METHODS OF WAGE PAYMENT, WAGES STRUCTURES AND THE INFLUENCE OF FACTOR AND PRODUCT MARKETS

AuthorB. J. McCormick
Publication Date01 Jul 1977
DOIhttp://doi.org/10.1111/j.1467-8543.1977.tb00087.x
British Journal
of
Industrial
Relations
Vol.
XV
No.
2
METHODS OF WAGE PAYMENT, WAGES STRUCTURES AND THE INFLU-
ENCE OF FACTOR AND PRODUCT MARKETS
B.
J.
MCCORMICK*
INTRODUCTION
There are several reasons for believing that an examination of the influence of
factor and product markets upon methods of wage payment would seem desirable.
First, the choice of wage payment is
a
means of solving the problem of how to
determine what a worker should be paid. Secondly, there is an extensive literature,
particularly that written in the fifties, which is concerned with the ineffectiveness
of payment by results schemes. Thirdly, it has been argued that any attempt to
establish a permanent incomes policy will founder upon the conflicts created by the
coexistence of workers paid on time-rates and piece-rates. Fourthly, the various
attempts
to
provide evidence on the slope of the supply curve
of
labour have ignored
effort and the distribution
of
time-rate and piece-rate workers between industries,
Fifthly, macroeconomic studies of the short-run behaviour of productivity and
employment have isolated the influence of variations in hours of work but have
ignored variations in effort. Finally, the slow rate of growth of the British economy
may result in a revival
of
interest in incentive payments which may equal the
enthusiasm for productivity bargaining that occurred in the sixties.
In the light of the various issues raised by wages systems the structure
of
this
article is
as
follows.
Part
I
examines the problem of wage determination in
a
market economy and introduces the firm and the method of wage payment
as
means of overcoming the transactions costs of using markets.
Part
I1
surveys the
broad trends in methods of wage payment in Britain and America. Part
I11
looks at
some general hypotheses suggested by the inter-industry pattern of wages sys-
tems. Part
IV
analyses the problems
of
wage drift, reversals of skill differentials
and their implications for incomes policies.
Part
V
examines the experiences of
a
few industries whilst
Part
VI
draws together some tentative conclusions.
I.
THE THEORY
OF
THE
FIRM
IN
LABOUR ECONOMICS
AND
INDUSTRIAL
RELATIONS
When George Bernard Shaw and Bertrand Russell stated that it was difficult to
determine what
a
man was worth because it was impossible to disentangle his
contribution to output from that of the other instruments with which he worked
they pinpointed a fundamental problem in labour economics.2 Robertson’s solution
was
to
appeal to the possibility that in the long run the form of capital could be
varied and employers could substitute between factors of production in response to
changes
in
factor prices and consumers could substitute between products and
thereby influence factor productivities and
reward^.^
The firm was, therefore,
transparent and its organisational structure and behaviour corresponded to the
classical organisational theory of Weber and
F.
W. Tay10r.~ But the long run can be
an extremely long time and,
as
Sato surmised, it may take
a
century for an economy
to reach equilibrium following
a
dist~rbance.~
According
to
Coase it is the costs of using the market which account for the
existence of firms-a fact not clearly recognised by industrial relations theorists
and accounting for the almost complete absence of
a
theory of the firm in industrial
246
*
Reader
in Economics, University
of
Shefield.
METHODS
OF
WAGE PAYMENT AND WAGE STRUCTURES
247
relations.& Market clearing prices are not obvious and the quantities and qualities
of factors of production are not instantly revealed. What the creation of a firm does
is
to
overcome some
of
the costs of using the market and
to
permit
a
more closely
controlled analysis of the efficiencies of workers to be conducted within the confines
of the internal labour market. Coase’s analysis tended
to
view the firm from the
demand side; in exchange for
a
wage a worker would agree to direction by an
employer. There is, however, an extensive industrial relations literature which
indicates that planning has a supply, as well
as
a demand side, explanation.
Workshop bargaining, with constant reference
to
custom and practice, lays down
rules which govern the use
of
labour. But, though these rules are sometimes
interpreted
as
giving rise to a lack of flexibility, they may be extremely flexible.
One
of
the most important methods of determining the productivity of workers
within
a
firm is through the method of wage payment adopted. Roughly speaking,
payments systems divide into two categories: payment by time or payment accord-
ing to the number of units or pieces produced. Time-rates do, of course, assume that
some expected level of output will be attained and payment by results schemes tend
to have a fall-back rate which is a time-rate and calculate the bonus on the amount
of
time saved. Furthermore, between the pure time-rate and the pure piece-rate
there exists a variety of bonus systems based on either the individual or the
workgroup. Nevertheless, the distinction between time-rates and piece-rates does
draw attention
to
the alternative methods of determining the efficiencies of work-
ers and to the relative costs
of
eliciting and monitoring output. Under a time-rate
system the costs of shirking arise mainly in the form of supervisory costs; a foreman
must be employed
to
make sure that workers are working. Under a piece-rate
system the supervisory costs take the form
of
checking the quality,
as
well
as
the
quantity,
of
work but there is less direct supervision of workers as compared with
time-rate workers. In an ideal world it would not matter which method of wage
payment was employed. But ideal worlds do not exist and the problem is similar to
that of devising an optimal tax system in
a
second-best w~rld.~ The efficiency
problem concerns which payments system will bring forth the greatest supply of
labour. The equity problem requires that workers with similar skills be treated
equally. Both employers and workers will, therefore, introduce that mix of wage
systems which will give the desired result.B
11.
TRENDS
IN
METHODS
OF
WAGE
PAYMENT
Table
1
throws some light upon the trends in methods of wage payment. During
the Second World War there was a big expansion in the use of incentives which was
probably due to the fact that full employment raised the costs of using supervisory
labour on
a
time-rate scheme. After the War there was some decline in their use
though the most notable features of Table
1
are the rise in the numbers of male
TABLE
I
Percentage
of
Wage-earners Paid under Systems
of
Payment by Results,
All
Industries,
1938-1974
Date
Men
Women
Youths
Girls
1938 18 46 21 27
1947 24 39 20 35
1951 28 44 22 38
1961
30
41
22
43
1974 41 34 23
11
Source:
Ministry
of
Labour
Gazette,New
Earnings
Suruey
and Department
of
Employment.

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