CAN A FLEXIBLE WAGE SYSTEM INCREASE LABOUR PRODUCTIVITY? : THEORY AND PRACTICE

Abstract

One main mechanism that links people and jobs in the economy is the system of remuneration. This system can also lead to significant consequences for employment levels and economic growth.

With such significance, effort has been put into the search for an efficient wage system that can improve productivity and shock resistance. And from its advocates, the flexible wage system has been pointed out to be a more efficient wage system as compared to traditional fixed wage system that has always been the primary remuneration system. Governments (eg. Japan, Singapore) have also tried to encourage films in their economies to adopt the flexible wage system.

In this paper, I discuss the impacts on productivity with the flexible wage system. My approach will be in the micro-economic point of view and will be using some game theory methods to access the flexible wage system in terms of its impact on productivity and some other factors. Since it is the fixed wage system that is being challenged by the flexible wage system, the natural party to discuss for comparison will be the fixed wage system. Therefore, in this paper I will be discussing both systems, pointing out advantages and disadvantages in each scenario.

In my two scenarios, I bring out the worlds of perfect and imperfect information and the different impacts of the two wage systems. In the micro­ economic view, I attempt to bring out sectoral differences in preferences to each wage system. This means that I shall focus more acutely on characteristics of different industries and sec if there are different preferences among industries. A conclusion on this part will be different cases where one wage system is more preferred than the other.

In the later part of the paper, I apply the concept of socially desirable equilibrium. This is an equilibrium that the government and both players (ie firm and worker) have maximised their objectives. Together with the previous results developed in my paper, I then evaluate if the flexible wage system can indeed improve labour productivity and lead to a socially desirable equilibrium. The answers arc positive under some conditions. We can then agree that the flexible wage system is an efficient wage system.