Personnel Economics Research Articles

Personnel Economics: Strengths, Weaknesses and Its Place in Human Resource Management

The management revue is a peer-reviewed interdisciplinary European journal publishing both qualitative and quantitative work as well as purely theoretical papers that advance the study of management, organisation and industrial relations.

Investment in General Human Capital and Turnover Intention

A key area of personnel economics focuses on the provision of human resource practices by firms, such as why one type of compensation is offered over another (Edward P. Lazear and Paul Oyer 2007). While this area of research includes various types of wage compensation, it also includes types of nonwage compensation, which have been shown to have sizable effects on worker behavior, such as mobility in the case of health insurance and traditional pension plans. The present analysis examines the effect of employer sponsored investment in general human capital, administered through tuition reimbursement programs, on employee turnover. Employer provided tuition reimbursement is a widespread program in which firms provide financial assistance for the direct cost of coursework taken by employees. Estimates of the percentage of firms that offer this program are as high as 85 percent (Peter Cappelli 2004). These programs support investment in an employee’s general human capital—skills that are transferable across employers—because accredited academic institutions are responsible for curriculum development, instruction, and certification and serve students employed at a wide variety of establishments. These programs represent a puzzle because firms are unlikely to make general human capital investments without some expectation of receiving an ex post return, but standard human capital theory Human Capital, Work, and outComes

Economics, Public Service Motivation, and Pay for Performance: Complements or Substitutes?

ABSTRACT This article summarizes what we can learn from personnel economics about the likely empirical veracity of the statements regarding the efficacy of pay for performance in the public sector: If pay is based on public service performance, and if people work for pay, then pay for performance will align motivation and performance. I argue instead that the predominant conclusion from the economics literature, which focuses on the private sector, is that in many contexts usually thought to characterize public as well as private sector employment, motivation, pay, and performance are more likely to be substitutes at critical margins. The consequence is that performance pay may have unintended adverse consequences. It is not widely used in many complex private sector organizations and probably should not be widely used in similar public sector operations.

The Personnel Economics Approach to Public Workforce Research

This article argues that the relatively new field of personnel economics (PE) holds strong potential as a tool for studying public sector workforces. This subfield of labor economics is based on a strong foundation of microeconomics, which provides a robust theoretical foundation for studying workforce and organizational design issues. PE has evolved on this foundation to a strong practical emphasis, with theoretical insights designed for practical use and with strong focus on empirical research. The field is also characterized by creative data entrepreneurship. The types of datasets that personnel economists use are described. If similar datasets can be obtained for public sector workforces, PE should be a very useful approach for studying them.

Gains from Specialization and Free Agency: The Story from the Gridiron

In the field of personnel economics, there are few opportunities to convincingly test for salary returns to specialization as against versatility. This paper performs such a test by modeling returns to performance measures associated with two different skills practiced by running backs in the National Football League. We find gains to both specialization and free agency with substantial predicted differences in returns for alternative skills. These differences vary across the salary distribution. In the top half of the salary distribution, model simulations show that specialists in either particular skill generate higher marginal returns than do versatile players.

Economic Perspective on Strategic Human Capital Management and Planning for the Centers for Disease Control and Prevention

An organization's workforce--or human capital--is its most valuable asset. The 2002 President's Management Agenda emphasizes the importance of strategic human capital management by requiring all federal agencies to improve performance by enhancing personnel and compensation systems. In response to these directives, the Centers for Disease Control and Prevention (CDC) drafted its strategic human capital management plan to ensure that it is aligned strategically to support the agency's mission and its health protection goals. In this article, we explore the personnel economics literature to draw lessons from research studies that can help CDC enhance its human capital management and planning. To do so, we focus on topics that are of practical importance and empirical relevance to CDC's internal workforce and personnel needs with an emphasis on identifying promising research issues or methodological approaches. The personnel economics literature is rich with theoretically sound and empirically rigorous approaches for shaping an evidence-based approach to human capital management that can enhance incentives to attract, retain, and motivate a talented federal public health workforce, thereby promoting the culture of high-performance government.

What Behavioural Economics Teaches Personnel Economics

In this survey article, we review results from behavioural and experimental economics that have a potential application in the field of personnel economics. While personnel economics started out with a clean economic perspective on human resource management (HRM), recently it has broadened its perspective by increasingly taking into account the results from laboratory experiments. Besides having inspired theory-building, the integration of behavioural economics into personnel economics has gone hand in hand with a strengthening of empirical analyses (field experiments and survey data) complementing the findings from the laboratory. Concentrating on employee compensation as one particular field of application, we show that for personnel economics there is indeed much to be learnt from the recent developments in behavioural economics. Moreover, integrating behavioural economics into personnel economics bears the chance of eventually reconciling personnel economics and classic HRM analysis that has a long tradition of relying on social psychology as a classical point of reference.

Personnel Economics: The Economist's View of Human Resources

Personnel economics drills deeply into the firm to study human resource management practices like compensation, hiring practices, training, and teamwork. Why should pay vary across workers within firms—and how “compressed” should pay be within firms? Should firms pay workers for their performance on the job or for their skills or hours of work? How are pay and promotions structured across jobs to induce optimal effort from employees? Why do firms use teams and how are teams used most effectively? How should all these human resource management practices, from incentive pay to teamwork, be combined within firms? Personnel economists offer new tools to analyze these questions—and new answers as well.

Wage Structure and Labor Mobility in Norway 1980-1997

To what extent do different firms follow different wage policies? How do such policies affect worker mobility between firms, and what are the effects of different wage bargaining regimes? The empirical branch of personnel economics has long been hampered by a lack of representative data sets. Norway is one of a handful of countries that has produced rich linked employer–employee data suitable for such analysis. This paper has three parts. First, we describe the wage setting and employment protection institutions in Norway. Next, we describe the Norwegian data sets. Finally, we document a large number of stylized facts regarding wage structure and labor mobility within and between Norwegian firms. Our main data set covers white-collar workers in the manufacturing and private sectors for the period 1980–1997. We also have blue-collar data for the 1986–1997 period covering the core of the manufacturing sector. Information about occupations, monthly wages, hours worked and bonuses is available, as well as various worker and firm characteristics.

Personnel Economics in Imperfect Labour Markets ‐ Pietro Garibaldi

Personnel economics is the application of economic analysis to the study of human resources within the organisation. This relatively new subdiscipline, based mostly on the work of Edward P. Lazear, was introduced in business schools in the USA only about a decade ago. The earliest textbooks were also written by Lazear (1995, 1998). Garibaldi informs us that personnel economics 'is becoming a standard course in business and economics departments around the world' (p. vii). Yet, there is very little choice in textbooks. Lazear's are the popular texts with minimal competition until the appearance of another American textbook (Neilson, 2007). This book is perhaps the first written outside the USA.

Book Review: Labor Economics: Personnel Economics in Imperfect Labour Markets

Book Review: Labor Economics: Personnel Economics in Imperfect Labour Markets

Internal Labor Markets: A Case Study

We select one firm from a large data set of firms and study its internal economics. First we prove that the information available allows us to inspect the personnel policies of the firm. Furthermore, this fact allows moving from the case study to more comprehensive studies in personnel economics using institutional surveys. The analysis also shows the patterns of workers' promotions and the differences in the characteristics of insider versus outsider workers. The decision to promote is analyzed. The hierarchic design directly influences the wage policy. Wages are determined to a great extent by the layers of the hierarchy. There are wage premiums upon promotion, even if the worker does not change his place in the organization. When the promoted worker moves up in the hierarchy he comes from the top of the wage distribution at the old job and goes to the bottom of it in the new job. We present evidence on workers' exit and entry to the bottom of the wage distribution, especially in the lower part of the hierarchy.

Introduction: HRM and job performance incentives

PurposeThe paper aims to introduce the special issue of IJM, a collection of papers that were originally presented at the 88th Applied Econometrics Association Conference.Design/methodology/approachProvides a general outline of the focus of the issue.FindingsThe conference papers aimed to stimulate discussion on the “Econometrics of labour demand”. They focus on aspects of HRM, including incentive pay schemes, job satisfaction, promotion and social concerns.Originality/valueThe paper outlines the development of personnel economics over the past 25 years and introduces the papers in the special issue of IJM.

Performance Pay and Adverse Selection*

AbstractIt is well known in personnel economics that firms may improve the quality of their workforce by offering performance pay. We analyze an equilibrium model where worker productivity is private information and show that the firms’ gain from worker self‐selection may not be matched by a corresponding social gain. In particular, the equilibrium incentive contracts are excessively high‐powered, thereby inducing the more productive workers to exert too much effort and increasing agency costs stemming from the misallocation of effort.

The Structure of Wages and Internal Mobility

As the fields of personnel economics and organizational economics have become more visible in recent years, more economists, practitioners, and policymakers have become interested in the internal workings of firms. Fortunately, at the same time as interest in these areas has grown, new data sets have emerged that provide consistent personnel data from a wide variety of firms. This paper provides an example of how newly available data can be used to analyze internal labor markets and suggests how such data can be used to address other issues. Basic questions in personnel economics include how firms set wages and how people move between jobs (within and across firms). Answering these questions is essential to assessing the relative importance of theoretical models as explanations of the nature of employment relationships. These models include agency theory, matching, and search theory, among others. Historically, most attempts to study these models were limited to data sets that are drawn from a random sample of individuals with no identification of firms, such as the Current Population Survey (CPS). While much can be learned from such studies, much of the inference is indirect and the data may suffer from inconsistent or inaccurate self-reported data. An alternative strategy, used by, for example, Lazear (1992), George Baker et al. (1994), and Kenn Ariga et al. (1999), is to procure detailed personnel information from a single firm and use it to study the policies at that firm. While these papers were successful at providing details of the individual firms, they leave open the question of how widely the results generalize, especially given that the results are not consistent even across these three papers, which are based on different firms. An important step in getting past the limits of CPS-style and individual-firm data is to find data sets that provide employee details for numerous firms. Such data sets have been created in the United States, France, Sweden, and other countries. As John M. Abowd and Francis Kramarz (1999) show, these data sets take many forms and, like the data that preceded them, have varying strengths and weaknesses. They have already been used, according to Abowd and Kramarz (1999), in over 100 studies of more than 15 countries. That paper provides details on many of these studies, as well as comparing some of the features of the various data sets. Although the U.S. data have many virtues, they lack job information. A key advantage of the Swedish data used here is its detailed and accurate job classifications. This makes it possible to determine whether job openings are filled internally or externally and to follow employees as they change jobs. The data include many firms, a long panel of years, and accurate wage data, allowing the study of the relative importance of firms and jobs on wage changes and levels. The main results of this paper are as follows. First, the Swedish firms studied fill a significant † Discussants: Henry Farber, Princeton University; Lawrence Katz, Harvard University; Derek Neal, University of Chicago.

Internal and external labor markets: a personnel economics approach

Internal labor markets are those where workers are hired into entry level jobs and higher levels are filled from within. Wages are determined internally and may be quite free of market pressure. External labor markets imply that workers move somewhat fluidly between firms and wages are determined by some aggregate process where firms do not have significant discretion over wage setting. There are a number of theories that lead to internal labor markets. Using data from Sweden from the late 1980s, it is found that although there is significant evidence of internal promotion being important, a significant external market exists that affects both wage setting and hiring patterns. Positions are filled by hiring outsiders at all levels of the typical firm. Even in Sweden, where many believe that job mobility is limited by institutional factors, external forces limit firms' ability to set wages. The external forces are likely to reflect both centralized wage bargaining and market factors that take the form of substitute workers available outside the firm.

Personnel Economics: An Economic Approach to Human Resource Management

The theoretical idea of personnel economics is to apply simple economic principles to the field of human resources management. Personnel economics as a research field has grown rapidly since the first text book on “Personnel Economics” was published in 1998. The development is driven by new theoretical insights based on institutional and behavioural economics and new empirical methods and data sets. Those new theoretical insights are very fruitful to analyze reasons and consequences of various human resource management practices, to understand what actually drives and motivates employees, and what causes organisations to be successful or to fail. With the new data sets and econometric methods the theories that have been laid out in personnel economics either many years ago or very recently can now be tested thoroughly. And the evidence produced by the new data and methods is strongly supportive, which is not only reassuring for researchers, but it also suggests that practitioners can actually rely on the ideas because they are born out in the data. So, personnel economics is not only a vivid research field, but also of great value for human resource managers, particularly for those taking strategic HR decisions. The fruitfulness of personnel economics is demonstrated with four examples: training strategies of companies, recruiting in tight labour markets, career incentives, team size and effort, and entrepreneurial signalling towards employees and creditors.

Pourquoi pas? Rational Choice as a Basic Theory of HRM

Pourquoi pas? Rational Choice as a Basic Theory of HRM** broad spectrum of theories from different disciplines is portrayed in contemporary HRM (as a discipline of business administration). Theories from psychology, sociology and economics correspond to the variety of problems addressed in HRM which are again situated at different levels of analysis, namely on the individual, group and organizational level. narrow focus solely on economic approaches, as sometimes suggested in personnel economics, is therefore not sufficient. Instead, the contemporary choice approach may serve as a new basis for the discipline. The approach stems from economics and sociology and, as an offspring of these, combines elements of action and structure in its basic explanatory models. Also it is able to explain effects that emerge on the system or macro level. Indepth explanations allow model building at different levels of analysis, namely on an environmental, organizational and individual level, which can be seen as a major prerequisite of explanations in HRM. In addition choice is conscious of the ignorance of its underlying action theory and this exposes it to the body of physiological and psychological knowledge. Anomalies of classic economic theory can therefore be restricted, for instance by using the method of decreasing abstraction. The method of decreasing abstraction serves as a basic principle or heuristic device for model building, in order to separate choice from traditional anti-reductionism. This article introduces basic elements of the modern choice approach: the macro-micro-macro model of explanation, homo socio-oeconomicus as a model of man and exchange theory as a baseline model of aggregation. final summary discusses research questions and applications of choice in HRM. Key words: Rational Choice, Economic Sociology, Micro-macro-link, Homo Socio-oeconomicus 1. Approach Ever since Pareto's (1935) distinction, it has generally been agreed, that the field of economics should concentrate on rational action; other areas of social science, i.e. sociology should concentrate on irrational behavior. However, economics is a broad field. Therefore it is hardly surprising that economists who are confronted with irrational human behavior or deviations from the perfect model of purposeful and rational behavior wrangle with Pareto and, in particular, with his line of distinction. Critical calls were confronted with only modest appreciation, if they were heard at all, when they suggested that unrealistic assumptions about behavior were required in order to deliver economic or normatively speaking good explanations (Friedman 1953). Academics in Business Administration, dealing with innovation, marketing, organization or human resources and phenomena like decision behavior, informal organizations or HRM abandoned the economic paradigm and searched for more feasible theories in other disciplines. The historical development of HRM is not the topic of this article. However, we need to stress that we are talking about a process of convergence towards neighboring disciplines, notably (social) psychology and (organizational and industrial) sociology, which represent a long wave of historical ideas: Simon's (1955) revolutionary work A behavioral model of rational choice was published half a century ago. Since then, considerable progress has been made in both theory and empirical knowledge. And this holds true for all levels of HRM research - for the individual, group and organizational level. Worth mentioning amongst others are motivation, learning and stress theories, theories about group dynamics, power and management as well as theories about organizations and their environments. Furthermore, it is worth emphasizing tendencies towards empirical social research which evolved at the same time as behavioral science. Economic theory was exported once again into HRM with the rediscovery of institutions in economic research and the development of appropriate models, such as property rights, transaction costs and information asymmetry, which all facilitated the explanation of the failure of the free market model of traditional economics (Coase 1960, Alchian/Allen 1972). …

Human Resource Management: The Need for Theory and Diversity

Human Resource Management as an academic discipline needs to be theoretically grounded, i.e. it requires support through theories, theory-driven empirical research and critiques. In doing so, different theoretical perspectives are addressed suggesting a problem-orientated theory selection which leads inevitably to theoretical diversity. Key words: Human Resource Management, Systems Theory, Work and Organizational Psychology, Behavioral Approach, Personnel Economics, Political Economy, Rational Choice 1. The need for theory Human Resource Management (FIRM) is concerned with the design of the human resource function in organizations. It has to provide explanations for the mechanisms of human resource practices and for the application of those practices in certain constellations. This means that HRM as an academic discipline needs to be theoretically grounded. Theoretical substantiation contains two dimensions: (1.) theoretical explanation in the narrower sense, i.e., the statements are based on proven and generally applicable theories, (2.) theoretically driven critique, i.e. it is scrutinized if and to what extent the scope of an explanation holds up in the confrontation with general theories. Following Nienhuser (1996), the theoretical strength of a discipline depends on the extent to which statements are based on general and informative theories that have been supported empirically, as well as being corroborated by critical evaluation. Efforts towards developing a theoretical basis of a field like HRM first of all focus on laws and basic theories. Proven empirical effects and their generalizations as well as theoretical approaches, concepts, frameworks and models can be included (Bunge 1998; Martin 2001). The objectives of science are theoretical descriptions and explanations of reality, as well as pragmatic predictions. This requires the creation of mental preconditions for the modification of reality. Accordingly, the functions of science are both Aufklarung (cognitive goal) and Steuerung (pragmatic goal) (Albert 1972; Albert 1985). The practical application of theoretical knowledge starts with prediction. Criticism and control of empirical procedures, as well as the development of technologies are central aspects of the pragmatic goal of science (Popper 1972; Nienhuser 1989). However, making overly high demands is risky: Theories do not necessarily have a direct reference to action. Nevertheless, grounded rules of applied science exist in various forms. Martin (2001) refers to technological rules, theoretically grounded maxims, action outlines, application models, blueprints and the conceptual framework. Technological rules prescribe how to proceed in order to achieve a predetermined goal. The theoretically grounded maxim implies principles which should be considered in actions - leadership principles or guidelines for organizational design fall into this category. Action outlines mirror reality at least in its contours. Application models encompass a few variables considered to be of high relevance. Blueprints are equivalents to construction plans for designing procedures. Conceptual frameworks tend to include all important aspects of a situation relevant to an action so that the theory is basically superposed on detailed categorizations. This position of critical rationalism still characterizes the basic understanding of many HRM researchers, however, it is only one of several epistemological approaches. 2. Subjects of and approaches to explanations Subjects central to the field of HRM are the deployment of employees in line with organizational goals, as well as controlling of employees' behavior, In more detail, HRM includes recruitment and selection, employee development, compensation, structural and personal leadership as well as the management of industrial relations. A theoretical substantiation is supposed to address all these fields of action. …

Introduction Personnel economics: theoretical perspectives and empirical evidence

Introduces the special issue on personnel economics and outlines the themes discussed in the papers contained within.