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Youth employment during recessions

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At which instant in time (A, B, C, D, or E) would the worker be earning the most ... At which point in time is the total 'rent' the firm ... Worse off after law ... – PowerPoint PPT presentation

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Title: Youth employment during recessions


1
Youth employment during recessions
  • Clip

2
Chapter 10
  • Variable Pay

3
Reading for Next Class
  • http//www.econ.ucsb.edu/babcock/Mathewson.pdf

4
Preview of Chapter Themes
  • Work out relative advantage/disadvantage of
    variable pay piece rates vs. straight salary.
  • For piece rates (i.e., commissions), what is the
    best commission rate?
  • Should pay commissions based on total revenue or
    revenue net of costs?
  • How to reduce problems of variable pay?

5
Opinion Poll
  • In your career, how would you prefer to be paid?
  • A. Straight salary
  • B. Performance based.
  • C. Both

6
Piece Rates Two effect
  • 2. Provides incentive to work harder
  • (Talk about this next lecture)
  • 1. Composition Screen out less productive
    workers

2/unit
/hr
10/hr
5/hr
Choose piece rate
Choose hourly pay
7
Composition Effects
  • You are mayor of a town with two firms, one
    paying piece rates, one paying straight salary.
    Productivity higher at the former firm.
  • Should you enact a law that both pay piece rates?
  • A. Yes
  • B. No
  • Does not follow
  • If higher prod at first firm due to sorting, then
    making all firms pay piece rates could lower
    overall prod.

8
Example
  • Say your town has 2 firms
  • Firm 1 piece rates, 10 workers, ave output
    50/day
  • High prod workers sorted into this firm
  • Define Output as (ave productivity -
    monitoring cost)
  • Ave prod for worker is 75, daily monitoring
    costs 25/worker,
  • So ave output 50/day
  • Firm 2, hourly wage, 10 workers, ave prod 25/day
  • Ave prod for town 37.5/worker
  • Pass law Firms must pay piece rates
  • Ave prod for 10 Firm 1 workers is still
    (75-25)50
  • Ave prod for 10 Firm 2 workers is now
    (25-25)0
  • Ave prod for town 25/worker
  • Worse off after law
  • Low skill workers yield more net production if we
    dont waste money on monitoring costs.

9
Notes
  • Sometimes piece rates better than hourly wage,
    sometimes not.
  • Depends on monitoring costs, and a big
    assumption
  • We have assumed that paying piece rates has NO
    EFFECT ON EFFORT!
  • Clearly unrealistic
  • Why make this assumption?
  • Piece rates alter the way workers select jobs.
    This is a profound aspect of labor markets. It is
    worth thinking about on its own. Next class,
    well talk more effort incentives provided by
    piece rates

10
Example Satellite Glass
  • Company changed from hourly wage to piece rates
  • Ave worker earnings up 9
  • Ave worker productivity up 36
  • Worker and company better off.
  • Why the increase in prody?
  • 2/3 due to increased effort
  • Other 1/3 due to more productive workers staying
    and less productive leaving.
  • Costs?
  • Output easy to measure
  • Quality control Workers replaced defective work
    for free.
  • Other examples

11
Midterm 1 Approx Grade Distribution
  • Median 82.5
  • Average 79
  • High 100
  • Low 46.5
  • A gt87.5
  • B gt75
  • C gt55
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