Compensation Schemes Switch and Its Effects on Recruitment

Subject: Employee Management
Pages: 1
Words: 264
Reading time:
1 min

The switch from time rate to piece-rate affects recruitment. The transition of increasing the workers’ wages to increase their productivity and efficiency is a possible cause for unemployment. The enhanced workforce productivity rules out the need for more workers, and the workers’ wages are higher than the equilibrium wage as the amplified productivity pays for increased salaries. These higher than equilibrium wages normally referred to as efficiency wages, may result in a market failure and consequently unemployment.

It is also important to note that efficient wages do not directly cause unemployment, but they result in job rationing in this market and unclear markets. Paying the workers according to their efficiency normally charges the existing workers to increase their efficiency for higher wages, and the employer does not need to hire more workers. The piece-rate theory significantly cuts off a turnover as it is more likely that employees will not see the need to look greener pasture. This saves the agony of recruiting new workers for replacement and incurs the high costs of training new replacements.

However, there are abnormal cases where time rate to price rate transition has insignificant effects on recruitment. This is a case of a monopolistic market where a single firm is the sole hirer of a particular type of labor. The monopolistic firm is the wage settler, and it can control the wage it pays through regulating the labor it hires. The graph below demonstrates this.

Wage rate graph.