Personnel Economics - Theory, Testing, and Possible Uses

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. 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. Many questions about wage determination and the relationship 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.

Major theories of the subject developed in the late 1970s and 1980s from the research of Bengt Holmström, Edward Lazear, and Sherwin Rosen 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 or when only the worker knows the difficulty of the job and his own contribution,
• 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.

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

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 and the implications of imperfect labor markets and rent-seeking behavior for the subject.

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:

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.

ersonnel economics induces researchers to ask new questions... Although much has already been done and the foundations have been laid, many more questions remain unanswered.

Recent research directions are reflected in the National Bureau of Economic Research series on Personnel Economics (1-page overview) and Working-Paper abstract links, 2003-2010 & 2011-.

A forthcoming review of the subject is organized around five aspects of the employment relationship: incentives, matching firms with workers, compensation, skill development, and the organization of work.