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Introduction

Wage determination - the basics

Introduction

The standard explanation of this topic used to me Marginal Revenue Product theory, but this has now disappeared from many specifications. Therefore the explanation here will be a simple supply and demand one.

Demand for labour

The demand for labour is a derived demand - firms want employees because people want to buy the goods and services that these employees make. Therefore, apart from the wage rate and the productivity of workers, demand will also be affected by factors like the state of the economy overall - during a period of rapid economic growth, the demand for workers will be much greater than during a recession.

There will generally be a negative correlation between wage rates and the demand for labour. As wage rates increase, other things being equal, firms' costs will be pushed up, and this will encourage firms to improve productivity either by changing working practices or substituting capital for labour. In either case, fewer workers are likely to be needed, certainly in the long term. Therefore a change in wage rates will lead to an extension or contraction in the demand for labour schedule. A change in any other factor should cause a shift:

Wage rate Wage rate

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W2

W1 DL

D recession D boom

Q2 Q1 Q labour Q labourTherefore, an increase in wage rates from W! to W" causes a contraction in the demand for labour (falling from Q1 to Q2). A change in economic conditions, such as a recession causes fewer workers to be demanded at every wages rate, leading the demand schedule to shift

Elasticity

This will be influenced by many of the same factors affecting PED for goods and services:

Substitutability: The easier it is to swap capital for labour, the more sensitive demand for labour will be to a change in wages.

% of costs: If labour forms a high proportion of the firm's costs, then they will be less able to afford a pay rise, making demand less elastic

Time period. In the short run, a firm might be forced to pay an increase in wages. In the longer term they will look for alternatives, introducing productivity schemes and so on. Therefore demand is likely to be more elastic in the long term.

Necessity: The more difficult an employee is to replace, the more inelastic demand is for them.

Supply of labour

When dealing with the supply of labour, it is important to be clear about whether it is total labour supply or the supply for an individual job that is being discussed - the supply of labour as a whole is clearly going to be more wage inelastic and more static than that for a particular job.

Whilst the supply of labour for a particular job will be mainly influenced by pay, conditions and skill requirements, the total UK labour supply is influenced by a much broader set of factors such as the replacement ratio

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(benefits: wages), the ease of getting benefit, the availability of child-care provision, the proportion of students going on to university - much broader factors that the government is trying to influence through supply side policies such as the working families tax credit and so on.

The relationship between wage rates and supply will generally be positive - an increase in the wage rate offered for a job will persuade workers either to switch from other occupations or to choose work over leisure:

Wage rate S labour

W2

W1

Q1 Q2 Number of workers

As the wage rate offered rises from W1 to W2, the number of workers prepared to accept a job rises from Q1 to Q2. The supply of labour function will only shift if there is a change in the conditions of supply - e.g. supply side policies by the government, an influx of young workers (the baby boom), or for a particular job, an increase in the number of workers possessing the required skills.

Labour market equilibrium

In principle this will occur at the wage rate where there is no tendency for change - this will be where the supply of labour equals the demand for those workers:

Wage rate

W2 Supply of labour

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We

W1Demand for labour

Number of workers

At W1, there is more demand for employees than there are workers available. Firms will be forced to 'poach' employees from other firms. This will push up wage rates, causing supply to extend and demand to contract. At W2, the reverse is true meaning that wage rates will tend to fall. At We, supply and demand for labour are equal, meaning that there will be no tendency to change.

Wage differentials

Many questions on this area of the syllabus look to explain why there are wage differentials between jobs. The best way of looking at this is to look at the conditions necessary for there to be no wage differentials between jobs. This in fact requires only two basic conditions:

1) All jobs must be perceived as equally desirable2) There must be no immobilities in the labour market

If both of these held true, there would be no differentials. Suppose that job 'A' did pay more than job 'B'. As soon as workers realised this, employees would leave industry 'B' to look for work in industry 'A'. Supply of labour would therefore begin to fall in industry 'B' and rise in 'A', forcing wages down in 'A' and up in 'B'. This would continue until there was no reason for workers to change industries - i.e. when wage rates were equal.

Therefore any wage differentials must exist as a result of the failure of these assumptions to hold true. Suppose that jobs are no longer perceived to be equally desirable, but that labour is still perfectly mobile, and suppose that

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two jobs initially have the same wage rate, but one is perceived as more desirable than the other.

Workers would start to leave the undesirable job and look for work in the more desirable industry, forcing up ages in the undesirable job, as firms compete for the smaller supply of workers. Likewise wages in the more desirable industry will fall due to the surplus of labour.

Wage rate S1 Wage rate S2 S1 S2

W3W1 W1

W2

D1 D2Number of workers Number of workers

Industry 'A' Industry 'B'

In the diagram, supply rises from S1 to S2 in industry 'A', but falls in 'B'. This will continue until the difference in wages is large enough to cancel out the difference in desirability, meaning workers no longer wish to switch industries. The difference between W2 and W3 is known as the equalising wage differential because it cancels out the differences in desirability between jobs. Therefore in the absence of labour immobilities:

Wage in job 'A' + Utility from job 'A' = Wage from job 'B' +Utility from job 'B'

Low High High Low

This provides a partial explanation of wage differentials - there are some jobs that are well remunerated because of their unpleasantness, difficulty or danger (e.g. coal mining). However, this does not explain why jobs of company directors or consultants at hospitals are comparatively well

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remunerated, even though these jobs are not believed to be particularly unpleasant. The answer comes from the failure of the second assumption - labour mobility.

In reality it is not possible to switch between jobs without at the very least retraining (labour immobility). This means that the supply of labour for some jobs will be both lower and less wage elastic than others. Combined with relative demand, this explains why some jobs can command very high wages while others are paid comparatively poorly:

Wage rate W1 Sns Wage rate

W2 Ssg

Dns Dsg

Neurosurgeons Security guards

The supply of neurosurgeons is both more limited and more inelastic than that of security guards, meaning that the equilibrium wage rate will be much higher (W1Rather than W2).

Theoretically the causes of immobility can be subdivided into two broad categories, occupational and geographical.

Occupational immobilities are those restrictions that make it difficult to move between different jobs, and include access to training/retraining, length of time taken to convert, the need for innate skill or ability, the need for qualifications and so on.

Geographical immobilities are restrictions making it difficult to move between areas of the country, such as house price and cost of living differentials between the north and south. In January 2001, the average

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house price in the North of the UK was £64542, whereas in the South East the price was £139940, a differential of 117%. Other factors include social ties, which mean that even if people could afford to move to wealthier areas elsewhere in the country, they might not want to. These psychological factors can be difficult to take into account when making policy.

Labour and Wage Policy in Pakistan

Government wields widely pervasive influences on the labour market and inparticular on wage levels in different segments of the economy. Both action and inaction of the various regimes bear upon labour market outcome. The paradigmatic shift entailed by imperatives of globalization and implementation of IMF/WB reform packages during 1990’s and in particular during 1999/2003 in fact resulted into change in the thrust of the governmental approach, labour was no longer regarded as social partner but was accorded the role of a factor of production to be priced by the forces of demand and supply. Exception was made in case of hiring blue eyed guzzlers at extraordinary high salaries. However, various regimes during the period understudy had to maintain a façade of being pro-labour because of political considerations and ratification of various ILO conventions.

Labour LegislationThe British enacted laws during the pre-independence era constitute the edifice of the Pakistan’s Labour Legislation. The legal framework that has evolved since independence over the years broadly covers the following areas:

(a) Working conditions that prescribe working hours and leave entitlements;(b) Minimum wages;(c) Occupational health, hygiene and safety standards;(d) Old age pensions;(e) Social security and welfare relating to medical care, education for workers’ children and share in the companies profits; and(f) Labour rights to organize, form associations and bargain collectively and

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dispute resolution mechanisms.

The recent labour legislation of the IRO 2002 which is no more applicablebecause of the cancellation by the current regime was formulated in a substantially changed frame of the mind of the policy makers, wherein the removal of labour market rigidity and injection of flexibility in the working conditions as well as market driven wages were to be achieved to facilitate the private investor. The IRO 2002 was part of a package embracing consolidation and rationalization of labour laws, in response to theRecommendations of 1999 Task Force on labour. The needed labour legislation was reconstituted into five different categories, industrial relations, payment of wages, employment and working conditions, occupational health and safety, and labour welfare and safety nets.

Minimum Wage Legislation in PakistanThe Minimum Wage Ordinance of 1961 was the first major legislation thatprovided for the establishment of Provincial Minimum Wage Boards with representation of workers and employers to fix Minimum Wages for unskilled and other workers for the whole province or for a specific industry. Initially, the Ordinance covered enterprises with 20 or more workers. In 1965 its scope was extended to establishments employing 10 or more workers. In 1969, as a part of the new labour policy, the West PakistanMinimum Wage Ordinance for unskilled workers was promulgated and made applicable to enterprises with 50 or more workers. For smaller size establishments the provincial governments had to constitute Minimum Wage Boards under the 1961 Ordinance.

The objectives of wage legislation were not explicitly mentioned in the Minimum Wage Ordinance, 1961. The 1969 West Pakistan Minimum Wage Ordinance for unskilled workers professed to achieve the objective of the 1969 Labour Policy, to provide “a fair and equitable living to the workers”, without making any effort to rigorously define what constituted a subsistence or living wage. The preamble to the 1969 Ordinance states that the purpose of fixing a minimum wage is to safeguard the basic and legitimate rights of workers and to “prevent exploitation of ignorant or lesseducated or less organized and under privileged members of society by their employers”. The law was extended to the whole of Pakistan, and to all factories or places of work and to all workers except Federal and provincial government employees, mine workers (who had a separate law covering

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them), and agricultural workers. The last exception was significant as it eliminated a very large number of workers from the protection providedby the minimum wage legislation.

With the announcement of the new labour policy in the early 1970’s a number of benefits were extended to industrial workers. These included : a) doubling of workers’ share in profits (from 2.5 to 5%); (b) the entire contribution for social security was to be made by the employers; and c) employers were also required to pay a profit related bonus in addition to a customary bonus. The Cost of Living Relief Act with wider coverage than the above mentioned measures was enacted in 1973, whose ambit also included the construction industry and enterprises covered by the West Pakistan Industrial and Commercial Ordinance of 1968. During the mid 1980s the Government of Pakistan introduced a system of indexation for fixed income groups. Under this 1985-86 scheme salaries and wages were indexed to inflation, apparently as a substitute for the relief the Cost of Living Act, with employees classified on the basis of basic pay.

The West Pakistan Minimum Wages for Unskilled Workers Ordinance, 1969 was amended by the Minimum Wages for Unskilled Workers (Amendment) Act, 1993 to uniformly increase workers wages and fix the minimum wage at Rs.1,500 p.m. The only permissible authorized deductions from this minimum wage could be for housing accommodation and transport. The Minimum Wage was revised to Rs. 2, 500 in 2001under the Minimum Wage Legislation of 2001. This law distinguishes itself by its applicability to all manufacturing and commercial establishments, irrespective of the size of establishment. The new minimum wage of Rs.2, 500 per month has, however, failed to compensate the workers for the post inflation bite, thereby failing to protect the living standard of workers, a professed objective of minimum wage legislation; the 1992 minimum wage of Rs. 1,500 adjusted for inflation works out to Rs. 3,165 in 2001.

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Practical study

Unilever Pakistan History

In the world of consumer products Unilever Pakistan has created an indelible name for itself with brands such as Lifebuoy, Lux, Surf and Walls.

Unilever Pakistan Limited needs no introduction 

By far the largest consumer products company in Pakistan, UPL is a part of the consumer products giant Unilever. 

UPL was established some fifty years ago in the then newly created Pakistan. The town of Rahim Yar Khan was the site chosen for setting up a vegetable oil factory in 1958 and that is where the first UPL manufacturing facility developed. 

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Now a force to be reckoned with

Today, Unilever Pakistan is a force to reckon with. Its contribution to Pakistan's economic development cannot be overestimated. Now operating four factories at different locations around the country, the company contributes a significant proportion of the country's taxes. It employs a large number of local managers and workers. The UPL Head Office was shifted to Karachi from the Rahim Yar Khan site in the mid 60's. By this time the once dusty and sleepy village was the hub of activities for UPL. A residential estate situated near the factory is the home of UPL employees at Rahim Yar Khan.

Mission statement

Unilever's mission is to add vitality to life. We meet everyday needs for nutrition, hygiene, and personal care with brands that help people feel good, look good and get more out of life.

Labour relations

Between 2006 and 2009, four complaints were brought to Unilever's attention by the International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Associations (IUF) relating to our operations in India and Pakistan. A further complaint was submitted by the Turkish transport union TUMTIS in 2008.

These complaints concerned site closure (Sewri factory, India), freedom of association and collective bargaining (Doom Dooma, India) and the use of temporary and contracted labour at our factories in Pakistan (Rahim Yar Khan and Khanewal).

Under the terms of the OECD Guidelines for Multinational Enterprises, the unions referred their complaints to the OECD's National Contact Points in the UK and Turkey for investigation.

Unilever Pakistan reached agreement with the IUF to resolve the dispute at the Rahim Yar Khan factory in June 2009. More recently, on 21 October, Unilever Pakistan reached an agreement relating to a further IUF complaint at Khanewal (retroactively applicable to 15 October 2009).

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Rahim Yar Khan, Punjab, Pakistan

In November 2007, the IUF submitted a complaint to the OECD on behalf of the Unilever Employees Federation regarding the treatment of temporary labour at our Rahim Yar Khan factory in Pakistan.

This case was subsequently withdrawn at the request of the local union.

However in November 2008 the IUF re-submitted the complaint on behalf of another local union, the Pakistan National Federation of Food & Beverage Workers. The complaint alleges that Unilever Pakistan dismissed 292 temporary workers who had decided to join a trade union. The company was also accused of retaining workers through third-party service providers in order to reduce the costs associated with the provision of welfare and other benefits.

Unilever Pakistan denied any breach of the OECD Guidelines. Temporary workers were not re-employed because of their desire to join a union but as part of the wider re-organization of the factory. This involved outsourcing most of the packing and non-core operations on the site to a third-party supplier. Outsourcing is a common business practice in Pakistan.

All temporary workers were advised of this fact in line with the requirements of national labour law. A number of the affected temporary workers were offered employment by the outsourced service provider.

Unilever Pakistan's use of workers employed through third-party service providers is consistent with local employment law and practice. We require our third-party suppliers to comply with our Business Partner Code (which recognises the right to freedom of association). The Code specifically requires that our service providers comply with local employment law with respect to minimum wage, social security and retirement contribution requirements.

Throughout the period of this dispute, Unilever Pakistan had been in dialogue with local trade union representatives to discuss the issues of outsourcing in the Pakistani market and sought to agree a possible way forward that could allay the concerns of all involved. We also maintained an open and ongoing dialogue with the IUF at international level.

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While we refuted any breach of the OECD Guidelines or any discrimination against union members, Unilever Pakistan agreed to co-operate fully with the OECD process to seek resolution of this case. In particular, we agreed to address the numbers of permanent employees relative to outsourced workers at the Rahim Yar Khan site.

In June 2009 Unilever Pakistan reached agreement with the IUF as part of the conciliation process of the OECD UK National Contact Point. Through this agreement we have established an additional 120 permanent posts at Rahim Yar Khan.

A minimum condition of employment at our factory is proof of secondary education qualifications. Those who can substantiate this will be appointed to these posts as of 24 June 2009. For those few people who cannot prove they have obtained these qualifications, we will offer scholarships equivalent to either one or two years' basic salary to help them attain them. These posts will be held open until the qualification is attained.

Those temporary workers who were dismissed in October and who accept permanent employment will also receive a one off lump sum payment conditional upon their confirmation of withdrawal of any related Court cases.

For those remaining workers for whom we are not in a position to offer permanent employment we have agreed to offer a one off lump sum payment equivalent to an average of three years' salary. This offer is conditional on the agreement that current and future legal action relating to this matter is dropped.

Khanewal, Punjab, Pakistan

Unilever Pakistan's Khanewal tea factory employs a mix of permanent and outsourced workers. To keep operations effective and competitive, Unilever Pakistan uses third-party service providers to supply workers for our non-core operations. Non-core elements include end-of-line packaging operations as well as ancillary services such as housekeeping, catering and security. Outsourcing non-core operations is widespread in Pakistan, and Unilever Pakistan's practice is in line with that of other multinationals and local competitors.

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On average, some 533 people are employed at Khanewal, including 22 permanent employees who work in roles such as process, plant and utilities operators and technicians. The number of people employed varies due to the demand-led nature of the business which affects the number of people required for packaging operations. The outsourced workers are employed by licensed third-party service providers. We require our third-party suppliers to comply with our Business Partner Code (which recognises the right to freedom of association). Unilever Pakistan seeks to ensure that our service providers comply with local employment law with respect to minimum wage, social security and retirement contribution requirements.

In March 2009 the IUF lodged a complaint with the OECD alleging that Unilever's employment practices undermine the rights of workers to fair or decent pay as well as freedom of association.

In Pakistan, local market practices had evolved to the point where the ratio of permanent to outsourced workers commonly skewed in favour of outsourced workers. We acknowledged that this was an issue for workers and their union representatives and recognised the need to address it. We offered to increase the numbers on permanent contracts using fair and transparent criteria.

On 21 October 2009, Unilever Pakistan and the IUF reached an agreement under the OECD conciliation procedure to resolve the issue (retroactively applicable to 15 October). Under its terms Unilever Pakistan will create 200 permanent positions at the facility in addition to the existing 22 positions at Khanewal.

To ensure a fair and transparent selection procedure for the appointment of these permanent positions, the IUF and Unilever Pakistan will form a committee to oversee and implement the process. The selection of workers will be made on the basis of seniority and skill with priority being given to members of the local trade union Action Committee (Unilever Mazdoor Union Khanewal). The Action Committee will also oversee the implementation of the agreement.

Furthermore, Unilever Pakistan has agreed that it will ensure its third-party service providers make lump sum payments to all contract agency workers (whether they will be given a permanent position or not) to cover any outstanding mandatory financial obligations. The company will also ensure

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that the third-party service providers have fulfilled their statutory obligations regarding payment of state pension and social security related benefits for all their employees.  In return, the Action Committee members have agreed to withdraw all pending court actions. 

Unilever Pakistan has confirmed its intention of continuing operations at Khanewal and has made a commitment to invest in these operations. However, this will include implementation of automation or other efficiency measures to ensure business viability.

Both Unilever Pakistan and Action Committee members have committed to a process of ongoing dialogue. The IUF and its affiliates will be entitled to exercise full representational functions within the facility without interference.  Implementation of this agreement will be monitored by the IUF and Unilever at national, regional and global levels.

Unilever Employees Federation

The Unilever employees Federation was establish in 1962 which is very effective federation. This federation is linkup with International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Associations (IUF) and PTUDC Pakistan trade union defense campaign. As we above mention that who Unilever employees federation solved the issue of permanent labor. This federation not only active in Rahim Yar Khan but it also doing massive job in Khanawal and Karachi plants. The federation play an important role in wages determination. The most important thing is to maintain the minimum wages. In current situation the minimum wage is 4000Rs but as per new budget 2008/09 government of Pakistan decide to increase the daily wages 4000Rs to 6000Rs. Now in this new scenario the Unilever employee’s federation establishes a campaign in future.

Wages determination and Unilever

Unilever is one of a international organization and they are working in different areas of the world . in Pakistan the Unilever is working more then

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60 year and they follow the proper rules of Ministry of Labour. The government of Pakistan properly manage the laws for labor and it is binding on all the industrial organization in Pakistan. The government of Pakistan given clear instruction about the determination of wages in which the minimum wages are mention. In the budget 2008/09 government decide to increase the minimum wages from 4000Rs to 6000Rs and it is possible that the resent year its implement on all industrial organization. Unilever already have good relations with his workers and recently they satel an issue with the help of IUF which is mention before in this assignment. In current era the Unilever management follow the roles of government of Pakistan and they are looking forward to follow the new instruction in future.

The Data Collection

Primary Data

BOOKS

Labor Management Relations (Daniel Quinn Mills)

5th Edition

Chapter# 18

Page # 512,518,522

Web site

www.karmayog.org

www.wikipedia.org

www.corporatewatch.org.uk

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http://www.pide.org.pk

Secondary Data

Organization

Unilever Pakistan (Ltd)

Web site

www.unileverpakistan.com.pk/

http://202.83.164.26/wps/portal/Molmophttp://www.ilo.org.pk

SWOT Analysis

Strengths

Unilever Pakistan (70.4% Unilever equity) is the largest FMCG Company in Pakistan, as well as one of the largest multinationals operating in the country. 

The company had a turnover of Rs. 23.3 bn  (Euro 309 mn) in 2007,

Unilever have a proper employees foundation named

Weaknesses

Unilever mostly relay on temporary labor which are on daily wages therefore the level of worker loyalty is not much high.

One of a weakness is that the Unilever still not establish a proper program to facilitate there labor on non financial incentives.

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Unilever employees foundation therefore they are able to negotiate with proper channel in any matter.

Opportunities

Unilever doing good job on social responsibility but they must focus on the non financial incentives for labor.

Unilever have an opportunity to permanent its temporary labor which is very benefital in future.

Threats

Business situation in all over the world is not suitable in these days this factor may be effect on Unilever wages determination.

Conclusion:

We know that business is an economic activity, which is carried out on a regular basis to earn profit. The biggest challenge today is linking incentives to performance both large and small organizations have made a variety of efforts to do so, with mixed results. The problems have ranged from a lack of communication to a change in the business environment. Any organization in the world is only running with the help of its employees. The business not only the name of capital or profit there is most important organ is employees. It is one of a basic responsibility of organization to keep motivated and establish there employees. It is necessary to improving the quality of employee’s life and therefore some provide housing, transport, education and health care to their employees and their families but before this there wages determination is most important thing. The ILO and the government of Pakistan have a proper legislation on this matter and all the organization are binding to follow these principals. In some places businessmen provide free medical facility to there labor. Incentive pay plans

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are not always popular because they have problems that may make them not worth their advantages. The assumption that workers operate only on an economic level is not supported when one sees the restriction of output that often occurs in wages determination. Wages determination also require considerable administrative costs, take control away from supervisors, and require a supportive climate within management because the demand and supply is also effect it. Further, the inability to define performance in a way that is complete and acceptable often has doomed wages determination. Changing the conditions of the plan once established is very difficult, as it is often seen as taking away things from the employee. Finally, it is obvious to follow and bind organization management to at lest complete the parameter of minimum wages.

Recommendations:

I found Unilever one of a big business group of Pakistani industries. They provide good jobs to there employees my recommendation is that Unilever should fix minimum wages 6000Rs before government implement it properly that act can shows good gestures for the labor and there loyalty level will be increased. Cash plays a very important role in fulfilling the needs of the individuals especially of labor class.

References BOOKS

Labor Management Relations (Daniel Quinn Mills)

21

5th Edition

Chapter# 18

Page # 512,518,522

Web site

www.karmayog.org

www.wikipedia.org

www.corporatewatch.org.ukhttp://www.pide.org.pk

www. unilever pakistan.com.pk/

http://202.83.164.26/wps/portal/Molmop

http://www.ilo.org.pk

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