Final answer:
Output-related pay is impractical when productivity is hard to measure, such as for accountants in large departments, and because it may adversely affect work incentives by enabling income maintenance with reduced work hours. Additionally, labor market dynamics and wage adjustments do not always reflect the needs of workers' families.
Step-by-step explanation:
Output-related pay can become impractical to use in scenarios where measuring individual productivity is challenging. For instance, quantifying the output of an accountant in a large corporation's tax department is not straightforward. Furthermore, labor markets do not always swiftly adjust wages to productivity levels, as wages are typically reviewed once or twice a year and productivity changes may affect the natural rate of unemployment temporarily.
Moreover, output-related pay might reduce the incentive to work because it could encourage individuals to work fewer hours if they can still maintain or increase their income. This is illustrated with a choice on a new budget line like 'S', which indicates more income for fewer hours worked, as opposed to 'P' or 'R' where individuals work the same or more hours. Additionally, market forces do not consider the actual needs of families for food, shelter, clothing, and healthcare when determining pay.