Edward Lazear Analyzed Data Provided by the Safelite Group, the Nation's

question 89

Multiple Choice

Edward Lazear analyzed data provided by the Safelite Group, the nation's largest installer of auto glass, after the company changed the way it paid its glass installers beginning in the mid-1990s. Instead of paying workers hourly wages, Safelite began to pay workers on the basis of how many windows they installed. Which of the following describes what Lazear concluded from his analysis of Safelite's data?

• A) Although workers installed more windows under the new system, Lazear found that there was also an increase in the number of workmanship-related defects. Lazear attributed this to workers taking short-cuts in order to earn higher wages. As a result, productivity did not improve and Safelite went back to paying hourly wages.
• B) Lazear found that worker productivity increased with the new system; about half of the increase in productivity was due to workers who continued with the company and half was due to new workers being more productive than those who left the company.
• C) Although worker productivity improved, the increase in hourly wages resulted in a significant decline in Safelite's profits.
• D) Because of a principal-agent problem, worker productivity was not affected by the new compensation system. However, Lazear attributed this to management problems that had nothing to do with Safelite's compensation system.

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Definitions:

Ceteris Paribus

A Latin phrase meaning "all other things being equal," used in economics to analyze the effect of one variable on another while holding all other relevant factors constant.

Total Income

The sum of all earnings obtained by an individual or entity, including wages, salaries, benefits, and income from investments, before any deductions.

Complementary

Goods or services that are used together, where the consumption or use of one increases the value or demand for the other.

Fixed Proportions

A production condition where inputs are used in constant ratios, without substitution between them, over a range of output levels.