Labor Economics Alternative Pay Schemes Research Paper

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Labor Economics

Alternative Pay Schemes and Labor Efficiency

The chapter commences be helping the student relate to the importance of payment schemes as well as the components and efficiency of a wage system. The author introduces the concepts with the real life example of a graduate student, seeking a position and needing to be informed.

Economics of fringe benefits

Fringe benefits refer to those additional services the employee will receive, aside the average salary and may refer to components such as social security, unemployment compensation or the employee's compensation, such as premiums and bonuses. The importance of fringe benefits has grown significantly throughout the past recent years and so has their financial proportion in the overall compensation costs. In 1929 for instance, fringe benefits accounted for an estimated 3% in all compensation costs; in 2006 on the other hand, these benefits accounted for more than 25%.

Theory of optimal fringe benefits

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As the composition of fringe benefits has changed, so has the response received by the employee. Otherwise put, employees will receive different utility and will register different satisfactions relative to the benefits packages. These are best explained with the aid of the worker's indifference map. This map is represented by curves, aligned from left to right; the curves on the right offer increased utility and are therefore sought by the employee. On the other hand, the employer will seek to reduce these expenditures with fringe and wages in order to ensure increased profits. This is best revealed by the employer's isoprofit curve, which sees that the most desirable level of investment in the human resource is reached when the isoprofit curve meets the highest point of the employee's indifference curve.

The increase in fringe benefits produces a higher level of employee satisfaction and this can often be achieved without major efforts from the employer. Such situations refer to tax advantages, increased efficiencies or the creation of economies of scale.

The principal-agent problem

Research Paper on Labor Economics Alternative Pay Schemes and Labor Assignment

The principal is the organization, which follows to register profits. In this however, they need the support of the employees, or the agents, who are hired by the principal to make products and services which are then transformed into profits. The agents become employees because they need the wage and the benefits to sustain their living standards. As a result, the principal-agent relationship is based on mutual interest. The problem in this relationship occurs when the goals of the two parties begin to diverge. In this instance then, while the companies remain focused on profit registration, the agents become more focused on achieving increased utility. The problem arises when the employees pursue other goals than those promoted by the principal.

Pay for performance

In order to better stimulate the employees to increase their on the job performances, organizations have implemented various pay schemes based on the results retrieved by the employees. These have become extremely popular in the business community and refer to systems such as piece rates, commissions and royalties, promotions, raises, premiums, profit sharing or tournament pay.

Piece rates ensure a payment in accordance to the personal output realized by an employee. Commissions and royalties base the salary on the volume of sales finalized by the employee in a base period. Raises and promotions are often granted to employees who work on a fixed pay and can bring into discussions matters of incentives or annual salary. The bonuses are offered based on personal, team or organizational performance. Profit sharing means that employees can purchase corporate stocks and participate to profit sharing. Finally, the tournament pays are based on relative performance.

Efficiency wage payments

The performance-based wage systems are only useful within organizations that can easily quantify the efforts and results of their staff members. In some cases however, this is impossible. To overcome the impediment, an efficient remuneration scheme could be based on the monitoring of the personnel efforts. The efficiency wage model points out that principals should increase wages up to the point where employees' efforts are maximum.

Chapter 8: The Wage Structure

The labor force presents the individual with a wide array of wage possibilities, in the meaning that one employee could make $2 million a year, whereas another can make$13,000. The differences which explain the differences can be equilibrium wage differentials or transitional wage differentials.

Perfect competition: homogeneous workers and jobs

The Perfect competition and the homogeneity of workers and jobs results in equal access to information, an equitable distribution of jobs and equal salaries for all employees.

The wage structure: observed differentials

Historical observation of economic factors reveals that wage differentials do exist and they tend to persist over the time. Management employees for instance earn the highest incomes, whereas the workers in agriculture are seated at the opposite extreme. Another differential is given by location. In this order of ideas then, the employees in Connecticut register the highest incomes whereas those in Mississippi register the lower hourly pay. Within the industry sector, the highest wages are earned by the mining workers and the lowest by those working in agriculture.

Wage differentials: heterogeneous jobs

The actual market presents heterogeneous jobs, rather than homogeneous ones and they differ due to the skills required, non-financial attributes or productivity. Compensating differentials refer to the nonwage benefits granted due to the unpleasant feature of a particular job, such as risk of injury or even death, job status, location or security, as well as the prospect of wage advancement. Skill differentials occur when employees need various skills to complete the tasks of a job, such as college education vs. high school diploma. But differences also occur for workers with similar skills; these can be explained through the efficiency of wage payments. Other differentials emerge from the union status, the discriminatory behavior or the size of the employing organization.

Wage differentials: heterogeneous workers

These differences are given by varying productivity levels of employees, as well as by their varying preferences fro nonwage aspects. Within a noncompeting group, the varied human capital can be determined by different innate skills and abilities to learn and perform, as well as by physical or intellectual limitations or capabilities. Also, the differences reside in the training and education they acquire along the years. Outside of the noncompetitive market, differences may occur due to individual preferences on time spending or nonfinancial aspects of the employment contract.

The hedonic theory of wages

The hedonic theory of wages starts at the premises that both workers and jobs are heterogeneous. It emphasizes on the idea that employees will seek to increase utility, by conducting more operations which bring them pleasure. They will even exchange some of these utilities in order to reduce those activities which bring them disutility, in the form of pain or discomfort. The hedonic indifference map presents various curves, all revealing various degrees of utility. The curves towards the right offer the highest utilities. The isoprofit curve reveals the efforts an employer has to make in order to reach a desired level or profitability and also ensure employee utility.

Wage differentials: labor market imperfections

Aside from the heterogeneity of workers, organizations and jobs, differentials can also be generated by market imperfections. These pose difficulties as they impede the proper circulation of capitals. Becoming informed in the market place is time and money costly. This further reduces the possibility of achieving equilibrium on the labor market. Equilibrium will be reached within a group, but not at the level of the entire market. Then, as the information is not evenly distributed, the players in the labor market encounter time challenges to adjusting the differences.

Aside an uneven distribution of information, labor immobility is yet another generator of wage differentials. They generically refer to inabilities in properly moving within the labor market and can be classified into geographic, sociological or institutional immobilities.

Chapter 9: Mobility, Migration and Efficiency

The mobility and migration of the workforce, alongside with the adherent efficiency are three concepts noticeable within the economics of labor market.

Types of labor mobility

There are a wide variety of changes which determine employee mobility. Four of the most important ones are succinctly presented in the lines below:

change of job, without change in residence or occupation change in occupation, without change in residence change in the place of work, without change in occupation migration, change in residence, followed by a consequent change in occupation

Migration as an investment in human capital

The movement of the human capital can be seen as an investment as long as the employee is recognized to be the result of previous experiences and acquired skills. To better understand then, migration offers increased changes for professional development, producing a highly skilled worker. However, the phenomenon does imply additional costs and not all employees or employers will vote in favor of it.

The determinants of migration: a closer look

The ultimate decision in favor or against migration is given by a comparison of the costs and benefits, alongside with a consideration of the future increase in income which could be generated by… [END OF PREVIEW] . . . READ MORE

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APA Style

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"Labor Economics Alternative Pay Schemes."  October 31, 2008.  Accessed May 10, 2021.