Question

Explain the components of compensation of employees for calculation of national income by income method.

Answer 1

When estimating national income using the Income Method, one of the key components is compensation of employees (COE). This refers to the total remuneration (in cash or kind) paid by employers to employees for their work during the accounting year.

The components of  “Compensation of Employees” for the calculation of national income by the income method include the following elements:

1. Wages and Salaries in cash: This is the basic monetary remuneration paid to employees for their labor services.
2. Employers’ contribution to social security schemes: Payments made by employers towards social security benefits like pensions, health insurance, etc., are considered part of employee compensation.
3. Compensation in kind: This includes non-monetary benefits provided to employees, such as food, housing, free transport, medical facilities, etc. Importantly, the contribution of employees themselves towards social security schemes is not included as part of the compensation of employees. Therefore, while calculating national income by the income method, compensation of employees comprises wages and salaries (cash), employers’ contributions to social security, and compensation in kind.