is less then the wages will be more. On the other hand, if supply of labor is more demand on the other hand, is less then persons will be available at lower wage rates also. In the words of Mescon, ‘the supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on going wage concepts since, in essence all of these remuneration standards are determined by immediate market forces and factors.
• Cost of living : The wage rates are directly influenced by cost of living of a place. The workers will accept a wage which may ensure them a minimum standard of living. Wages will also be adjusted according to price index number. The increase in price index will erode the purchasing power of workers and they will demand higher wages. When the prices are stable then frequent wage increases may not be undertaken.
• Trade unions bargaining power : The wage rates are also influenced by the bargaining power of trade unions. Stronger the trade union higher well be the wage rates. The strength of a trade union is judged by its membership, financial position and type of leadership. Union’s last weapon is strike which may also be used for getting wage increases. If the workers are disorganized and disunited then employers will be successful in offering low wages.
• Government legislation : To improve the working conditions of workers, government may pass a legislation for fixing minimum wages of workers. This may ensure them a minimum level of living. In under developed countries bargaining power of labor is weak and employers try to exploit workers by paying them low wages. In India, Minimum Wages Act, 1948 was passed to empower government to fix minimum wages of workers.
• Psychological and social factors : Psychological the level of compensation is perceived as a measure of success in life. Management should take into consideration the psychological needs of the employees while fixing the wage rates so that the employees take pride in their work. Sociologically and ethically, the employees want that the wage system should be equitable, just and fair. These factors should also be taken into consideration while devising a wage programme.
• Economy : Economy also has its impact on wage and salary fixation. While it may be possible for some organizations to thrive in a recession, there is no doubt that economy affects remuneration decisions. A depressed economy will probably increase the labor supply. This, in turn, should lower the going wage rate.
• Technological development: With the rapid growth of industries, there is a shortage of skilled resources. The technological developments have been affecting skills levels at faster rates. Thus, the wage rates of skilled employees constantly change and an organization has to keep its level up-to the mark to suit the market needs.
• Prevailing market rates: No enterprise can ignore prevailing or comparative wage rates. The wage rates paid in the industry or other concerns at the same place will form a base for fixing wage rates. If a concern pays low rates then workers leave their jobs whenever they get a job somewhere else. It will not be possible to retain good workers for long.

2. Internal factors influencing Wage and Salary Administration

• Ability to pay: The ability to pay of an enterprise will influence wage rates to be paid. If the concerns is running into losses then it may not be able to pay higher wage rate. A profitable concern may pay more to attract good workers. During the period of prosperity, workers are paid higher wages because management wants to share the profits with labor.
• Job requirements: Basic wages depend largely on the difficulty level, and physical and mental effort required in a particular job. The relative worth of a job can be estimated through job evaluation. Simple, routine tasks that can be done by many people with minimum skills receive relatively low pay. On the other hand, complex, challenging tasks that can be done by few people with high skill levels generally receive high pay.
• Management strategy: The overall strategy which a company pursues should determine to remuneration to its employees. Where the strategy of the organization is to achieve rapid growth, remuneration should be higher than what competitors pay. Where the strategy is to maintain and protect current earnings, because of the declining  fortunes of the company, remuneration level needs to be average or even below average.
• Employee: Several employee related factors interact to determine his remuneration.

1. Performance or productivity is always rewarded with a pay increase. Rewarding performance motivates the employees to do better in future.
2. Seniority. Unions view seniority as the most objective criteria for pay increases whereas management prefer performance to effect pay increases.
3. Experience. Makes an employee gain valuable insights and is generally rewarded.
4. Potential. Organization do pay some employees based on their potential. Young managers are paid more because of their potential to perform even if they are short of experience.

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