Personnel economics assignment week 4

Cijfer/Grade = 7,5

Assignment incentive pay:
a. Which two main effects explain the change in productivity when firms change from an
hourly wage to incentive pay (Lazear 2000)?

According to Lazear (2000) there are two main effects when changing from an hourly wage to
incentive pay. The first effect is seen in the general increase of output, which is the so-called
productivity gain. The second effect is the increase of the variance in the productivity of an
individual worker. There is a difference between low-ability workers and high-ability
workers. According to Lazear (2000) high-ability workers will increase their outputs to be
able to respond to the piece rate incentive. This is relative to the level of output under an
hourly wage. Simultaneously there will be a raising in average productivity for the firm and
between the low-ability workers and high-ability workers will be an increase in the
productivity variance (Lazear, 2000). In contrast to high-ability workers the low-ability
workers will have the same output level as the hourly wage scheme and this means that these
workers will not have an increase in their output. According to Lazear (2000) low-ability
workers will therefore have minimum output requirements within the piece-rate incentive
scheme. High-ability workers will be attracted more to the firm when switching from an
hourly wage to incentive pay, in return this will increase the ability and productivity at the
whole firm (Lazear, 2000).




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