Wages

Article byNanditha Saravanakumar
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Wages Definition

Wages refer to the payment made to an employee for a specific period, mostly hourly or daily. It is closely associated with laborers engaged in production rather than clerks or executives, who are paid salaries. It is fixed, and the payment is mostly made immediately after the work is done.

Wages Meaning

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Wages are an expense for the firm and, more specifically, a variable cost because it varies with factors such as an increase in aggregate demand, seasonality, labor market fluctuations, etc. Therefore, the concept is important to laborers, the firm, and the economy, as it affects parameters like inflation, demand, etc.

Key Takeaways

  • Wages refer to the monetary compensation paid to the laborers based on work done. The payment is made either on an hourly or daily basis.
  • Every firm is legally mandated to pay minimum compensation to all its employees. This is known as minimum wage. In the United States, the Federal minimum wage has been $7.25 since 2009, with a proposed increase in minimum wages in several states in 2023.
  • Accounting is considered an expense and is often included in the cost of goods sold and other entries like raw materials, cartage, etc.

Wages Explained

Wages are an important concept, as it affects many components of an economy. First, it is the compensation made to a section of unskilled laborers. Secondly, it is important for a firm that wants to make payments based on productivity rather than paying them a monthly salary. This gives the firm a degree of control over how many laborers they need during a particular season.

Thirdly, it can affect factors like demand, supply, inflation, etc. For example, when employees receive more money, they can avail of consumer goods and services, which drives the demand and prices upwards, thus leading to inflation. Therefore, wage growth is necessary if an economy should grow.

Given its importance, the government in almost all countries mandates that a minimum level of wages be paid to workers. Therefore, every firm or employer should adhere to this requirement. For example, in the U.S., the Department of Labor mandates that employees be paid at least $7.25 as hourly wages.

However, most companies employ laborers according to the prevailing wages, which refers to the hourly pay of similar laborers employed in a similar occupation. This would increase the supply of more qualified workers to a company. In addition, the federal minimum wage rate has remained the same since 2009. However, as many as 25 states are planning to increase their minimum wage rate at the onset of 2023.

Example

Let’s understand the concept of minimum wages better with the help of an example.

Here’s recent news about Amazon.com Inc., which announced that it would raise compensation for hourly workers. The company had earlier paid $15 per hour, twice the minimum wage mandated by the law. Now, the company is set to increase the per-hour pay to $19 for laborers in transportation and warehousing. In contrast, the payment will increase to $16 per hour for employees working in customer fulfillment.

The company estimates that this increase will lead to an additional $1 billion in expenditure. Amazon employs more than 1.5 million people in the United States. The company spokesperson also informed that it plans to make more frequent payments than once or twice a month for hourly workers.

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Wage vs Income

The terms wage and income are often confused with each other. Income refers to cash earned or received in exchange for work done or capital invested. As income in a strictly employment-related context, an employee’s monthly income would include wages, bonuses, gifts, interests, dividends, etc. Thus wage is a part of one’s income. Though the former is fixed, the latter is not. Income varies depending on the season or the company’s stock performance.

Another distinction is that employees receive income irrespective of the work they do. Even if an employee were to take a two-day paid leave, they would still receive their income. However, an hourly worker is paid based on the amount of work done, i.e., their productivity.

But the key difference one should understand is between wages and salaries. The latter denotes the remuneration paid to an employee at the end of the month or, in rare cases, annually. It is not fixed for work done per hour or day and is more associated with office workers than factory workers.

Wage Growth vs Inflation

Now, let’s analyze the relationship between remuneration increases and price levels. Usually, when a firm provides higher income to its employees, more people are empowered to increase their spending. This increases the demand in the economy and, thus, pushes the price level upwards. Therefore, one can say that an increase in wages contributes to inflation.

Higher inflation further motivates laborers to demand higher hourly pay. To keep their profit margins constant, firms must increase their selling price. This price indicates the cost of goods sold (which includes wages). Hence, this further leads to inflation. This phenomenon, in macroeconomics, is referred to as the wage-price spiral.

Frequently Asked Questions (FAQs)

1. Are wages going up?

Over the years, wages have kept going up. This is a result of increasing inflation, and the remuneration of workers should keep up with the increasing standards of living in an economy. This is why the government sets the minimum remuneration and keeps changing it to become more relevant as the economy grows.

2. How are wages determined?

The wage rate in an economy is determined by factors such as supply and demand, cost of living, inflation, the ability of the firm to pay, bargaining power of trade unions, government regulations, and prevailing wages.

3. Are wages a fixed cost?

No. Though wages are fixed (hourly/ daily), they do not constitute a part of a firm’s fixed cost. Instead, they are considered a variable cost, as the number of laborers recruited, the remuneration rate, etc., vary depending on seasonality, aggregate demand, etc. Therefore, the total amount incurred by a firm varies from month to month.

This article has been a guide to Wages and its definition. We explain the topic in detail, including an example, and compare it with income and inflation. You may also find some useful articles here –

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