Pay, risk, and productivity: The case of Finland, 1980 - 1996

In this paper we report on four topics. (1) To what extent are piece-rate systems used among manufacturing workers in Finland? (2) What is the effect on the average pay level of using piece- versus time-rate systems? (3) How much wage risk is associated with a piecerate system? (4) How much of the pay differential between piece- and time-rate workers is compensation for extra effort and how much is compensation for bearing additional risk? How do the studied years 1980, 1990, and 1996 differ with respect to the four questions? We have access to unique individual-level data on payment system (piece- versus time-rate) and occupation from several thousand establishments and more than a quarter of a million individuals engaged in the private sector in Finland. The central findings are that a majority of the studied employees work on time rate only and that there has been a shift from mixed piece-rate schemes to only piece-rate schemes between 1980, 1990 and 1996. Second, there is a substantial extra payoff from working at a piece-rate scheme. Third, piece-rate jobs entail a risk of loss: A nonnegligible percentage of the piece-rate workers earn less than the time-rate workers at the same occupation–establishment level. Fourth, there is evidence of risk compensation: The higher the variance of pay at the occupation–establishment level, the higher the average pay at that level is. Finally, most of the pay differential between time- and piece-rate workers is compensation for extra effort and a smaller part consists of compensation for risk, which confirms that there are strong productivity gains from the use of piece rate.