Question

We know the pros and cons of piece rates pay. Nonetheless, explain under what condition the piece rate could still be the optimal payment mechanism.

Answer 1

Piece rate payment, involves paying workers on the basis of number of units performed. This type of payment method is optimal under the condition where workers can be allocated works in a way that is clearly identified and each worker is responsible to produce goods on his own. It makes firms to identify the contribution of each worker and accordingly pay them. Here, marginal productivity is also used as a worker is paid on the basis of his outputs produced that can be different for different people.

For example, when each worker is responsible for the production of soft toys on his or her own, then the worker is paid on the basis of piece rate payment system and it motivates the workers.