In discussing “output-based compensation schemes,” such as piece-rate systems, Stanford economist Edward Lazear observed, “One major advantage of this approach is that it accommodates a variety of worker preferences.” But he also noted, “A disadvantage is that a pure piece-rate scheme makes the worker bear risk associated with variations in . . . business conditions.”
a. What does Lazear mean by the first quote above? How do these compensation schemes accommodate different worker preferences? Preferences for what?
b. What does Lazear mean by the second quote above? What are “business conditions”? How do they affect worker compensation when a firm is using a piece-rate scheme?