Personnel economics has been defined as "the application of economic and mathematical approaches and econometric and statistical methods to traditional questions in human resources management".• Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, p. 380 [pp. 380–84]. Abstract. • _____ and Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, 21(4), pp. 91–114. It is an area of applied micro labor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal.Edward P. Lazear and Paul Oyer, 2004. "Internal and External Labor Markets: A Personnel Economics Approach," Labour Economics, 11(5), pp. 527–554 . In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers.Above text adapted from JEL Classification Codes Guide: M per JEL:M5.
The subject has been described as significant and different from sociological and psychological approaches to the study of organizational behavior and human resource management in various ways. It analyzes labor use, which accounts for the largest part of production costs for most firms, by formulation of relatively simple but generalizable and testable relationships. It also situates analysis in the context of market equilibrium, rational maximizing behavior, and economic efficiency, which may be used for prescriptive purposes as to improving performance of the firm.• Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, pp. 381, 383. Abstract. • _____, 2000a. "Economic Imperialism," Quarterly Journal of Economics, 115(1), pp. 99–100 & 119–22 pp. 99–146. For example, an alternate compensation package that provided a risk-free benefit might elicit more work effort, consistent with psychologically-oriented prospect theory.Daniel Kahneman and Amos Tversky, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, 47(2), pp. 263–292. But a personnel-economics analysis in its efficiency aspect would evaluate the package as to cost–benefit analysis, rather than work-effort benefits alone.Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, p. 381. Abstract.
Personnel economics has its own Journal of Economic Literature classification code, JEL: M5 but overlaps with such labor economics subcategories as JEL: J2, J3, J4, and J5.JEL Classification Codes Guide: M per JEL:M5. Subjects treated (with footnoted examples below) include: firm employment decisions and promotions, including hiring, firing, turnover, part-time and temporary workers, and seniority issues related to promotionsJed DeVaro, 2005. "Employer Recruitment Strategies and the Labor Market Outcomes of New Hires," Economic Inquiry, 43(2), pp. 263–82. Abstract. compensation and compensation methods and their effects, including stock options, fringe benefits, incentives, family support programs, and seniority issues related to compensationHarald Dale-Olsen, 2006. "Wages, Fringe Benefits and Worker Turnover," Labour Economics, 13(1), pp. 87–105. Abstract. training, especially within the firmFilipe Almeida-Santos and Karen Mumford, 2005. "Employee Training and Wage Compression in Britain," Manchester School, 3(3), pp. 321-42. labor management, including team formation, worker empowerment, job design, tasks and authority, work arrangements, and job satisfactionStephen J. Deery and Roderick D. Iverson, 2005. "Labor-Management Cooperation: Antecedents and Impact on Organizational Performance," Industrial and Labor Relations Review, 58(4), pp. 588–609. labor contracting devices, including outsourcing, franchising, and other options.Axel Engellandt and Regina T. Riphahn, 2005. "Temporary Contracts and Employee Effort," Labour Economics, 12(3), pp. 281–99. Abstract.Above text and footnoted examples are from JEL Classification Codes Guide M5.
History of Personnel Economics The field can be traced back to 1776 when Adam Smith, a British economist, suggested that within the labor market equilibrium, a trade-off between a worker's wages and non-monetary working conditions could exist. However, Personnel Economics did not gain prominence until 1987, when the Journal of Labor Economics published 10 articles on the field. During the 1990s, Personnel Economics gradually became more empirical-based, whereas previously the field was more heavily theoretical. Personnel Economics is now considered a branch of Labor Economics. In 1998, Edward Lazear described it as "the use of economics to understand the internal workings of the firm." With the availability of new data, the field has evolved to have more practical use. Econometric techniques have played a significant role in the field's development, with data being used to analyze personnel records and other human resource data. This is known as Insider Econometrics.
Theory, Testing, and Possible Uses Personnel economics began to emerge as a distinct field from a flurry of research in the 1970s that sought to answer the questions of how prices of goods and services traded within a firm are determined. An early difficulty that the subject addressed is possible differences between the interests of an employer considered as wanting cost-free output and employees as wanting cost-free income.Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, p. 381 [pp. 380–84]. Abstract. The relationship is represented at a general level in the principal-agent problem whose solution is the firm modeled as a set of contracts for efficiently allocating risk and monitoring the performance of the production team and its members.• Stephen A. Ross 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, 63(2), pp. 134–139. • Eugene F. Fama, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, 88(2), pp. 288–307. Many questions about wage determination and the relationship between wages and productivity in a firm or government enterprise were raised as a result. The subject was developed in addressing those questions, including examination of pay structure and promotions within hierarchical organizations.• Joseph E. Stiglitz, 1975. "Incentives, Risk, and Information: Notes Towards a Theory of Hierarchy," Bell Journal of Economics, 6(2), pp. 552-579. • James A. Mirrlees, 1976.The Optimal Structure of Incentives and Authority within an Organization,"Bell Journal of Economics, 7(1) pp. 105–131. • Abram Bergson, 1978. "Managerial Risks and Rewards in Public Enterprises," Journal of Comparative Economics, 2(3), pp. 211–225. Abstract. • Morley Gunderson, 2001. "Economics of Personnel and Human Resource Management," Human Resource Management Review, 11(4), pp. 431–452. • Debra J. Aron, 1990. "Firm Organization and the Economic Approach to Personnel Management," American Economic Review, 80(2), pp. 23-27. • Michael Gibbs and Alec Levenson, 2002. "The Economic Approach to Personnel Research," ch. 6, in S. Grossbard-Shechtman and C. K. Clague, ed., The Expansion of Economics: Toward a more Inclusive Social Science, M.E. Sharpe. pp. 99- 133.
Major theories of the subject developed in the late 1970s and 1980s from the research of Bengt Holmström,• Bengt Holmström, 1979. "Moral Hazard and Observability," Bell Journal of Economics, 10(1), pp. 74–91. • _____, 1982. "Moral Hazard in Teams," Bell Journal of Economics, 13(2), 324–340. • _____, 1983. "Equilibrium Long-Term Labor Contracts," Quarterly Journal of Economics, 98(Supplement), pp. 23-54. • _____, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, 66(1), 169–182. • _____, 1994. "The Firm as an Incentive System," American Economic Review, 84(4), pp. 972–991. • _____ and Paul Milgrom, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, 7(special issue), 24–52 . Edward Lazear,• Edward Lazear, 1979. "Why Is There Mandatory Retirement?" Journal of Political Economy, 87(6), pp. 1261-1284. • _____, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, 71(4), pp. 606-620. • _____, 1986. "Salaries and Piece Rates," Journal of Business, 59(3), pp. 405-431. • _____, 1987. "incentive contracts," The New Palgrave: A Dictionary of Economics, v. 2, pp. 744–48. Table of Contents link. • _____ 1995. Personnel Economics. MIT. Arrow-page searchable contents. • _____, 1999. "Personnel Economics: Past Lessons and Future Directions," Journal of Labor Economics, 17(2), pp. 199–236. (Presidential address to the Society of Labor Economists.) • _____, 2000a. "Economic Imperialism," Quarterly Journal of Economics, 115(1), pp. 119–22 [pp. 99–146. • _____, 2000b. "The Future of Personnel Economics," Economic Journal, 110(467), pp. F611-F639. • _____, 2000c. "Performance Pay and Productivity," American Economic Review, 90(5), pp. 1346–1361. • _____, 2008. "personnel economics," The New Palgrave Dictionary of Economics. 2nd Edition. Abstract. • _____ and Michael Gibbs, 2009. 2nd ed. Personnel Economics in Practice, Wiley. Description and preview. • Edward Lazear and Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, 21(4), pp. 91–114. • Edward Lazear and Paul Oyer, 2009. "Personnel Economics," draft of chapter to appear in R. Gibbons and D. J. Roberts, ed., 2013,Handbook of Organizational Economics, Princeton University Press. and Sherwin Rosen• Sherwin Rosen 1978. "Substitution and Division of Labour," Economica, 45(179), pp. 235–250. • _____, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, 13(2), pp. 311-323. • _____, 1986a. "The Theory of Equalizing Differences," ch. 12, O. C. Ashenfelter and R. Layard, ed. Handbook of Labor Economics, v. 1, Elsevier, pp. 641-692. • _____, 1986b. "Prizes and Incentives in Elimination Tournaments," American Economic Review, 76(4), pp. 701-715. to name but a few. Research threads included analysis of: Compensation according to piece rate, that is contributions to output, both when output is easily measuredEdward Lazear, 1986. "Salaries and Piece Rates," Journal of Business, 59(3), pp. 405-431. or when only the worker knows the difficulty of the job and his own contribution,Robert Gibbons, 1987. "Piece-Rate Incentive Schemes," Journal of Labor Economics, 5(4, Part 1), pp. 413–429. efficiency-improving contracts as constrained by noise in production contributions, moral hazard, and distribution of risk aversion, compensation based on principles of tournament theory as a possibly more efficient substitute for piece-rate compensation.• Edward P. Lazear and Sherwin Rosen, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, 89(5), pp. 841–864. • Sherwin Rosen, 1986b. "Prizes and Incentives in Elimination Tournaments," American Economic Review, 76(4), pp. 701-715.