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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.

Suggested Citation

  • Richard B. Freeman & Morris M. Kleiner, 1998. "The Last American Shoe Manufacturers: Changing the Method of Pay to Survive Foreign Competition," NBER Working Papers 6750, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6750
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    References listed on IDEAS

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    1. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
    2. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    3. 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.
    4. Charles Brown, 1990. "Firms' Choice of Method of Pay," ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-1-182-, April.
    5. 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.
    6. 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 363-376, August.
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    Citations

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    Cited by:

    1. Tor Eriksson & Marie Claire Villeval, 2004. "Other-Regarding Preferences and Performance Pay. An Experiment on Incentives and Sorting," Post-Print halshs-00176781, HAL.
    2. David Marsden & Richard Belfield, 2010. "Institutions and the Management of Human Resources: Incentive Pay Systems in France and Great Britain," British Journal of Industrial Relations, London School of Economics, vol. 48(2), pages 235-283, June.
    3. Takao Kato, 2003. "The Recent Transformation of Participatory Employment Practices in Japan," NBER Chapters,in: Labor Markets and Firm Benefit Policies in Japan and the United States, pages 39-80 National Bureau of Economic Research, Inc.
    4. Lazear, Edward, 2003. "Output-Based Pay: Incentives, Retention or Sorting?," IZA Discussion Papers 761, Institute for the Study of Labor (IZA).
    5. Kräkel, Matthias, 2004. "Emotions and Incentives," IZA Discussion Papers 1270, Institute for the Study of Labor (IZA).
    6. Edward P. Lazear, 1999. "Output-based Pay: Incentives or Sorting?," NBER Working Papers 7419, National Bureau of Economic Research, Inc.
    7. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 917-962.
    8. Shaw, Kathryn & Lazear, Edward P., 2008. "Tenure and output," Labour Economics, Elsevier, vol. 15(4), pages 704-723, August.
    9. Arindrajit Dube & Richard B. Freeman, 2010. "Complementarity of Shared Compensation and Decision-Making Systems: Evidence from the American Labor Market," NBER Chapters,in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 167-199 National Bureau of Economic Research, Inc.
    10. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
    11. 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.
    12. Kräkel, Matthias, 2004. "Tournaments versus Piece Rates under Limited Liability," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 15, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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