Copyright © 2009 Pearson Education, Inc. 11- 1 Topic 6-2. (Ch. 11) Effort, Productivity, and Pay

Copyright © 2009 Pearson Education, Inc. 11- 1

Topic 6-2. (Ch. 11)

Effort, Productivity, and Pay


Figure 11.1: Two Alternative Divisions of the Surplus


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


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


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


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)


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)


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.


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


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


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


Figure 11.2: A Compensation Sequencing Scheme to Increase Worker Motivation


Figure 11.3: Alternative Explanations for the Effect of Job Tenure on Wages


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


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


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


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


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)


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)


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.


Self Employment (cont’d)

Documents

Copyright © 2009 Pearson Education, Inc. 11- 1 Topic 6-2. (Ch. 11) Effort, Productivity, and Pay