Living Economics

To Each According to His Work
Piecework pay could raise labor productivity, pay, and company earnings when output and quality are easily measurable.

Jim Williams could potentially do 20% more work than his co-workers. But he was paid the same hourly wages. So a tacit culture of output cap per worker developed in the shop.

That was the situation at Safelite Glass at Columbus, Ohio before the company introduced the piecework pay system to shore up an inefficient auto glass replacement business.

The piecework rate coupled with a safety-net hourly wage minimum boosted average productivity per worker by 20%. The shared gain led to an average 10% increase in worker pay.

Because worker pay was directly linked to his output, absenteeism was reduced. Higher paychecks from piecework rate also reduced turnover of more productive workers and attracted better workers. All these led to a 36% increase in company output.

Increasing labor productivity through piecework rate is however difficult to pull off. High physical output might come at the expense of quality. In Safelite, shoddy jobs must be fixed by the responsible installer at his own expense. That was possible because poor quality was easily detectable and each job was clearly traced back to a specific worker due to a sophisticated computerized system.

Higher productivity might also lead to morale-destroying layoffs if business is not growing to absorb the higher output. But when all the stars are properly aligned, the favorable results are an economist's dream coming true.

References:
  • Business Week. 2/171997. "Truly tying pay to performance."
  • Christian Science Monitor. 12/23/1996. "Incentive pay boosts output on shop floor."
  • New York Times. 6/16/1996. "Earning it; paid by the widget and proud."
Access Tools
• Advanced Search
• Browse Micro
Comparative advantage (14) Competitive strategy (27) Costs and opportunities (53) Entrepreneurship (3) Externality (28) Free Market Solutions (17) Free Ridership (3) Game Theory (22) Incentives (13) Income Distribution (25) Information (19) Labor Market (24) Marginal optimization (33) Market Demand (17) Market Entry (9) Market Exit (2) Market Intervention (12) Market Structure (29) Market supply (4) Material Flow (2) Miscellaneous (3) Price Discrimination (17) Pricing Strategy (46) Profit maximization (48) Property Rights (42) Regulation (16) Rent Seeking (2) Risk Taking (12) Scarcity (10) Tastes & Preferences (27) Taxes (7) Technology (9) Type of goods (31) What Price Means (27)
• Browse Macro
Boom and Bust (9) Budget Balance (12) Comparative advantage (13) Economic Development (1) Economic Indicators (6) Fiscal Policy (12) Incentives (1) Income and output (25) Income Distribution (5) Labor Market (6) Money and Credit (20) Regulation (5) Rent Seeking (1) Saving (6) Taxes (4) Technology (1) Trade and Foreign Exchange (30)
• Glossary
List All
Search

• Microeconomics Lectures • Macroeconomics Lectures
Instructor
• Instructor Log in • Sample TOC • Demo/Register • Video Tour
Student
• Student Log in
Close
Instructor Log in

Class
Close
Student Log in


Open Menu
Term
Definition