INCENTIVES AND WAGE INEQUALITY

The role of direct incentives (piece rates, commissions, bonuses) in the determination of wages is studied. Two broad types of incentive schemes are considered: individualistic and group based schemes. Under the former the wage of a worker depends solely on her own output. Under the latter it depends on the output of the work group.

Two types of individualistic incentive schemes are studied: straight piece rates and piece rates plus a salary. It is shown that the latter, under the condition of efficiency of contracts between workers and employers, will yield higher wages than the former. The prediction is confronted with data on 63000 salespersons in 178 department stores in 1981. It is confirmed in nine out of eleven detailed occupational groups.

Two types of group incentive schemes are studied: group piece rates and group target rates. In the latter, low wages are paid for output below a target and high wages for outputs above. It is shown, using non-cooperative game theory, that group piece rates are subject to free-rider problems, possibly yielding collectively irrational outcomes. Group target rates, in contrast, can overcome free-rider problems by aligning individual and collective interests. The theoretical analysis generates the hypothesis that group piece rate workers will earn less than group target rate workers.

To test this hypothesis, data are used on the wages of 1765 group piece and group target rate workers in 28 establishments in the wood household furniture industry in 1974. It is shown that group target rate workers on the average earn fifty percent more per hour than group piece rate workers, indicating that the free-rider problems in the latter may be severe.