Piece Rate and Time Rate(Final) Payment

8/11/2019 Piece Rate and Time Rate(Final) Payment

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Piece Rate and Time Rate Payment System in Agrarian Economies:

A Theoretical Insight on Malaysian Rubber Estate.

Parthiban S.Gopal

Abstract

Wages and its method of payment is a perennial old problem for the rubber tappers in

Malaysian estates. This paper proposes the method of payments which is prevalent in

agrarian economies, is widely adopted in Malaysian rubber estates wage structure,particularly for the rubber tappers. The method of payment that becomes the centre of

contention in this paper is weather the time rated or piece rate payment is appropriate for

the rubber tappers. Therefore the objective of this paper is twofold: Firstly, to examine theconceptual difference and operational definition of time and piece rated payment in

Malaysian rubber estates. Secondly, to scrutinize the viability of these mode of payment

vis-a-vis theoretical interpretation, in the rubber estates. The methodology of this paper isbased solely on document research; that is, peer reviewed journals as well as books and

articles authored by prominent researchers and scholars on wages and payment structure

especially in agrarian economies. Finally, the findings of the study would further elucidate

the importance of this mode of payment as a part of wage determinism mechanism for therubber tappers in the Malaysian rubber plantation sector.


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I. Introduction

This study investigates the compensation theory that guides the two methods of payments

widely used in agrarian economies. Piece rates and time rates are the two methods of

compensation that are commonly employed in agricultural activities. The rubber estates in

Malaysia are no exception. This crux of this study provides a theoretical perspective of the

main features of the two systems and the circumstances under which an employer is likely

to choose one or the other.

II. Background of the Study

The earnings of rubber tappers have attracted considerable attention in the literaturei. At

least two reasons account for this; first, the tapper is not separable from the rubber industry

that has contributed so much to the prosperity of the Malaysian economy since its

commercial cultivation in the 1800s. Second, while previous studies have shown that the

earnings of plantation workers have been low, relative to workers of comparable skill in

other sectors ( Zulkifly and Ishak, 1998; Selvakumaran and Bala, 1995), it is not always

realized that even within the plantation sector, the earnings of the rubber tapper have been

among the lowest. In 1998, the average monthly earnings of a tapper was

MYR605.00(USD195.00)ii, relative to MYR886.00(USD285) earned by an oil palm

harvester, RM765.00(USD246.00) earned by a palm oil mill worker (Category II) and

RM612.00(USD197.00) taken home by a rubber installation worker. The tappers earnings

generally exceed only those of the field workers whose monthly income averaged

RM430.00 (USD138.00) (Audong and Tan, 2000: 46; see also Navamukundan and Geetha,

2003: 325-425). However, not all studies that have commented on the low earnings of

rubber tappers have explored the underlying payment system because their main concerns


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lay elsewhere. In fact, there is a general paucity of studies devoted solely or primarily to

wage issues in the plantation sector. The studies by Parmer (1960) and Nijhar (1976) are

among the few exceptions.

III. Objective of the Study

The primary objective of this paper is twofold: Firstly, to examine the conceptual difference

and operational definition of time and piece rated payment in Malaysian rubber estates.

Secondly, to scrutinize the viability of these mode of payment as a part of the wage

structure, in the Malaysian rubber estates.

IV. Research Methodology

Since the study focuses on various theoretical features of payment system with regards to

the rubber estates wage structure, document research deemed suffice and was conducted.

To ensure reliability of these documents, only established peer reviewed journals as well as

books and articles authored by prominent researchers and scholars on wage system

especially in agrarian economies

V. Methods of Payment: Piece Rate and Time Rate

Two modes of payment are widely used, especially (though not exclusively) in agriculture.

They are piece rates and time rates (Lazear, 1986: 405-430; 1998: 98-119). A piece rate

rewards labour according to some measure of the workers output, whereas a time rate

compensates a worker based on the number of hours allocated to the job (Borjas, 1996:

402). Under a time rate, time on the job is used as the unit of measuring input (or as the

proxy for effort).


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Under a piece rate, compensation of a worker is a function of output or:

wt =f (qt)

where wtis compensation for period t,andqt is a workers output in period t.

On the other hand, compensation under a time rate is a function of input (or effort), usually

measured by time allocated to the job, or:

wt =g (Et)

where wtand Et are compensation and (some measure of) effort in period t, respectively.

Piece rates are often viewed as incentive pay because earnings are dependent on individual

output (Seiler, 1984: 363-376), whereas time rate earnings are solely a function of hours

worked. The International Labour Organization (ILO) offers a different perspective: time

rates are payments to employees who are redeemed hourly, daily, weekly or monthly, while

piece rates are paymenst for workers who complete specific steps in the production

process (ILO, 1984: 1-164 and Sajhau 1986: 79). The piece rate system is now more

popularly referred to as payment by results (PBR). In short, a piece rate and a time rate

represent a payment by output and a payment by input respectively (Dobb 1959: 50-55;

Paarsch and Shearer, 1997: 1-2; Shearer, 2003: 1-3)

V.1 Piece Rates or Time Rates?

Output based pay has several advantages (Lazear, 1998: 98-119). First, the inherent

strength of an output based pay system is that it discourages unproductive workers from

applying for the job and induces inefficient workers to leave. This can be illustrated by


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examining the choice faced by a tapper in deciding between an estate offering payment on

the basis of output (piece rate) and one that pays a fixed monthly salary (time rate). This

two payment systems are reflected by schedules B and A respectively in Figure 1 (Refer

Appendix).

Schedule A represents a time rate payment while schedule B represents a piece rate

payment. Assume that MYR0.60 sen (USD0.20 cents) is paid for each kilogram of latex

collected under scheme B. Under scheme A (the time rate wage scheme), the weekly salary

is fixed at MYR180.00 (USD58.00), regardless of the amount of latex collectediii

. What

would be the workers choice?

If the worker is able to tap and collect more than 300kg of latex eachweek, he will opt for

the piece rate scheme since his takings will exceed MYR180 (USD 58.00) per week. On the

other hand, a less productive job-seeker who is unable or unwilling to tap and collect at

least 300kg of latex a week will choose the time rate scheme that offers a fixed weekly

income of MYR180.00(USD58.00). The piece rate scheme, therefore, attracts more

productive or better motivated workers. The less motivated and less productive workers

will seek employment with employers offering a time rate paying scheme.

However, Baland et. al (1999: 445-461) express a slightly different view. While they agree

that a piece rate contract attracts the most able workers, they point out that it draws the least

able ones as well. Only workers with medium level ability opt for the time rate. A highly

able worker can choose his own level of effort, under the piece rate, to earn a higher level

of earnings per day than is possible under a time rate contract. By the same token, a less


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If the payment for each unit of output produced is given by w, the marginal revenue (MR)

from each unit of output will be constant and equal to w. The horizontal line labeled MR in

Figure 2 (refer Appendix) shows this.

The marginal cost of producing output (MC) is the disutility suffered in allocating time

away from other pleasurable activities to work. The MC of effort will rise as more output is

produced because more leisure is sacrificed in favour of work. Furthermore, the MC of

effort of a more able worker (MC A) will be lower than the MC of a less able worker (MC)

as shown in the Figure 2 (refer Appendix) .

The utility maximizing worker will choose that level of output (effort) where the MR from

the additional output is equal to the MC of producing the output. For the less able worker,

this is given by the level of output q* whereas the more able worker will produce a larger

output (q able).

Thus, a piece rate system not only attracts more productive workers, but also motivates the

more able among them to produce a higher output than the less able ones.

Let us now examine the time rate system. How much effort will time rate workers allocate

to their jobs? Assume that in order to earn a fixed rate of pay, a minimum level of output

(q*) is required of them. The worker will thus, be motivated to produce this minimum

output level and no more. The worker will be terminated if he does not meet this minimum,


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the employers monitoring costs and reduce the attractiveness of the piece rate systems to

the employer.

The fact that earnings can fluctuate considerably under a piece rate system also undermines

its attraction to workers. For example, in the rubber estates, the amount of latex collected

depends on weather conditions, the age of the tree, the terrain and others. These factors,

outside the control of the tapper, can affect his earnings significantly even if there is no lack

of effort on his part. This uncertainty in earnings level is absent under the time rate mode.

A related question is: who should bear the risk of any fluctuation income? If pay is output-

based, the worker assumes the risk and a risk-averse worker will avoid working under such

an arrangement. On the other hand, under a time rate system, the firm assumes the risk and

it will attract risk-averse workers.

Lazear (1998: 119) argues that other things being equal, it is better to have the firm bear

the risk. This is because firstly, firms are generally in a better position to diversify the risk

by pooling it with other projects or by selling it to a third party through the capital market.

Apart from diversifying, firms can also conduct arbitrage to protect themselves from wild

fluctuations in output or in the prices of their input and output.

Second, workers find it more difficult to deal with the risk. Workers, particularly those with

low wages, have liabilities such as food, housing, clothing and other expenses that are

relatively fixed. Hence, any variation in their income is likely to cause significant

difficulties for them and their families. But highly paid executives or big companies have


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substantial savings to cushion any decrease in workers wages. As a result it is generally

better to have the firm bear the risk. The problem, however, is that when the firm bears the

risk and the worker feels insured, his incentive to work is reduced. Thus, there is a trade-

off: More risk-taking by the worker means more effort and higher average compensation.

However, more risk-taking also means more variable pay. Lazear (1998) suggests that, in

general, the rule should be high productivity workers whose average compensation is high,

should bear a greater proportion of the risk than low productivity workers.

A fundamental principle missed by Lazear (1998) is that since capital keeps the profit, it

must be prepared to take the risk. After all, profit is a reward for risk-taking. On the other

hand, if capital wants to share the risk with labour, it must be prepared to share profits as

well!

Borjas (1996: 407), on the other hand, suggests that firms will have to find means to

compensate workers for the disutility caused by fluctuations earnings. This compensating

differential, however, will reduce the employers profits and fewer firms will choose to

offer piece rates.

Finally, imbedded in the piece rate system is the so-called ratchet effect (Borjas, 1996:

407). If a worker produces high output, the management may interpret this to mean that the

job was not quite as difficult as originally conceived and lower the piece rate in the next

period. This forces labour to work

harder just to keep even. The ratchet effect discourages workers from accepting piece rate

jobs.


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3. Piece rate contracts may be supplementary contracts that coexist with time rate

contracts because the benefits of piece rate contracts are achieved at some cost to

the employer in terms of task quality.

4. Piece rates and time rates for the same task may coexist, especially in periods of a

slack in the demand for labour. During such periods, the time rate is rigid

downwards and cannot be brought down, leading to involuntary unemployment.

The coexistence of time rates allows the absorption of unemployed workers on

piece rate contracts. A dual labour market thus emerges where time rate

employment is rationed and piece rate work is competed for.

5. Finally, piece rates are also becoming popular as a means of avoiding statutory

regulations covering time rate workers whose employment is more formalized.

Piece rates are being used as a device to implement the casualization of labour

employment.

Apart from market structure,our earlier discussion suggeststhat the piece rate contract may

be made more attractive over the time rate in several situations where:

1. the cost of measuring output is low and can be done without too much error.

2. the value of the alternative wage is high in relation to the average output at the

current firm.

3. workers ability levels are heterogeneous.

4. there is the need to attract the most able workers.

5. only workers of poor ability are available because payments are made based on

acceptable results.

Of course, where these conditions are not met, the time rate will be the better alternative.


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VI. Conclusion

The study evaluated the strengths and weaknesses of the piece and time rate systems of

payment. The piece rate system had several advantages that make it a logical choice,

particularly in agrarian settings. It attracts the more productive workers, motivates the more

able workers to produce more, ties pay directly to performance, requires minimal

supervision in some circumstances and increases the firms productivity. Time rate, on the

other hand, has persisted because it de-emphasizes quantity at the expense of quality, and is

useful in situations where output is difficult to measure, or is attributed to a particular

worker. A time rate also minimizes the risk of fluctuating incomes and is therefore,

preferred by risk-averse workers. The wage system that evolved in the estates began with a

piece rate payment and later incorporated elements of a time rate. Understanding the

theoretical underpinnings of these two systems helps us evaluate the arguments for and

against this gradual modification.


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Appendix

Figure 1

Wage Rate

The Screening Effect of Output Related Wage

Source: Lazear (1998: 100)

Figure 2

Wage Rate

The Allocation of Work Effort by Piece Rate Workers

Source: Borjas (1996:404)

0

180(58)

300 Kgs. of latex tapped

B

A

MYR(USD)/week

0

MYR (USD)MC MC able

MRw

q* q able Output


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Figure 3

Wage Rate[RM (USD)

/week]

The Sorting Effect of Output Related Wage

Source: Lazear (1998: 104)

0

60(20)

X

Y

300 Kg. of latex tapped


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Piece Rate and Time Rate(Final) Payment