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.
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