Topic 6 Pay schemes

Question 1

Draw the curve for optimal fringe benefits. Explain the implications of this to employer and employee

Answer 1

Check notes

Question 2

Draw employers isoprofit curve, explain implications of this.

Answer 2

check notes

Question 3

What does isoprofit curve show?

Answer 3

combination of wages and fringe benefits that yield the same amount of profits - show much the company can afford and prices of wages and benefits

Question 4

Draw wage-fringe optimum graph, explain the consequences of these

Answer 4

(hint includes indifference curve)

Question 5

What causes reduction of price of fringe benefits? What is the impact on the isoprofit curve? What other implications? Draw & explain

Answer 5

• Economies of scale
• Tax advantages
• efficiency
  Causes curve to shift outwards.
  Worker can attain higher indifference curve, fringe benefits expand. Wage remains the same / increases slightly, but fringe benefits become cheaper

Question 6

Benefits of tax advantages

Answer 6

From wages you pay tax, from fringe benefits you don’t. (lower monetary payments lead to less taxes)

Question 7

Benefits of economies of scale

Answer 7

Lower per unit cost for fringe benefits especially when you consider bigger companies

Question 8

In the USA what happens when you make health insurance tax efficient?

Answer 8

More employers are inclined to take it, especially economies of scale, more makes it cheaper

Question 9

Benefits of efficiency considerations

Answer 9

Lower turnover to protect training investment with various fringe benefits, less recruitment costs (salary universal, fringe benefits unique). E.g. pensions are popular

Question 10

Explain principal-agent problem in the context of labor economics. what does this lead to?

Answer 10

Employees objectives conflict with employers, e.g. increase their leisure time by shirking on the job, leading to loss of efficiency and profits

Question 11

How do you tackle principal-agent problem?

Answer 11

Profit incentives, compensations, performance pay, or monitoring (expensive & ineffective) or pay above market salaries

Question 12

Draw impact of raise in tackling principal-agent problem, explain implications

Answer 12

Check notes

Question 13

Discuss piece rate as a solution

Answer 13

compensation as a proportion to the number of outputs. Limits shirking. May be difficult to offset, increases income variability forcing firms to pay premiums, difficult if produced in teams, workers may decrease quality for more output & pay

Question 14

Commission and roalties: discuss

Answer 14

proportion of the value of sales paid to employees. Efficient where work efforts are harder to observe, applies to artists, salespeople. Hard to get the rate right especially with royalties

Question 15

Bonuses: discuss

Answer 15

payments beyond the annual salary based on personal/company performance factors. One of payments. Can be team or personalised performance bonuses. Individuals may get too comfortable with superiors, teams may make individuals to slack. keep team small..

Question 16

Discuss profit sharing

Answer 16

system that allocates a proportion of the firms profits to the employees, gives employees incentives to work - more profits to company, more benefits to employee. Free-riders? Evidence: modest positive effect on productivity

Question 17

Tournament pay - discuss

Answer 17

compensation on relative performance. compensations on scale, encourages all workers work hard. Favors CEO - they are paid more than their MRP

Question 18

Consider effect of tournament pay on CEOs (pros and cons)

Answer 18

Check notes

Question 19

how can higher wage increase employee productivity?

Answer 19

increases work efforts, improves worker capabilities, increases proportion of skilled worker in the workplace.

Question 20

What is efficiency wage

Answer 20

Minimises employers wage cost per effective unit of labor employed. Marginal benefit of a higher wage equals the marginal cost of higher wage

Question 21

Explain Shirking model as efficiency wage theory, basic and implications

Answer 21

Opportunity cost for shirking, fear of losing job with higher wage, employees increase their effort (productivity)

Question 22

Explain Labor turnover model as efficiency wage theory, basic and implications

Answer 22

Firms increase wage to reduce turnover. The lower turnover increases productivity since more experienced workers don’t quit as often.

Question 23

Illustrate the increase in labor wages and how it results in increased productivity

Answer 23

CHeck notes

Question 24

alternatives to reduce shirking:

Answer 24

Piece rates and commissions, bonds which employee loses for negligence, or deferring pay if employee found shirking.

Question 25

Illustrate the MRP and wage relationship with individuals length of service. Explain implications of this

Answer 25

Check notes

Question 26

Explain pensions & MRP of the individual, why ideal why not ideal, and how pensions solve this mismathc

Answer 26

Older people are paid more than their MRP, and this encourages them to remain in employment, not efficient to the firm. Pensions solve this as generous benefit of pension drives employee out to retirement, costing less to employer. ALso during employment, reduces turnover, as lenght of service equals to more pension.