A canonical prediction of economic theory is that high wages increase labor productivity. In settings where workers are salaried or paid by the hour, this is the concept of efficiency wages . In settings where workers are paid in proportion to their output , the theoretical connection between wages and productivity is even clearer. However, it has proven difficult to empirically estimate the responsiveness of labor productivity to piece rate wages, since much of these wages’ variation is driven by endogenous characteristics of the production process. In this paper, I provide the first quasiexperimental estimate of the elasticity of labor productivity with respect to piece rate wages. Specifically, I analyze a high-frequency panel of worker-level production data from over 2,000 California blueberry pickers paid by piece rates. Surprisingly, I find that on average, labor productivity is very inelastic with respect to wages. Piece rate wages are interesting to study because they offer such a direct, clear, and salient link between a worker’s effort and reward. In general, optimal labor contracts can be quite complex, as they must effectively incentivize worker effort while simultaneously accounting for issues like risk aversion, asymmetric information, and moral hazard . However, these complications are less of a concern in settings where a firm can cheaply monitor both worker productivity and product quality. In such cases, theory suggests piece rate wages will outperform other common incentive schemes . Understanding how workers respond to changes in a piece rate wage is important in sectors where these wages can vary over time, like in specialty agriculture, the auto repair industry, hydroponic net pots or the growing ride share market . Econometricians face a fundamental challenge when trying to estimate the causal effect of piece rate wages on labor productivity: these wages are inherently endogenous.
As an example, consider blueberry picking. When ripe berries are scarce and spread out , average worker productivity is low. When ripe berries are abundant and dense , it is easier for workers to pick berries quickly, and average productivity is markedly higher. Because farmers aim to keep their workers’ average effective hourly pay relatively stable over time, they set piece rate wages higher when picking is more difficult, and lower when picking is easier. In order to account for piece rates wages’ endogeneity, I adopt a two-pronged identification strategy. First, exploiting the richness of my multidimensional panel data, I econometrically control for environmental factors like seasonality and temperature that directly affect the berry picking production function. Second, I use the market price for blueberries as an instrument for piece rate wages. This price is a valid instrument because it affects a farmer’s willingness to raise piece rates , but is otherwise uncorrelated with picker productivity. Furthermore, the market price for California blueberries is set by global demand and global supply. As a result, individual farms are too small to directly affect the market price, and supply shocks at the farm level can be considered orthogonal to aggregate supply shocks. I find that, on average, labor productivity is very inelastic with respect to piece rate wages, and I can reject even modest elasticities of up to 0.7. This finding contrasts with both canonical economic theory and previous structural estimates: relying on a calibrated structural model of worker effort, Paarsch and Shearer estimate a labor effort elasticity of 2.14 in the British Columbia tree-planting industry, and Haley estimates a labor effort elasticity of 1.51 in the U.S. midwest logging industry. Why, then, do blueberry pickers not seem to respond to changes in their wage? One explanation of my findings could be that blueberry pickers respond to average effective hourly wages rather than marginal piece rate wages, similar to how electricity consumers respond to average prices rather than marginal prices . This is unlikely, both because piece rate wages are highly salient in the context I study, and because my identification strategy specifically isolates marginal effects from average effects.
Instead, I find suggestive evidence that blueberry pickers face some binding constraint on physical effort that is related to temperature. Specifically, I find that at moderate to hot temperatures, I cannot reject that the piece rate wage level has no effect on labor productivity. However, at temperatures below 60 degrees Fahrenheit , a one cent per pound increase in the piece rate wage increases worker productivity by nearly 0.3 pounds per hour, implying a positive and statistically significant productivity elasticity of approximately 1.6. In other words, blueberry pickers respond to the piece rate wage level at cool temperatures, but seem not to respond to changes in their wage at higher temperatures.Temperature also affects productivity directly in economically meaningful ways. Specifically, I find that blueberry pickers’ productivity drops precipitously at very hot temperatures: workers are 12% less productive at temperatures above 100 degrees Fahrenheit than they are at temperatures between 80 and 85 degrees Fahrenheit . However, I also find negative effects at cool temperatures. Workers are nearly 17% less productive at temperatures below 60 degrees Fahrenheit than at temperatures in the low eighties. The most likely explanation of this finding is that berry pickers lose finger dexterity at cool temperatures and find it uncomfortable to maintain high levels of productivity. This hypothesis is supported by evidence from the ergonomics literature , and highlights that temperature’s effects on labor productivity depend on the particularities of the relevant production process. To demonstrate the robustness of my findings, I address several threats to my identification strategy. First, I investigate berry pickers’ labor supply on both the intensive and extensive margins. I show that neither temperature nor wages have a statistically significant effect on these measures. Next, I address the fact that there exists a minimum hourly wage rule in the setting I study. This constraint binds for approximately 15.8% of my observations, raising concerns that workers falling below this threshold have an incentive to shirk or “slack off.” I re-estimate my results using only those observations where workers earn more than the minimum wage and see no qualitative change in my findings. Finally, I confront the possibility of adverse selection in my sample by limiting my sample to only the observations from workers who work more than thirty days in a single season. Previous studies have shown, and I confirm, that temperature affects labor productivity directly. However, I am the first to demonstrate that temperature also affects labor productivity indirectly by disrupting the economic relationship between wages and worker effort. As global temperatures rise, my findings suggest that firms in outdoor industries like agriculture and construction will have a reduced ability to effectively incentivize their employees’ productivity. This can have large economic consequences. In the $76 billion U.S. specialty crop sector, for instance, harvest labor can account for more than half a farm’s operating costs. This is also a setting where piece rate wages are common: in California alone, over 100,000 specialty crop farm workers were paid by piece rates in 2012. My econometric estimates allow me to make several predictions about how rising temperatures will affect the agricultural labor sector. To do this, I develop a model of a firm choosing an optimal piece rate wage under some exogenous environmental condition . My model produces two interesting sets of comparative statics. First, I show that temperature’s effect on the optimal piece rate wage depends on how temperature affects labor productivity directly, and how temperature affects labor productivity’s responsiveness to the wage. Plugging my empirical estimates into this model, I find that an optimizing blueberry farm would pay its workers a higher piece rate wage on particularly cool days, ceteris paribus. Second, I show that temperature’s effect on overall farm profits has the same sign as temperature’s direct effect on labor productivity.
In the case of California blueberry farms, blueberry grow pot where cool temperatures have meaningful negative effects on productivity, this suggests that the first-order effect of rising temperatures on profits is likely to be positive. However, in contexts where cool temperatures do not lower labor productivity, the opposite is likely to be true. The remainder of this paper is organized as follows: in section 1.2, I develop a simple theoretical model of workers’ optimal effort under a piece rate wage scheme. In section 1.3, I describe the institutional details of the two California blueberry farms I study in this paper. I then discuss my data and report summary statistics in section 1.4. Section 1.5 outlines my empirical strategy, and section 1.6 reports my results. I discuss my findings in section 1.7, giving particular attention to how rising temperatures are likely to affect the agricultural labor sector. Finally, in section 1.8, I conclude.There has been relatively little theoretical work done on piece rate wage schemes in the past, partly because their structure is so straightforward, and partly because they are so much less common than salaries or hourly wage schemes. Nonetheless, previous research has highlighted several important aspects of piece rate wages that are relevant to this paper. Prendergast and Brown both provide good summaries of when and where piece rates are likely to be effective. Specifically, in cases where firms can cheaply monitor productivity and ensure quality control, piece rates should correctly align workers’ incentives with those of their employer, maximizing labor productivity.10 Several papers have confirmed the prediction that, under the correct circumstances, piece rate wage schemes better incentivize labor productivity than do more traditional wage schemes. Lazear , studying an auto glass company, finds that a switch from hourly to piece rate wages boosts output per worker by an average of 44%. Shi , studying a tree-thinning company, estimates a more modest effect of 23%. Shearer , studying tree-planters in British Columbia, also finds an effect near 20%. Bandiera et al. study agricultural workers in the United Kingdom and come to a similar conclusion, noting that piece rates based on individual production eliminate cross-worker externalities found in relative incentive schemes. In a non-causal study from California, Billikopf and Norton also provide evidence that piece rate wages boost vine-pruners’ performance relative to hourly wages. Such increases in productivity under piece rates seem to come from increased worker effort, as Foster and Rosenzweig demonstrate by measuring workers’ net calorie expenditures under different pay schemes. None of the papers cited above, however, estimate how labor productivity responds to changes in a piece rate wage. Among the most well-known papers that have attempted to do so are Paarsch and Shearer and Haley . In both cases, the authors calibrate a structural model of worker effort in order to address piece rates’ endogeneity. They find positive elasticities of effort with respect to wages, of 2.14 and 1.51 respectively, in line with theoretical predictions. Other papers have relied on natural experiments or natural field experiments to try and recover the effect of piece rate wage levels on productivity. For instance, Treble exploits a natural experiment from the 1890s in an English coal mine to derive a near unit-elastic productivity response. In a more recent setting, Paarsch and Shearer implement a natural field experiment with tree-planters in British Columbia and estimate a productivity elasticity of 0.39. While the authors note that this estimate is “substantially smaller” than that of Paarsch and Shearer and Haley , it is unclear wether they think this result invalidates the earlier estimates. Finally, Guiteras and Jack conduct an experiment in rural Malawi to explore how variation in piece rate wages affects both quantity and quality of worker output. The authors find a positive but very inelastic effect of piece rate wages on workers’ output. Despite the theoretical simplicity of a piece rate wage scheme, it is not immune to employees’ behavioral responses. Even though a firm may be able to set a different piece rate every day, doing so may foment unrest among employees if the changes are seen as arbitrary . In other situations, high piece rates may operate as efficiency wages – à la Yellen , Shapiro and Stiglitz , and Newbery and Stiglitz – especially if a firm is trying to retain high-quality workers . An additional consideration is that variable piece rate wages may lead to a less reliable supply of labor on the intensive margin. In other words, piece rate employees may work fewer or more hours depending on the day’s wage. Such behavior would be consistent with a reference-dependent preference model like that of Kőszegi and Rabin where workers have some internal reference point for how much money they intend to earn in a particular day. Finally, piece rate wages are much more common in seasonal specialty agriculture than in many other industries or settings.