Question

If piece rates elicit more effort from workers, why do firms not use this method of compensation more often?

Answer 1

The piece rate here means that worker is paid per unit of production done by him. Now commonly it is understood that this will increase productivity of workers as the effort by workers will increase. This will also lead to increase in overall income of workers which will attract new work force. But, in practice it is seen that this method of compensation has some equally bad side effects as well which compensates the benefit of this approach. It increases the gap in work performance of employees. It also increases the fatigue and workers soon start getting distracted. It increases cost of monitoring and workers are now more concentrated on quantity than quality so there is in decline in quality of products as well.