Personnel economics

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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."[1] 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.[2] In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers.[3]

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.[4] For example, an alternate compensation package that provided a risk-free benefit might elicit more work effort, consistent with psychologically-oriented prospect theory.[5] But a personnel-economics analysis in its efficiency aspect would evaluate the package as to cost–benefit analysis, rather than work-effort benefits alone.[6]

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.[7] 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 promotions[8]
  • compensation and compensation methods and their effects, including stock options, fringe benefits, incentives, family support programs, and seniority issues related to compensation[9]
  • training, especially within the firm[10]
  • labor management, including team formation, worker empowerment, job design, tasks and authority, work arrangements, and job satisfaction[11]
  • labor contracting devices, including outsourcing, franchising, and other options.[12][13]

Theory, testing, and possible uses[edit]

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.[14] 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.[15] 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.[16][17]

Major theories of the subject developed in the late 1970s and 1980s from the research of Bengt Holmström,[17] Edward Lazear,[18] and Sherwin Rosen[19] 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 measured[20] or when only the worker knows the difficulty of the job and his own contribution,[21]
  • efficiency-improving contracts as constrained by noise in production contributions, moral hazard, and distribution of risk aversion,[17]
  • compensation based on principles of tournament theory as a possibly more efficient substitute for piece-rate compensation.[22]

From the later 1980s, researchers began to forge closer links with experimental economics, including generation of data to test the theories in the field.[23] Other empirical studies conducted then utilized data from sports (e.g. golf tournaments and horse racing).[24] and company records on their suppliers' performances (e.g. raising broiler chickens).[25]

From the 1990s, there was a further surge of empirical tests of the theory from wider availability of personnel records of large companies to researchers and interest in the relation between compensation and productivity[26] and the implications of imperfect labor markets and rent-seeking behavior for the subject.[27]

A retrospective collection of the personnel economics-literature is in Lazear et al., ed. (2004), Personnel Economics, Elgar, with 43 articles dating from 1962 to 2000 (link to contents link here).

Two millennial articles by a contributor to the subject argued in the course of review and assessment to the conclusions that:

[B]ecause of the relevance and newly found rigor of personnel analysis, personnel economics should and will become a more important part of the educational curriculum. The field is growing and has a large potential audience, of both students and practitioners.[28]

See also[edit]


  1. ^ • 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.
  2. ^ Edward P. Lazear and Paul Oyer, 2004. "Internal and External Labor Markets: A Personnel Economics Approach," Labour Economics, 11(5), pp. 527–554.
  3. ^ Above text adapted from JEL Classification Codes Guide: M per JEL:M5.
  4. ^ • 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.
  5. ^ Daniel Kahneman and Amos Tversky, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, 47(2), pp. 263–292.
  6. ^ Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, p. 381. Abstract.
  7. ^ JEL Classification Codes Guide: M per JEL:M5.
  8. ^ Jed DeVaro, 2005. "Employer Recruitment Strategies and the Labor Market Outcomes of New Hires," Economic Inquiry, 43(2), pp. 263–82. Abstract.
  9. ^ Harald Dale-Olsen, 2006. "Wages, Fringe Benefits and Worker Turnover," Labour Economics, 13(1), pp. 87–105. Abstract.
  10. ^ Filipe Almeida-Santos and Karen Mumford, 2005. "Employee Training and Wage Compression in Britain," Manchester School, 3(3), pp. 321-42.
  11. ^ Stephen 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.
  12. ^ Axel Engellandt and Regina T. Riphahn, 2005. "Temporary Contracts and Employee Effort," Labour Economics, 12(3), pp. 281–99. Abstract.
  13. ^ Above text and footnoted examples are from JEL Classification Codes Guide M5.
  14. ^ Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, p. 381 [pp. 380–84]. Abstract.
  15. ^ 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.
  16. ^ 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.
  17. ^ a b c • 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.
  18. ^ • 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.
  19. ^ • 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.
  20. ^ Edward Lazear, 1986. "Salaries and Piece Rates," Journal of Business, 59(3), pp. 405-431.
  21. ^ Robert Gibbons, 1987. "Piece-Rate Incentive Schemes," Journal of Labor Economics, 5(4, Part 1), pp. 413–429.
  22. ^ • 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.
  23. ^ • Clive Bull, Andrew Schotter, and Keith Weigelt, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, 95(1), pp. "Tournaments-and-Piece-Rates-An-Experimental-Study".pdf 1–33.
       • Edward L. Deci, Richard Koestner, and Richard M. Ryan, 1999. "A Meta-Analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation," Psychological Bulletin, 125(6), pp. 627–668.
       • Daniel S. Nagin, James B. Rebitzer, Seth Sanders, and Lowell J. Taylor, 2002. "Monitoring, Motivation, and Management: The Determinants of Opportunistic Behavior in a Field Experiment," American Economic Review, 92(4), pp. 850–873.
       • Bruce Sheare, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," Review of Economic Studies,71(2), pp. 513–534.
       • Oriana Bandiera, Iwan Barankay, and Imran Rasul, 2007. "Incentives for Managers and Inequality Among Workers: Evidence from a Firm Level Experiment," Quarterly Journal of Economics, 122(2), pp. 729–773.
  24. ^ Ronald G. Ehrenberg and Michael L. Bognanno, 1990. "Do Tournaments Have Incentive Effects?" Journal of Political Economy, 98(6), pp. 1307–1324.
       • Sue Fernie and David Metcalf, 1999. "It's Not What You Pay It's the Way that You Pay it and That's What Gets Results: Jockeys’ Pay and Performance," LABOUR, 13(2), pp. 385–411.
  25. ^ Charles R. Knoeber and Walter N. Thurman, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, 12(2), pp. 155-179.
  26. ^ • Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, pp. 380–84. Abstract.
       • Paul Oyer and Scott Schaefer, 2011. "Personnel Economics: Hiring and Incentives," ch. 20, Handbook of Labor Economics, v. 4B, pp. 1769–1823. Abstract and pre-pub PDF.
       • Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, 37(1), pp. 7–63.
       • _____, 2008. "contracting in firms," The New Palgrave Dictionary of Economics, Second Edition, Abstract and pre-pub PDF.
       • Michael C. Jensen, and Kevin J. Murphy, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, 98(2), pp. 225–264.
       • George Baker, Michael Gibbs, and Bengt Holmstrom, 1994a. "The Internal Economics of the Firm: Evidence from Personnel Data," Quarterly Journal of Economics, 109(4), pp. 881-919.
       • _____, 1994b. "The Wage Policy of a Firm," Quarterly Journal of Economics, 109(4), pp. 921-955.
       • Andrew D. Foster and Mark R. Rosenzweig, 1994. "A Test for Moral Hazard in the Labor Market: Contractual Arrangements, Effort, and Health," Review of Economics and Statistics, 76(2), pp. 213-227.
       • Robert Drago and Gerald T. Garvey, 1998. "Incentives for Helping on the Job: Theory and Evidence," Journal of Labor Economics, 16(1), pp. 1–25.
       • Casey Ichniowski, Kathryn Shaw, and Giovanna Prennushi, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, 87(3), pp. 291–313.
       • Brent Boning, Casey Ichniowski, and Kathryn Shaw, 2007. "Opportunity Counts: Teams and the Effectiveness of Production Incentives," Journal of Labor Economics, 25(4), pp. 613-650. Abstract.
       • Ann Bartel, Casey Ichniowski, and Kathryn Shaw, 2007. "How Does Information Technology Affect Productivity? Plant-Level Comparisons of Product Innovation, Process Improvement, and Worker Skills," Quarterly Journal of Economics, 122(4), pp. 1721–1758.
       • Tor Eriksson and Mette Lauste, 2000. "Managerial Pay and Firm Performance: Danish Evidence," Scandinavian Journal of Management, 16(3), pp. 269–286.
       • Paul Oyer, 2004. "Why Do Firms Use Incentives That Have No Incentive Effects?" Journal of Finance, 59(4), pp. 1619–1650.
       • Paul Oyer and Scott Schaefer, 2005. "Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories," Journal of Financial Economics, 76(1), pp. 99–133.
  27. ^ • Pietro Garibaldi, 2006. Personnel Economics in Imperfect Labour Markets, Oxford. Description and preview.
       • Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, 37(1), pp. 31–32, 39. [pp. 7–63.
       • Canice Prendergast and Robert H. Topel, 1993. "Discretion and Bias in Performance Evaluation," European Economic Review, , vol. 37, issue 2–3, pages 355–365.
  28. ^ Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future


  • Blank, David M., and George J. Stigler, 1957. The Demand and Supply of Scientific Personnel, NBER & UMI. Chapter-preview links.
  • Hutchens, Robert M., 1989. "Seniority, Wages and Productivity: A Turbulent Decade," Journal of Economic Perspectives, 3(4), pp. 49–64.
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  • Shapiro, Carl, and Joseph E. Stiglitz, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, 74(3), pp. 433–444.