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