Labour Economics

Labour Economics

Part A

Question 1

Indeed, the issue of pay schemes outlines the manner in which employment contracts affect the output of workers and as such, possess considerable effect on the profits realised by the respective organisations (Bruchs & Evers, 2000). With respect to Safelite Glass Corporation, the firm decided to change the nature of employment contract with its workers based on initializing a performance-pay schedule. The schedule focused on changing the compensation/pay scheme of the auto glass installers from an hourly wage rate to a piece rate schedule. Notably, the hourly wage rate did not change in any undeviating manner with respect to the number of windows fixed. Additionally, with the piece rate schedule, the organisation focused on remunerating its auto glass installers based on the number of glass units they installed rather than the number of hours they performed.

Due to the change in pay schemes, the rates changed but on average, installers received US$ 21 per unit as well as a guarantee of approximately US$ 11 every hour. Interestingly, if the weekly compensation regarding the pierce rates became less than the guarantee amount, then the workers would receive the guarantee amount. As such, the inclusion of a fixed guarantee amount with respect to unachieved piece-rate basis inclined most workers to stay within the guarantee range. This certainly affects the productivity of the workers in a negative way. Foremost, the time rates did not infer any guarantee wage and as such, motivated the workers to work on an hourly basis in order to maximise their gains.

This translated into greater productivity for the organisation based on the instances of marginal output if workers continued to work overtime. However, by switching to piece rates with the inclusion of a guarantee wage, the productivity fell since workers would gain the guarantee wage for negligible effort. Furthermore, with respect to a piece-rate basis, the workers would have to select the degree of output they would exert in order to capitalize on their utility. This is because the workers will experience larger disutility if they exert higher degrees of output (Parasnis, 2013). As such, with the incentive of a guarantee wage, the workers would maximise their utility by installing less glass units in a day and still receive the guarantee wage.

Question 2                                                                                                                                         

From the evidence of the effect of the guarantee wage in the workers’ output, it is clear that there should not be a guarantee wage. Indeed, the organisation may put into utilisation the guarantee wage in order to motivate the workers. However, the wage only served as a means towards facilitating the utility of the workers. Usually, organisations utilise piece-rate pay schemes in the event that monitoring the productivity of workers is actually cost-effective. As such, firms pay minimal attention towards the productivity of the workers. Furthermore, with respect to the piece-rate scheme, usually organisations may desire to overcome considerable costs of monitoring by issuing a time-rate scheme at a specific monetary range. This is similar in this instance where Safelite Glass Corporation seeks to regulate monitoring costs by assigning a guarantee wage of US$ 11 every hour in instances that the weekly pay for the workers is less than the guarantee wage.

As such, the organisation gains by reducing the costs incurred in monitoring the productivity of the workers. However, this is incomparable to the loss the organisation faces in terms of the effort exerted by the workers and the output resulting from the respective effort. Typically, organisations employ piece-rate pay schedules in instances where workers vary in requisites of either capability or willingness to exert effort in the work. Furthermore, piece-rate imbursement schemas appeal to the workers that are considerably capable and produce high degrees of effort in the work allocated to them. Nevertheless, even though piece-rate systems attract overly capable workers, it is utility which determines whether the worker will exert enough effort within the work. In this case, the worker selects the degree of output in order to capitalise on their utility (Parasnis, 2013).

This is because of the occurrence of a guarantee wage. As mentioned, the guarantee wage is evident in the instances that the weekly pay is lower than the wage itself. As such, this influences the workers to exert minimal effort that will allow them to gain the guarantee wage and at the same time, allow them to maximise their utility. Adding on, the workers will be able to maximise their utility due to the notion that more productivity requires greater effort, which translates into greater disutility. In summary, the workers experience greater disutility in exhibiting high productivity. Furthermore, the guarantee wage, with its negative effect on workers’ effort, conceals the true productivity of the workers from the organisation (Leeves, 2013).

Question 3

The switch by Safelite Glass Corporation from the Time-rate pay scheme to the piece-rate system possesses considerable effect on recruitment. This is because both pay schemes require different types of workers and, therefore, depend on particular workers within the organisation. The first pay scheme for the organisation, the Time-rate pay scheme, do not focus on the existing productivity of the workers but rather on the time utilised in performance. Furthermore, organisations use time-rates in instances whereby the monitoring of the workers’ productivity is impossible or when costs are high. As such, the scheme allows the organisation to monitor productivity of workers. In addition, workers working with a time-rate basis obtain similar degree of utility and produce similar degrees of output irrespective of their ability. On the other hand, piece-rate mechanisms focus on the quantity of the output produced by the worker and thus, does not have a certain threshold that the worker should cover as minimum. With respect to this, it is clear that the switch affects recruitment (Parasnis, 2013).

With the time-rate scheme, workers that are less capable would prefer working on a time rate organisation since effort below a certain threshold is capable of monitoring and thus, will allow them to produce to a certain level without exerting greater effort. The piece-rate scheme will employ overly capable workers who find it simple to exert greater effort in order to gain greater earnings and utility.

Part B

Question 1

Usually, most countries possess similar schemes involving incentive reimbursements. Usually, these incentive payment structures comprise benefits attributed to the position held by the designated recipient. With respect to this case, the position of an employer holds essential incentive payment schemes that comprise advantageous benefits. An example of an incentive payment scheme is the Employer Job (PRSI) Incentive Scheme (Connor, 2012). The Employer Job (PRSI) Incentive Scheme excuses employers from committing to liability regarding the imbursement of the portion of the PRSI for definite employees.

Alternately, PRSI represents the Pay Related Social Insurance (PRSI). Usually, the scheme integrates both employees and employers but in this case, the package only applies to employers of workers within certain classes eligible for payment of the taxation by the employers. For instance, in order to pay for the PRSI, classes A to H pay a certain amount of income based on their job description and as such, the income translates to what the employer will pay with respect to the specified amount each class should pay for the social insurance. In summary, employers have to pay for the classes of employees a certain rate that differentiates along each class. As such, the Employer Job (PRSI) Incentive Scheme seeks to alleviate employers by providing them with tax and insurance exemptions.

In addition, the incentive scheme is also accessible for employers who develop novel and supplementary jobs and thus create new employment opportunities. Employers who qualify for the incentive scheme gain exemptions from paying the PRSIs of employees for a maximum period of 18 months from the time that the employer gained approval for the scheme. Nevertheless, the main objective of the Employer Job (PRSI) Incentive Scheme is to sustain the establishment of jobs and offset the shift of individuals into continuing unemployment and dependence on welfare.

As such, since the scheme focuses on alleviating the employer from the paying the contributions of social insurance, then the incentive for the employee is the payment of the contribution of the insurance by the employer for the employee. In summary, the main incentive the employee receives is an exemption from paying social insurance in the country. This is because, in order for the employer to qualify for the PRSI Incentive Scheme, he or she should be able to operate the standard PRSI for employees.

This means that the employer fulfils his or her duty of paying for the social insurance for the part of the employee in order to be eligible for qualification within the Employer PRSI Incentive Scheme (Stephens & McCallum, 2005). Furthermore, in order for the employer to qualify for the incentive scheme, he or she should inculcate a new job within the firm and ensure for the employment of a new employee within the newly added job.

The job should also last or a minimum of 6 months and employ a minimum time-rate scheme of 30 hours in every week. Nevertheless, the employer is subject to pay for the contributions of the employee if the employment culminates in the 6 months of indemnity. From this point, it is clear that the incentive for the employee is weak based on the evidence that the scheme mostly concentrates on the employment of casual employees and exemption of the employer from the PRSI.

Question 2

In general, income risks refer to the risks experienced in the event that the income stream reimbursed by a subsidy decreases in retort to a drop in the rates of interest (Burgess, 2000). With respect to the Employer PRSI Incentive Scheme, the income risks will affect the employer based on the longevity of the scheme. This is because income risks usually affect funds that are fixed and are in the short-term. The Employer PRSI Incentive Scheme is a short-term fund strategy that lasts for not more than six months depending on the number of new employees and the number of new jobs that the employer creates with respect to the qualification for applying for the exemptions within the scheme (Hovy, 2000).

Nevertheless, the income risks affecting the employee are dependent on the effect of Marginal Revenue Product (MRP) and Marginal Wage Cost (MWC) on the productivity of the employees. In summary, the Marginal Revenue Product refers to the deviation in the sum revenue that arises from the employment of a novel worker. Consequently, the Marginal Wage Cost (MWC) refers to the deviation in the sum wage cost of employing an extra employee. Usually, employers should put into account the hiring of new employees based on the two specifications. As such, employers should ensure that the MRP is equal to the MWC in enacting employment (Parasnis, 2013).

In addition, the development and creation of new employment opportunities only increases the Marginal Wage Cost. Therefore, the employer should assume that employing an additional employee would be advantageous if the employee, in turn, adds more income to the revenue than the costs of the wages arising from the employment of new workers within the organisation. As such, since the Employer PRSI Incentive Program will cater for exempting the employers in the short-run, the Marginal product arising from the extra labour will fall, as most of it will coincide with a permanent quantity of capital.

As such, in the event that income risks such as decrease in interest rates occur based on the incentive fund, then the scheme will only fund the employer at a lower rate since the financiers will consider reinvesting the fund at the novel rates (Nawalkha, Soto & Beliaeva, 2005). This will affect the employee considerably based on the contribution required for the existing employees. As such, the employee will receive wage cuts in order to cater for the wage costs that the new employees will incur.

Furthermore, the employer will focus on equating and equalling the MRP with the MWC in order to ensure that the revenues in the short-run will be greater than the costs of the wages for the new employees. As such, the income risks affecting the employees will primarily arise from the objective of equating the MRP and the MWC within the respective firm in order to cater for the threat of low rates arising out of the Employer PRSI Incentive Scheme.



Bruchs, A., & Evers, Y. M. (2000). Employment contracts. Madison: Credit Union Executives Society.

Burgess, S. M. (2000). Measuring income risk. London: Centre for Economic Policy Research.

Connor, D. (January 01, 2012). Employment & investment incentive scheme. Accountancy Ireland, 44, 4, 78.

Hovy, M. (2000). Effective incentive schemes. Randburg: Knowledge Resources.

Leeves. (2013). Topic 6: Hiring and Recruitment. [PowerPoint Slides].

Nawalkha, S. K., Soto, G. M., & Beliaeva, N. A. (2005). Interest rate risk modelling: The fixed income valuation course. Hoboken: John Wiley.

Parasnis, J. (2013). Topic 4 chapter 5: The demand for labour [PowerPoint slides].

Parasnis, J. (2013). Topic 6 chp 6 and chp 7: Wage Determination Pay Schemes [PowerPoint Slides].

Parasnis, J. (2013). Topic 7 chp 8 and 16: Wage structure and the distribution of personal earnings [PowerPoint Slides].

Stephens, T., & McCallum, S. (2005). Employee reward. London: Chartered Institute of Personnel and Development.