Working Paper: NBER ID: w5672
Authors: Edward P. Lazear
Abstract: What happens when a firm switches from paying hourly wages to paying piece rates? The theory developed below predicts that average productivity rises, that the firm will attract a more able work force and that the variance in output across individuals at the firm will rise as well. The theory is tested with data from a large autoglass company that changed compensation structures between 1994 and 1995. All theoretical predictions are borne out. In the firm examined, the productivity effects are extremely large, amounting to anywhere from about 20% to 36% of output, depending on what is held constant. About half of the worker-specific increase in productivity is passed on to workers in the form of higher wages.
Keywords: performance pay; productivity; piece rates; labor economics
JEL Codes: J33; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switch from hourly wages to piece rates (J33) | increase in average productivity (O49) |
| higher output from individual workers due to incentives (J33) | increase in average productivity (O49) |
| reduction in turnover among the most productive workers (J63) | increase in average productivity (O49) |
| ability to hire more productive workers (J24) | increase in average productivity (O49) |
| moving to piece rates (J33) | increase in variance in output among workers (D29) |
| increase in average productivity (O49) | higher wages for workers (J38) |