1

Introductio
n 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

2
 W2

W1
DL
D recession D boom

Q2 Q1 Q labour Q labour
Therefore, 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

3
(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

We

4
 W1
Demand 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 desirable

2) 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

5
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

W3
W1 W1

W2

D1 D2
Number 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

6
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 (W1
Rather 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

7
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 in

particular 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 Legislation
The 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

8
dispute resolution mechanisms.

The recent labour legislation of the IRO 2002 which is no more applicable
because 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 the
Recommendations 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 Pakistan

The Minimum Wage Ordinance of 1961 was the first major legislation that
provided 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 Pakistan
Minimum 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 less
educated 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

9
them), and agricultural workers. The last exception was significant as it
eliminated a very large number of workers from the protection provided
by 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 2001
under 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.

10
11
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.

12
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).

13
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.

14
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.

15
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

16
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

17
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

18
 http://www.pide.org.pk

Secondary Data
Organization

Unilever Pakistan (Ltd)

Web site

www.unileverpakistan.com.pk/

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

SWOT Analysis

Strengths Weaknesses

• Unilever Pakistan (70.4% • Unilever mostly relay on

Unilever equity) is the largest
FMCG Company in Pakistan,
as well as one of the largest
multinationals operating in the
country.
• One of a weakness is that the
• The company had a turnover
of Rs. 23.3 bn (Euro 309 mn)
in 2007,
• Unilever have a proper
employees foundation named
temporary labor which are on
daily wages therefore the level
of worker loyalty is not much
high.
Unilever still not establish a
proper program to facilitate
there labor on non financial
incentives.

19
 Unilever employees
foundation therefore they are
able to negotiate with proper
channel in any matter.

Opportunities Threats

• Unilever doing good job on • Business situation in all over

social responsibility but they the world is not suitable in
must focus on the non these days this factor may be
financial incentives for labor. effect on Unilever wages
determination.
• Unilever have an opportunity
to permanent its temporary
labor which is very benefital in
future.

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

20
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.uk
http://www.pide.org.pk
www.unileverpakistan.com.pk/

http://202.83.164.26/wps/portal/Molmop

http://www.ilo.org.pk

22