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The Last American Shoe Manufacturers: Changing the Method of Pay to Survive Foreign Competition

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  • Richard B. Freeman
  • Morris M. Kleiner

Abstract

During the last 150 years, shoe manufacturing in the U.S. has gone from one of the largest employers in manufacturing to one of the smallest, yet some firms have survived and remained profitable. This study examines the role of changing methods of compensation in shoe manufacturing, in a sector that faces severe import competition. During the 1970s - 1990s, most firms in the industry shifted from piece rate to time rate modes of compensation as a strategy for survival. Using longitudinal establishment data files, we find wide variation in labor input usage and in labor's share of sales among establishments in the sector, with establishments having high labor shares of cost disproportionately likely to close down over time; and a widening range of labor input usage in production associated with the widening U.S. wage structure. Using data for a simple manufacturer, methods of pay was part of a move toward continuous flow methods of production, with job rotation and rapid changes in work tasks to introduce new styles. The switch reduced productivity, but brought offsetting cost savings in the form of lower workers' compensation insurance costs, smaller inventories, lower monitoring costs, and lower hourly wages, and made it easier for the firm to introduce new shoe styles. On net, the shirt to time rates lowered labor's share of cost at the company and increased the economic surplus available to the firm.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6750.

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Date of creation: Oct 1998
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Publication status: published as Freeman, Richard B. and Morris M. Kleiner. “The Last American Shoe Manufacturers: Decreasing Productivity and Increasing Profits in the Shift from Piece Rates to Continuous Flow Production." Industrial Relations 44, 2 (April 2005).
Handle: RePEc:nbr:nberwo:6750

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  1. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  2. Seiler, Eric, 1984. "Piece Rate vs. Time Rate: The Effect of Incentives on Earnings," The Review of Economics and Statistics, MIT Press, vol. 66(3), pages 363-76, August.
  3. Charles Brown, 1990. "Firms' choice of method of pay," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-182, February.
  4. Bruce Shearer, 1996. "Piece-Rates, Principal-Agent Models, and Productivity Profiles: Parametric and Semi-Parametric Evidence from Payroll Records," Journal of Human Resources, University of Wisconsin Press, vol. 31(2), pages 275-303.
  5. Paarsch, Harry J. & Shearer, Bruce, 1996. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," Cahiers de recherche 9623, Université Laval - Département d'économique.
  6. Gary Clyde Hufbauer & Kimberly Ann Elliott, 1994. "Measuring the Costs of Protection in the United States," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 77.
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Cited by:
  1. Marie-Claire Villeval & Tor Eriksson, 2004. "Other-Regarding Preferences and Performance Pay – An Experiment on Incentives and Sorting," Working Papers 0408, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Matthias Kräkel, 2004. "Tournaments versus Piece Rates under Limited Liability," Bonn Econ Discussion Papers bgse8_2004, University of Bonn, Germany.
  3. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 917-962, August.
  4. Kräkel, Matthias, 2004. "Emotions and Incentives," IZA Discussion Papers 1270, Institute for the Study of Labor (IZA).
  5. Matthias Krakel, 2006. "Tournaments versus Piece Rates under Limited Liability," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 185-199, December.
  6. Edward P. Lazear, 1999. "Output-based Pay: Incentives or Sorting?," NBER Working Papers 7419, National Bureau of Economic Research, Inc.
  7. Richard Belfield & David Marsden, 2009. "Institutions and the Management of Human Resources: Incentive Pay Systems in France and Great Britain," CEP Discussion Papers dp0941, Centre for Economic Performance, LSE.
  8. Kathryn Shaw & Edward P. Lazear, 2007. "Tenure and Output," NBER Working Papers 13652, National Bureau of Economic Research, Inc.
  9. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
  10. Lazear, Edward, 2003. "Output-Based Pay: Incentives, Retention or Sorting?," IZA Discussion Papers 761, Institute for the Study of Labor (IZA).
  11. repec:nbr:nberwo:14272 is not listed on IDEAS

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