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Copyright © 2009 Pearson Education, Inc. 11- 1
Topic 6-2. (Ch. 11)
Effort, Productivity, and Pay
Copyright © 2009 Pearson Education, Inc. 11- 2
Figure 11.1: Two Alternative Divisions of the Surplus
Copyright © 2009 Pearson Education, Inc. 11- 3
Implicit Contracts
Monitoring is costly needs an implicit contracts: incentive to induce self-monitoring (cf. explicit contract)
Should be self-enforcing since it cannot be enforced by legal means
Should be incentive compatible: the agreements where is in the best interest of each party to honor the agreement
Copyright © 2009 Pearson Education, Inc. 11- 4
Piece Rate Pay
Piece rate: according to outputHourly wage: time rate regardless of
outputSalary / flat ratePiece rate is common where the pace of
work is under the control and where it is easy to measure the output
If cooperation is important, group incentive is more important. Piece rates are less common in large companies
Copyright © 2009 Pearson Education, Inc. 11- 5
Evidences of piece rate
Piece rate workers receive higher wage > time rate. Maybe because more able workers chooses job offer that offer piece-rate
Wage dispersion:
Commissions > time-rate pay
Group piece rate < individual piece rateOften regulated by quota by union
Copyright © 2009 Pearson Education, Inc. 11- 6
Difficulties of piece rate
It is hard to monitor the quality of output in a piece rate plan
If employees can determine their own production process, it has perverse incentive
(Czech republic doctors case: increased the number of procedures performed)
Copyright © 2009 Pearson Education, Inc. 11- 7
Salary
Employees maintains a good deal of control over the pace of work
Output is difficult to measureThe time it will take to complete task is
uncertainIncentive for investment in human
capital (participate in employer sponsored training program)
Copyright © 2009 Pearson Education, Inc. 11- 8
Bonuses, profit sharing, and effort
Bonus: extra payments to workers based on assessments of their output (larger portion of payment for some jobs: real estate agencies)
Group profit sharing: bonus based on performance of their division or department. Could be seen in more profitable firms.
Copyright © 2009 Pearson Education, Inc. 11- 9
Efficiency wages
Paying high wages cause workers to provide greater effort (prohibit “shirking”)
Absolute wage: nutrition basedRelative wage: better paid can get better
applicants and less turnoverEvidence: Ford motor company $5 pay a day
in 1914. Absenteeism 10% 0.5%Shock theory: reduce inefficiency in
management
Copyright © 2009 Pearson Education, Inc. 11- 10
Job Hierarchies in Pay
Job ladders:
Port of entry & internal labor market create long term attachment to single employer. Employers need a pay structure
1) Motivate workers to be more productive
2) Encourage workers to leave the firm when their productivity falls short of their wage
3) Provide a way to determine who should move up to the ladder
Copyright © 2009 Pearson Education, Inc. 11- 11
Why wages rise by tenure
1) Skill
2) Good match
3) Incentive: delayed payments (ex: pension). Workers receive all benefit by extra effort
Evidence: if monitoring is easy less likely to have delayed payments
Incentive to cheat for firm? reputation game.
Mandatory retirement is an issue
Copyright © 2009 Pearson Education, Inc. 11- 12
Figure 11.2: A Compensation Sequencing Scheme to Increase Worker Motivation
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Figure 11.3: Alternative Explanations for the Effect of Job Tenure on Wages
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Tournament and executive pay
Winner takes all: only relative output matters. Uncertainty makes the system better.
Payoff must be larger if 1) The more competitors 2) Competitors are homogenous3) Horizon becomes shorter Sabotage: only relative performance matters Evidence:1) Larger prize better performance2) The more competitors, the more homogenous
workers, the shorter horizons least to better compensation
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Up or out contract
Professors or lawyers promotionFirm pay wage regardless effort for given
period of time workers do not have any incentive to misrepresent of the productivity given period of time
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Shirking and unemployment
How much will employers have to pay so that workers do not shirk? Cost of shirking is losing their job.
NSC’NSC
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More on shirking conditionIf unemployment insurance goes up, the N (No
shirking condition) moves to the left since employers should pay higher wages to induce them not to shirk
Evidences- W-W(local average) higher fewer workers are
dismissed- Strong negative relationship between local
unemployment rate and current wages controlling for other factors
Copyright © 2009 Pearson Education, Inc. 11- 18
Efficiency wages and industry wage differentials
Earnings differential across industry existIn part because of different skill required
or compensating wage differential or existence of unions
Controlling for all these the wage differential still exist. Why?
Maybe monitoring problems (size differentials)
Copyright © 2009 Pearson Education, Inc. 11- 19
Firm size wage differentials
Hard to monitor workers in large firms
1) Efficiency wage is smaller for workers with less capital equipment (capital is expensive)
2) Smaller in unionized plants: union rules render monitoring systems
3) Bigger if workers control their own working hours (flexibility)
Copyright © 2009 Pearson Education, Inc. 11- 20
Self Employment
US: 8%, Greece and Italy:25%Reasons: hard to find regular jobs (rise
with recession). Employee-protection regulation.
Self monitoring. Sometimes tax evasion.
Copyright © 2009 Pearson Education, Inc. 11- 21
Self Employment (cont’d)
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