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Economics

The Economics of Salary and Wages

Many people believe that there is no difference between a salaried employed and an employee who works on wages. However, that’s not true. I will teach the fundamental difference between salary and wages.

Some people have a misconception that salaried employees have a white-collar job and wage based employees have a blue-collar job.

Some people have an opinion that you should work as a salary based employee rather than wage and vice versa.

In short, if you have no idea about it, make sure you read the entire article, educate yourself and take the decisions wisely with respect to your career.

Difference Between Salary and Wages

When you get paid a fixed amount monthly or yearly basis and there is an agreement between you and the employer regarding the fixed pay, this means you are getting paid based on salary.

For instance, before you get hired, the HR manager will inform you regarding your annual salary (based on annual, you can easily find out your monthly pay). If you agree with the pay offered, you get hired and the employer must pay the certain amount monthly to you in the form of salary.

However, some employers also consider giving weekly or biweekly salary to their employees.

You get a job with an annual salary of $60,000 as a Software Developer. You will get paid $5,000 a month.

Fair enough?

Let’s talk about wages.

The monthly income does not remain fixed when you make based on wages. In wages, you get paid hourly.

For instance, you get hired as a Sales Representative with an hourly wage of $16. Here, if you work 40 hours in a week (8 hours/day for 5 days), your weekly salary would be $640 ($16*40).

Fundamental difference between the two is that, by giving more time to your work, you eventually make more money as a wage based employee. On the other hand, no matter how much time you give to your job, you get paid a fixed amount.

Pros and Cons of a Salary Income

To make the concept clear, let us define the pros and cons of a salary income.

Pros of a Salary Income

1. Job Security

When you are hired as a salaried employee, the employers usually consider you as a long-term employee because they need your skillset and expertise for their businesses.

Because of this reason, you get higher job security compare to wage based employees. Also, in the countries like the US and Canada, the businesses should have a valid reason for terminating an employee and in some cases, they also have to compensate 2-3 month of income so that the fired employee can cover his/her family expenses.

2. Income Stability

If you are having a family or if you have taken a home loan or if you have taken a car loan, and your income is not stable, my friend, this can be a dangerous situation.

We all thrive for stability in our life and the fundamental step to achieve that stability is to have a stable income.

A salary offers mental peace as you don’t need to worry how much will you make the next month or how much did you make the last month.

Having a stable income allows you to manage your money properly. If you make a budget, it is very easy for you to track how much you spend, how much you save and how much you can invest and grow your wealth.

3. Career Growth

You get lots of opportunities to grow and make money if you are working as a salaried employed.

By providing value to the business, the company would promote you for the higher position with higher salary.

If you are disappointed with your salary, you can discuss and negotiate with the manager. And in the worst case scenario, you can leave the job and find a new job offering you higher salary.

4. Employee Benefits

Most of the companies have the policies for Employee Benefits.

Being a salaried employee, you get an advantages like a vacation time, bonuses, insurance, remote working facilities, sick leave, pension plan or retirement plan, maternity, paternity leave and the list goes on.

Of course, each company has a different policy for Employee Benefits.

I have personally seen lots of people who compromise on their salary if the company offers lots of employee benefits. Therefore, it is a major advantage.

5. Overtime Pay

It is again completely up to the company policy.

If you get a job offering you overtime pay, it is good thing. It means, if you work more than 40 hours in a week or sometimes, 8 hours a day, the company would pay you for the extra effort that you put for the company.

Cons of a Salary Income

1. Occupied Day

While working on salary for full-time, the employees have to work for at least 8 hours. Therefore, you won’t get enough time to work on other things which you actually love doing.

2. Work Hours

Most of the time, you may need to work more hours than scheduled hours. Hence, if your company does not pay you for working overtime, it is a major disadvantage.

Also read: What is Purchasing Power Parity (PPP)? How does it Work?

Pros of Wage Based Income

1. Freedom to Pursue Other Interests

You only go to work when there is any need. When there is tremendous need, you may not have enough time to pursue other interests because you would require to spend hours and hours for working.

However, when you don’t have shifts, you can work other things which you like to do.

2. Overtime Pay

Earlier, we discussed about overtime pay for salaried employees. There is no surety as it depends completely on company policy.

Here, when you work on wage basis, the company is entitled to pay you for the overtime work. Hence, by putting additional hours at work, you make more money.

3. Easy to Get Hired

These types of jobs do not require super-duper high skill.

It is very easy to find wage based jobs because the demand for labor remains always high.

Cons of Wage Based Income

1. Number of Working Hours

Let’s say, you get paid $40 per hour as a wage based employee.

Sounds like a really good handsome amount at the end of the month.

Isn’t it?

But, in the entire month, you only get to work for 60 hours. Which means, before taxes, you earn $2,400 a month. This amount is not sufficient enough to cover your monthly expenses.

You never know how many hours you will have to work because the employer will give you work based on business requirement. Sometimes, you don’t get to work in the entire week and sometime, you have to work 7 days a week.

2. Easy to Get Fired

If the company does not need you, the company will stop giving you the shifts.

The company pays you hourly wages and therefore, the employer is entitled to pay you only when you work.

Imagine a scenario.

You worked 5 days a week for a month. The next month, you don’t get any shift for 2 weeks.

In this case, your income will be half than you earned in the previous month.

Conclusion

I have seen people working on wages for more than 20-25 years and they are happy with what they earn. At the same time, I personally believe that having a stable income with salary based working is a better way of living life.

There is nothing like ‘salaried employees make more money and wage based employees make less money’. Feel free to checkout the link to find the highest paying hourly jobs.

Now, it is up to you.

Let me know your thoughts in the comment section below.

Thanks for reading.

Cheers.

Anuj Vohra

Hi , I am Anuj Vohra. Founder of Itsfacile.com & Saral Investment.

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Anuj Vohra

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All the articles are written by Anuj Vohra