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Chapter 17: Problem 4

Research by economists Susan Helper, Morris Kleiner, and Yingchun Wang found that the use of pay-forperformance, or piece-rate pay, has declined in manufacturing industries in recent decades. In a summary of this research, Lester Picker explained, 鈥淭his change has come about with the adoption of modern manufacturing systems in which firms produce a greater variety of products to a more demanding quality and delivery standard." a. What characteristics determine whether a salary system or a piece-rate system is likely to be more profitable for a manufacturing firm? b. Why would modern systems "in which firms produce a greater variety of products to a more demanding quality and delivery standard" than manufacturers used previously result in firms choosing to pay their workers salaries rather than use piece rates?

Short Answer

Expert verified
In determining whether a salary or piece-rate system is more profitable, a firm might consider factors such as the nature and variety of products, the skills required, the level of quality required, and the feasibility of measuring individual output. Modern manufacturing firms, which produce a greater variety of products to demanding standards, might choose to pay salaries because it can be difficult to measure individual output, and because higher skill levels and quality might be better rewarded under a salary system.

Step by step solution

01

Understand the Salary and Piece-rate System

The salary system refers to a fixed pay structure where employees receive a set amount of compensation, usually on a yearly basis, irrespective of their productivity. On the other hand, the piece-rate system refers to a pay structure where employees are paid based on their output or productivity, i.e., the number of units they produce.
02

Determine Factors Influencing the Choice of Pay System

The decision to use either a salary system or a piece-rate system is likely determined by a number of characteristics. These might include: the nature and variety of products produced, the nature of the work and the skills required, the level of quality and precision required in the production process, and the feasibility of accurately measuring individual output.
03

Understand the Influence of Modern Manufacturing Systems

In modern manufacturing systems where a greater variety of products are produced to more demanding quality and delivery standards, it may be more difficult to accurately measure individual output, making it impractical to use a piece-rate system. Additionally, the emphasis on higher quality may also require a higher level of skill and precision, which may not be adequately compensated under a piece-rate system. Hence, a salary system that rewards skill and consistency rather than quantity of output may be more appropriate.
04

Draw Conclusions

So, to conclude, in modern manufacturing systems, factors such as the need for higher skill levels, increased focus on quality, difficulty in measuring individual output, and the variety of products may make salary systems more profitable than piece-rate systems.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Modern Manufacturing Systems
Modern manufacturing systems have transformed significantly from traditional methods. These new systems are designed to produce a wide range of products that meet high standards for both quality and delivery.
The transformation is largely due to technological advancements, which have allowed manufacturers to become more flexible and efficient.
  • Flexible Production: Companies can switch production processes quickly to meet market demands.
  • High Quality: There's an increased emphasis on quality assurance at every stage of the production process.
  • Demanding Standards: Customers today expect not only high-quality products but also timely deliveries.
All these factors influence how companies structure their employee compensation, moving from simple piece-rate pay to more comprehensive salary systems.
Employee Compensation
Employee compensation is a critical aspect of any business, as it directly influences worker performance and satisfaction.
Traditionally, compensation was often based on output, especially in manufacturing. This is known as piece-rate pay. However, this pay model is declining in favor.
  • Fixed Salary: Offers income stability and can help retain talented employees who value security.
  • Reflects Skills: As production demands higher skills, compensation systems must reflect the expertise level rather than just the quantity of work.
  • Encourages Quality: By moving to a salary-based system, companies can emphasize high-quality work over sheer volume.
Ultimately, the choice of compensation affects not just the motivation of individual employees but also the overall productivity of the manufacturing process.
Industry Pay Structures
Industry pay structures have evolved over time, transitioning from simple to more complex systems.
In the past, many industries relied heavily on piece-rate systems. These were simpler to manage when production was predictable and product variety limited.
  • Piece-Rate Limitations: Does not support industries where output measurement is difficult and precision is high. This limits its effectiveness in modern contexts.
  • Adaptable Structures: Modern industries favor structures that can accommodate skill level, precision, and output quality.
  • Balance and Fairness: Pay structures now aim to balance fairness to employees with competitiveness in attracting talent.
By adapting these structures to modern needs, industries remain competitive and aligned with employee expectations.
Incentive Pay Models
Incentive pay models are designed to motivate employee performance and productivity.
While piece-rate systems are a direct form of incentive pay, modern manufacturing environments often require more nuanced approaches.
  • Performance Bonuses: Encourage high-level outcomes without linking pay strictly to units produced.
  • Skill-Based Pay: Rewards the acquisition and application of skills critical to modern manufacturing processes.
  • Flexible Incentives: Allow adjustments based on market conditions and individual performance metrics.
These models ensure that employees remain motivated while maintaining a focus on quality and efficiency, reflecting the complexity and demands of today's manufacturing industry.

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Most popular questions from this chapter

During the same period that robots and other new technologies have been affecting the labor market, there has been an increase in imports to the United States of manufactured goods-including shoes, clothing, and automobilesfrom countries in which workers receive lower wages. \(\operatorname{In}\) addition, some U.S. firms have engaged in "offshoring," in which they move some operations - such as telephone help lines - to other countries where wages are lower. a. Are the workers most likely to lose their jobs to robots also likely to be affected by these developments? Briefly explain. b. By looking at changes in equilibrium wages in the affected industries, can we distinguish the effects of increased use of robots, increased foreign imports, and increased offshoring? Briefly explain.

Prior to the early twentieth century, a worker who was injured on the job could collect damages only by suing his employer. To sue successfully, the worker-or his family, if the worker had been killed- had to show that the injury was due to the employer's negligence, that the worker did not know the job was hazardous, and that the worker's own negligence had not contributed to the accident. These lawsuits were difficult for workers to win, and even workers who had been seriously injured on the job often were unable to collect any damages from their employers. Beginning in \(1910,\) most states passed workers' compensation laws that required employers to purchase insurance that would compensate workers for injuries suffered on the job. A study by Price Fishback of the University of Arizona and Shawn Kantor of the University of California, Merced, shows that after the passage of workers' compensation laws, wages received by workers in the coal and lumber industries fell. Briefly explain why passage of workers' compensation laws would lead to a decrease in wages in some industries.

Suppose that a large oil field is discovered in Michigan. By imposing a tax on the oil, the state government is able to eliminate the state income tax on wages. What is likely to be the effect on the labor supply curve in Michigan?

What are the three most important variables that cause the market supply curve of labor to shift?

In most jobs, the harder you work, the more you earn. Some workers would rather work harder and earn more; others would rather work less hard, even though as a result they earn less. Suppose, though, that all workers at a company fall into the "work harder and earn more" group. Suppose also that the workers all have the same abilities. In these circumstances, would output per worker be the same under an hourly wage compensation system as under a piece- rate system? Briefly explain.
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