• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Piece rate

Extracts from this document...


Piece rate can be defined as a fixed rate of pay for a particular amount of work done. Piece rate pay gives a payment for each item produced; it is therefore the easiest way for a business to ensure that employees are paid for the amount of work they do. Piece rate pay is also sometimes referred to as a "payment by results system". Piece rate have been the focus of several important theoretical studies, nearly all of which concentrated on the implications of piece rate use for incentives, productivity and labour costs. These studies suggested that a piece rate is used mainly to increase workers' incentives and to eliminate the uncertainty about workers' efforts that employers face when paying a wage. Under this method in contrast to time wage the performance of the worker is measured at frequent intervals and he or she is paid accordingly. This worker thus works for himself as well as for the employer and has a direct incentive on his work. In general, advantage of piece rate is that it is expected to increase output per worker and facilitate the incorporation of a more heterogeneous labour force. If output can be clearly measured, piece rates are considered simpler and more efficient than time wages. ...read more.


Exploiting the fact that he could follow the same workers before and after the change, Lazear found that sorting and incentives both played an important role in the productivity gain, with more than half the gain being due to incentive effects3. Piece rate pay encourages effort, but it is argued, often at the expense of quality. From the employee's perspective, there are some problems. For instance, if production machinery breaks down; if there is a problem with the delivery of raw materials that slows production. These factors are outside of the employee's control, but could potentially affect their pay. The answer to these problems is that piece rate pay systems tend to have two elements in reality: a basic pay element, this is fixed (time-based); an output-related element (piece-rate). Often the piece-rate element is only triggered by the business exceeding a target output in a defined period of time. The incentive properties of piece rate compensation schemes seem very attractive: works are paid for the work they do, not the work they could have done and this seems likely to solve problems associated with both hidden information(adverse selection) and hidden actions(moral hazard). However, Edwards(1979), argues that piece rate compensation schemes were ineffective because management did not know how fast a job could be done and therefore could not set use a worker's performance to determine the correct rate because the worker responded by restricting output. ...read more.


once it was set, yet every employer did cut pieces...Unless workers collectively restricted output they were likely to find themselves working much harder, producing much more, and earning only slightly higher wages". Employers could cut rates in many ways other than changing the piece price for a worker who continued to perform the same operations. New workers could be assigned to the job at a lower rate while old workers were transferred elsewhere, information about output on the job could be used to lower the initial price on new work, and any sort of minor change could be made the excuse for large price cuts. It could be conclude that the productivity effects associated with the switch from time wages to piece rates are very large. Market equilibrium is characterised by firms that choose a variety of compensation methods. Firms choose the compensation scheme by comparing the costs and benefits of each scheme. The benefit is a productivity gain. As a result of incentive effects, average output per worker rises. Thus, average ability should rise when a firm choose piece rates. However, piecework is not always profitable. Output is easily measured, quality problems are readily detected and blame is assignable. Furthermore, since the output is difficult to measure because of the difficulty in monitoring, the piece rate pay is not always working. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Macroeconomics essays

  1. Singapore Economics

    'If Singapore is not aggressive in trying to woo talented migrants, it will face a serious brain drain'. (Goh, K.W.G., 2009) The aggressive pursuit of foreign talent has paid off with the increased number of foreign employment.

  2. Low birth rate

    The objective of Family Council is to promote family values. Through advertisement and education, the public can learn to appreciate the formation of a family and what is good about having offspring. Instead of Economic incentives, family councils can contribute to changing the public mindset.

  1. Inflation and its solution

    * Output effects The presence of inflation can have impact on output level is explained by the uncertainty. Continual price raises lead to uncertainty about future and thus make decision-making more difficult for investors because investments seem more risky during high inflation, thus investors may stop investing during inflation for guaranteeing their rate of returns.

  2. FDI and MNC Create More Multiplier Effect to The Host Economy As Compared To ...

    FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.

  1. New product development for ericsson

    * Bio fuel - Nigeria, India. * Ongoing Research Projects (EMF, radio waves & health). Economical * Exposure to interest rate risk. * Exposure to Financial credit risk. Technology * Ericsson Mobility World - looking to expand mobile internet application. Competitors * Nokia. * Siemens. * Apple (Iphones).

  2. Is it worth switching energy suppliers?(TM)(TM)

    Consumers who do change supplier are able to make substantial savings of up �150 simply by changing supplier using online switching services. (Energylinx.co.uk, 2006) With energy prices showing no sign of ceasing their climb, energy suppliers in liberalised markets like the UK's vie for larger customer shares by competing not just on price, but by offering different tariffs.

  1. Gross Domestic Product (GDP) Performance

    The continued increase in Government expenditures and dwindling workers' remittances from abroad had meant an ever-increasing reliance on public sector borrowing. It has been estimated that since 1977, the public debt in real terms has grown at a much faster rate than the GDP.

  2. Balance of Payments

    For example, The UK's current account deficit has grown from 29.2 billion in 2005 43.4 billion in 2006. (http://www.statistics.gov.uk/cci/nugget.asp?id=194) So as a result the economists expect the pound to weaken over the coming years. As imports become expensive, it will reduce the people's disposable income to buy imported goods and services.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work