Piece Rate Work Essay

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Piece rate work  is work  for which an employee is paid  a fixed  amount for  each  unit  of work  produced. Specifically, the employer sets the piece rate that  an employee will be paid per unit of output, and  the  employee’s  earnings  per  day  equal  the number  of  units  of  output produced during  the day times  the  piece rate  per unit  of output. This differs  from  hourly  wage,  which  is based  on  the amount  of   time   (number   of   hours)   that   an employee works.  One example  of piece rate work is a  mechanic  being  paid  by  the  number  of  car tune-ups  completed. Another  example  is a seamstress who is paid by the number  of shirts sewn.

Economic  models  predict  that  employees  paid by  piece  rate  will,  all  else being  equal,  be  more productive  than  when  paid  by  the  hour  because they  will  increase  their  effort  levels. However,  a drawback of piece rate work is that employees will have little incentive to spend time and effort on anything  that  does not directly increase output. So employees will have little incentive to maintain the quality  of the output if it takes more time to do so since  this  will  decrease   their   daily  output  and lower  the  amount they are  paid.  For  this reason, piece rate work is typically seen in situations where the quality  of the output can be verified at a low cost  and  the  worker  is penalized  for  output that falls below a designated  quality level. For example, typists  may  be paid  according  to  the  number  of pages they type but may also be penalized  for the number  of typos they produce. When suitable penalties are imposed  for producing low-quality output, employees will internalize these costs when determining how  to  allocate  their  time  between producing higher-quality output  versus  a  larger quantity of output.

Piece rate  work  tends  to be preferable  in situations where it is difficult for an employer to verify how many hours  an employee actually  works.  For instance,  when  an employee  works  from  home, it may be very difficult for an employer to verify the hours of work. Piece rate work may also be preferable  when   employees   are  contingent/temporary and other  incentives such as the promise  of future promotions and wage premiums  are not feasible.

High-ability   workers   who  can  increase   their effort levels much more easily than low-ability workers  tend  to prefer  piece rate  work  to hourly wage work. With hourly wage work, workers must put  forth  a minimum  level of effort  to keep their jobs. There is no incentive, however,  for a worker to provide  effort beyond that  minimum  level since additional effort  is  costly  and  the  worker’s  pay remains  the same. When  pay is changed  from  an hourly wage rate to a piece rate, high-ability  workers will choose to substantially increase their effort level, and  hence  output, since they  are  rewarded for  it by increased  earnings.  On  the  other  hand, lower-ability  workers   who   find   it  difficult   to increase their effort may actually see their earnings fall. Thus,  moving  from  an  hourly  wage  rate  to piece rate pay tends to increase earnings inequality across employees.

One   potential  problem   that   employers   face when  using piece rate  pay is how  to set the piece rate. If only employees know  how easy or difficult it is to produce  a unit  of output, then  employers need   to   monitor  them   to   set  the   piece  rate. However,  if employees  know  that  they  are  being monitored for the purpose of determining the piece rate, they have an incentive to make it look  more time-consuming to produce  a unit  of output than it really is in order to increase the piece rate set by the employer.

One drawback for employees paid by piece rate is that  earnings may be more uncertain than  when they  are  paid  by  the  hour,  since  the  amount of output may depend  not  only on employee’s effort but  also  on  other  random factors.  For  example, apple  pickers  may be paid  per bin of apples  they pick. However,  the rate at which they can fill a bin may depend on factors out of their control, such as the weather.

In many  countries  (e.g., the  United  Kingdom), piece  rate  pay  must  conform   to  minimum   wage laws. Thus,  the piece rate  must  be set so that  the average worker who works at an average rate earns at least the minimum  wage set by law. Some countries (e.g., the United States) also require  piece rate pay to conform  to laws governing overtime pay.

Some empirical studies have found that employees are  more  productive   when  paid  a  piece  rate instead  of  an  hourly  wage.  A study  by  Edward Lazear found  that  paying windshield  glass installers by piece rate  instead  of by the hour  increased productivity by  44  percent,  while  Bruce  Shearer, using experimental data,  found  that  paying workers by the number  of seedlings they planted  instead of by the hour  increased  productivity by about  20 percent.  However,  in both  studies, the variance  of productivity increased  as well. Also, some empirical evidence shows that, all else being equal, workers who  are paid  by piece rate  have higher  injury rates than  those paid by the hour.  Other  empirical studies   have   found   that   as  the   piece  rate   is increased  so does productivity.

Empirical     evidence     from     the     National Longitudinal Survey of Youth  1979  suggests that in the United  States, women  are more  likely than men to receive piece rate  pay. This occurs even in occupations such as the crafts  and  operative  jobs that  more commonly  use piece rates. On the other hand, women are less likely to be paid by commission than  men.

Bibliography:

  1. Geddes, Lori and John Heywood. “Gender and Piece Rates, Commissions, and Bonuses.” Industrial Relations, 42/3 (2003).
  2. Gibbons, “Piece-Rate  Incentive Schemes.” Journal of Labor  Economics, v.5/4 (1987).
  3. Haley, M. Ryan. “The Response of Worker  Effort to Piece Rates: Evidence From the Midwest  Logging Industry.” Journal of Human Resources,  38/4 (2003).
  4. Shearer, Bruce. “Piece Rates, Fixed Wages and Incentives: Evidence From a Field Experiment.” Review of Economic Studies, v.71 (2004).

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