Participation vs. Effort Elasticity (Extensive vs. Intensive Margin)
RCTReview
Employers setting compensation schemes must distinguish whether wage increases primarily mobilize additional labor participation or increase individual worker productivity on the job.
Picture this
Think of opening a seasonal fruit-picking site. Increasing daily pay slightly attracts many more villagers from surrounding areas to show up for work, whereas workers already on site only pick fruit a tiny bit faster.
What the evidence says
Arc elasticity of labor participation (extensive margin) with respect to the piece rate is 0.58, whereas the elasticity of daily output quantity (intensive margin) with respect to the piece rate is only 0.06 (controlling for reservation rates).
- Who was studied
- N = 689 participants across 1,875 worker-days in rural Malawi.
- How
- Randomized field experiment measuring arc elasticities of participation (hiring uptake) versus daily sorting volume across 5 piece-rate levels (5 to 25 MWK).
What to do
Adjust piece-rate levels to expand total workforce participation rather than expecting proportional productivity gains per individual worker.
From the source
"Over the range of piece rates offered, the arc elasticity of participation with respect to the piece rate is 0.58 (Table S17), while the elasticity of output quantity with respect to the piece rate (controlling for the reservation piece rate) is 0.06 (Table S18)."
Productivity in piece-rate labor markets: Evidence from rural Malawi