Friday, 13 September 2019

Minimum wages and piece-rate work

Piece-rate payment for work can make a lot of sense when it's easy to observe output, hard to observe effort, and effort can yield substantial differences in worker output. It's been common in some agricultural work, especially fruit-picking.

This tweet from last year somehow crossed my stream this week. Jennifer Doleac last year tweeted the job-market papers of female economists out on the job market. And this paper struck my eye:

Dr Hill is now Assistant Prof in Ag Econ at Colorado State - excellent.

The paper shows what happens when a minimum wage sets a lower bound on wages payable under piece-rate work.

Suppose you think that you'd have to exert a lot of effort to make more than the minimum wage under piece-rate, and that you could get away with a lot less effort while not being fired. In that case you may prefer to exert less of that costly effort and get your backstop wage - the minimum wage.

If the minimum wage increases, or at least increases by more than any inflation adjustment to the piece-rate paid, more workers will be discouraged from putting in that effort. Hill shows that a three percent increase in the minimum wage reduces the average worker's productivity by seven percent.

But the paper goes beyond that with some nice theoretical testable results. Like that there'll be a range of income from piece-rates just above the minimum wage that will never be observed, because people will always prefer putting in minimum effort and getting the minimum wage to putting in more effort to get a small amount above the minimum.
In this paper, I use a theoretical model to show how, under this compensation policy, increases in the minimum wage can affect productivity. In particular, I show that for some workers the wage floor removes the incentives provided by the piece rate and creates the opportunity to shirk, i.e. to reduce effort a lot in exchange for a little decrease in pay. In the empirical application, I find evidence that supports the theory. My analysis follows the productivity of workers over two separate harvest seasons during which the employer raises the minimum wage and the piece rate. I show that in both seasons, minimum wage increases cause workers to slow down and piece rate increases cause workers to speed up. Both changes in the minimum wage are roughly three percent increases and cause the average worker to decrease productivity by seven percent. The piece rate is increased several times in both seasons, allowing for estimation of a piece rate-productivity elasticity. I estimate elasticities that range from 1.2 to 1.6. These suggest that a four to six percent increase in the piece rate would offset the productivity losses from the observed minimum wage increases. I replicate this analysis over a season with no changes in the minimum wage and find precise estimates of no effect from placebo increases and similar estimates of the piece rate-productivity elasticity (1.5 to 1.6).

I find evidence that employers can offset these losses by raising the piece rate. Estimates indicate that a four to six percent increase in the piece rate would offset the productivity losses from the examined increases in the wage floor. Though outside the scope of this paper, there are other strategies for mitigating these productivity losses. For example, employers may consider alternative contract structures or adopting new technologies that enhance productivity. Piece rate pay has well documented productivity gains compared with hourly pay, but alternative contract structures, such as hourly wages with daily, weekly, or seasonal bonuses, provide comparable incentives. Another potential strategy comes from technological innovation. The productivity decreases I find are an effect of piece rates and productivities that are low enough so that the minimum wage is desirable for some workers. Employer practices that increase productivity by lowering worker disutility from exerting effort are clear options for mitigating these effects. Technological innovations, such as picking assist for strawberry harvesters, are one way employers can do this. Future research can build on this by examining the economic viability of alternative compensation policies and mechanization for reducing the productivity effects from minimum wage increases.

In the next few years, the California minimum wage is scheduled to increase incrementally until reaching $15 per hour, a 40 percent increase from current levels. My results suggest that the farmer I study will need to increase the piece rate by 50 to 80 percent to prevent productivity losses from these minimum wage increases. Though my results are unlikely to translate linearly to large, statewide policy changes, these predictions are not unreasonable. Based on the productivity and piece rate in the 2015 season, the piece rate would need to increase by 20 percent for the average worker to earn $15 per hour. These piece rate increases can prevent productivity losses, but will substantially raise the marginal cost of producing strawberries. This farmer, and many other employers in low-wage industries who pay by the piece, face substantial increases in payroll costs from rising state minimum wages.
So, in short, a minimum wage has some weird interactions with piece-rate work. Piecework provides incentives to supply effort. A minimum wage increase removes that incentive not only for anyone whose piecework effort would result in piecerate wages no higher than the minimum wage, but for a lot of people above that margin: the extra earnings in the interval above the minimum wage aren't worth the extra effort that needs to be expended all the way though. So the piece-rate paid also has to increase.

The point of a minimum wage in piece-work is to ensure that employers aren't exploiting vulnerable workers. If the most a worker could hope to earn under a piece-rate is less than the minimum wage, and the worker is stuck there after having shifted out to the region because Work and Income insisted they take a job, that's not so hot.

So what to do? A few years ago, we did some work suggesting allowing regional variation in policy, in accordance with local needs. One idea I'd had at the time was allowing a modified version of the minimum wage for piece-rate employers in regions with a lot of fruit-picking.

The modified version would work as follows.

Any employer providing piece-rate pay would be deemed compliant with the minimum wage if at least 80% (say) of its workers on piece-rate were earning at least 125% (say) of the minimum wage. If the vast majority of workers earn a margin over the minimum wage on piece-rate, then it's hardly some sham piece-rate. If you're failing to earn at least the minimum wage while 4/5 of your coworkers are, on piece-rate, the remaining problem is likely you rather than your employer.

So even if some workers didn't wind up earning the minimum wage, that would be their problem rather than the employer's so long as most other workers were earning a margin over the minimum wage.

That kind of scheme could also hit some of the concerns MBIE tends to have about allowing seasonal workers to come in. It's less plausible that seasonal workers are driving down wages if the employer's complement of workers is still earning that margin over the minimum wage.

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