Wage payment methods of labor

Wage is also known as…

Factor income/ return

Wage payment methods

• Piece rate

• Time rate

• Basic salary plus commission scheme

Piece rate

• paid according to their output (work contribution to the firm)

• Suitable for standardized output so work contribution easily measure

Time rate

• working time

• For non standardised output where work contribution is hard to measure

Basic salary and commission scheme

• Fixed income and performance related commission

• Commission based on percentage of sales revenue, more businesses made = more commission

Piece rate advantages to firms and workers

To firms:

• Higher work incentive of workers → measured according to output, higher productivity

• Lower cost of monitoring workers performance → reduces supervision for shirking

To workers:

• possible to earn higher income by producing more output: earn more if more productive/ hardworking

Piece rate disadvantages for firms and workers

• Higher cost of measuring output of workers: higher cost in calculating wage payments

• Lower quality of output: hurry and neglect quality → higher cost for quality control

• Higher income fluctuation: earn less if produce less output

Time rate advantage

• Lower cost in measuring output of workers: X need to measure output → lower cost in measuring wage payments

• Lower cost in quality control: X hurry to produce more

• Lower risk of income fluctuation: stable and regular

Time rate disadvantages

• Lower work incentive of workers: shirk bc of fixed income → lower productivity

• Higher cost in measuring performance of workers → supervision against shirking

• Not possible to earn higher income; cannot raise income by working harder

Advantages of salary plus commission

• Higher incentive to provide better services for customers to increase firm revenue

• Lower cost in monitoring performance of workers: less supervision for shirking

• Spreading business risk between employers and workers: firm less revenue, less wage for workers, shift risk to workers

• More possible to form a higher income by contributing more revenue: hard working and better services = earn more

Disadvantages of basic salary plus commission scheme

• Higher cost of measuring the revenue generated by workers: higher cost of calculating wage payment

• More difficult to maintain a stable team of staff: unstable income, hard to recruit and retain staff bc of low basic salary

• Higher risk of income fluctuation: earn less if generate less revenue