Personnel economics

labor contracting devices, including outsourcing,

franchising, and other options.[12][13]

Personnel economics has been dened 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 rms, 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]

1 Theory, testing, and possible uses

Personnel economics began to emerge as a distinct eld
from a urry of research in the 1970s that sought to answer the questions of how prices of goods and services
traded within a rm are determined. An early diculty that the subject addressed is possible dierences
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
rm modeled as a set of contracts for eciently 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 rm 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]

The subject has been described as signicant 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
rms, 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 eciency, which may
be used for prescriptive purposes as to improving performance of the rm.[4] For example, an alternate compensation package that provided a risk-free benet might
elicit more work eort, consistent with psychologicallyoriented prospect theory.[5] But a personnel-economics
analysis in its eciency aspect would evaluate the package as to costbenet analysis, rather than work-eort
benets alone.[6]

Major theories of the subject developed in the late 1970s

and 1980s from the research of Bengt Holmstrm,[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 difculty of the job and his own contribution,[21]

Personnel economics has its own Journal of Economic

Literature classication 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:

eciency-improving contracts as constrained by

noise in production contributions, moral hazard, and
distribution of risk aversion,[17]

rm employment decisions and promotions, including hiring, ring, turnover, part-time and temporary workers, and seniority issues related to
promotions[8]

compensation based on principles of tournament

theory as a possibly more ecient substitute for
piece-rate compensation.[22]

compensation and compensation methods and their

eects, including stock options, fringe benets, incentives, family support programs, and seniority issues related to compensation[9]

From the later 1980s, researchers began to forge closer

links with experimental economics, including generation
of data to test the theories in the eld.[23] Other empirical studies conducted then utilized data from sports
(e.g. golf tournaments and horse racing).[24] and com training, especially within the rm[10]
pany records on their suppliers performances (e.g. rais[25]
labor management, including team formation, ing broiler chickens).
worker empowerment, job design, tasks and author- From the 1990s, there was a further surge of empirical
tests of the theory from wider availability of personnel
ity, work arrangements, and job satisfaction[11]
1

3 NOTES

records of large companies to researchers and interest in [9]

the relation between compensation and productivity[26]
and the implications of imperfect labor markets and rentseeking behavior for the subject.[27]
[10]
A retrospective collection of the personnel economicsliterature is in Lazear et al., ed. (2004), Personnel Economics, Elgar, with 43 articles dating from 1962 to 2000 [11]
(link to contents link here).

Harald Dale-Olsen, 2006. Wages, Fringe Benets and

Worker Turnover, Labour Economics, 13(1), pp. 87
105. Abstract.
Filipe Almeida-Santos and Karen Mumford, 2005. Employee Training and Wage Compression in Britain,
Manchester School, 3(3), pp. 321-42.
Stephen J. Deery and Roderick D. Iverson, 2005. LaborManagement Cooperation: Antecedents and Impact on
Organizational Performance, Industrial and Labor Relations Review, 58(4), pp. 588609.

Two millennial articles by a contributor to the subject argued in the course of review and assessment to the conclusions that:
[12] Axel Engellandt and Regina T. Riphahn, 2005. Tempo[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
eld is growing and has a large potential audience, of both students and practitioners.[28]

See also
Eciency wage

Notes

[1] Edward Lazear, 2008. personnel economics, The New

Palgrave Dictionary of Economics, 2nd Edition, v. 6, p.
380 [pp. 38084]. Abstract.
_____ and Kathryn L. Shaw, 2007. Personnel Economics: The Economists View of Human Resources,
Journal of Economic Perspectives, 21(4), pp. 91114.
[2] Edward P. Lazear and Paul Oyer, 2004. Internal and
External Labor Markets: A Personnel Economics Approach, Labour Economics, 11(5), pp. 527554.
[3] Above text adapted from JEL Classication 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. 99100 & 11922 pp.
99146.
[5] Daniel Kahneman and Amos Tversky, 1979. Prospect
Theory: An Analysis of Decision under Risk, Econometrica, 47(2), pp. 263292.
[6] Edward Lazear, 2008. personnel economics, The New
Palgrave Dictionary of Economics, 2nd Edition, v. 6, p.
381. Abstract.
[7] JEL Classication 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. 26382. Abstract.

rary Contracts and Employee Eort, Labour Economics,

12(3), pp. 28199. Abstract.
[13] Above text and footnoted examples are from JEL Classication Codes Guide M5.
[14] Edward Lazear, 2008. personnel economics, The New
Palgrave Dictionary of Economics, 2nd Edition, v. 6, p.
381 [pp. 38084]. Abstract.
[15] Stephen A. Ross 1973. The Economic Theory of
Agency: The Principals Problem, American Economic
Review, 63(2), pp. 134139.
Eugene F. Fama, 1980. Agency Problems and the Theory of the Firm, Journal of Political Economy, 88(2), pp.
288307.
[16] Joseph E. Stiglitz, 1975. Incentives, Risk, and Information: Notes Towards a Theory of Hierarchy, Bell Journal
of Economics, 6(2), pp. 552579.
James A. Mirrlees, 1976.The Optimal Structure of Incentives and Authority within an Organization,Bell Journal of Economics, 7(1) pp. 105131.
Abram Bergson, 1978. Managerial Risks and Rewards in Public Enterprises, Journal of Comparative Economics, 2(3), pp. 211225. Abstract.
Morley Gunderson, 2001. Economics of Personnel and
Human Resource Management, Human Resource Management Review, 11(4), pp. 431452.
Debra J. Aron, 1990. Firm Organization and the Economic Approach to Personnel Management, American
Economic Review, 80(2), pp. 2327.
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] Bengt Holmstrm , 1979. Moral Hazard and Observability, Bell Journal of Economics, 10(1), pp. 7491.
_____, 1982. Moral Hazard in Teams, Bell Journal of
Economics, 13(2), 324340.
_____, 1983. Equilibrium Long-Term Labor Contracts, Quarterly Journal of Economics, 98(Supplement),
pp. 2354.
_____, 1999. Managerial Incentive Problems: A Dynamic Perspective, Review of Economic Studies, 66(1),
169182.
_____, 1994. The Firm as an Incentive System, American Economic Review, 84(4), pp. 972991.
_____ and Paul Milgrom, 1991. Multitask PrincipalAgent Analyses: Incentive Contracts, Asset Ownership,

and Job Design, Journal of Law, Economics, and Organization, 7(special issue), 2452.
[18] Edward Lazear, 1979. Why Is There Mandatory
Retirement?" Journal of Political Economy, 87(6), pp.
12611284.
_____, 1981. Agency, Earnings Proles, Productivity, and Hours Restrictions, American Economic Review,
71(4), pp. 606620.
_____, 1986. Salaries and Piece Rates, Journal of
Business, 59(3), pp. 405431.
_____, 1987. incentive contracts, The New Palgrave:
A Dictionary of Economics, v. 2, pp. 74448. 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. 199236. (Presidential address to the Society of Labor Economists.)
_____, 2000a. Economic Imperialism, Quarterly
Journal of Economics, 115(1), pp. 11922 [pp. 99146.
_____, 2000b. The Future of Personnel Economics,
Economic Journal, 110(467), pp. F611-F639.
_____, 2000c. Performance Pay and Productivity,
American Economic Review, 90(5), pp. 13461361.
_____, 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 Economists View of Human Resources, Journal of Economic Perspectives, 21(4), pp.
91114.
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. 235250.
_____, 1982. Authority, Control, and the Distribution of Earnings, Bell Journal of Economics, 13(2), pp.
311323.
_____, 1986a. The Theory of Equalizing Dierences,
ch. 12, O. C. Ashenfelter and R. Layard, ed. Handbook
of Labor Economics, v. 1 , Elsevier, pp. 641692.
_____, 1986b. Prizes and Incentives in Elimination
Tournaments, American Economic Review, 76(4), pp.
701715.
[20] Edward Lazear, 1986. Salaries and Piece Rates, Journal
of Business, 59(3), pp. 405431.
[21] Robert Gibbons, 1987. Piece-Rate Incentive Schemes,
Journal of Labor Economics, 5(4, Part 1), pp. 413429.
[22] Edward P. Lazear and Sherwin Rosen, 1981. RankOrder Tournaments as Optimum Labor Contracts, Journal of Political Economy, 89(5), pp. 841864.
Sherwin Rosen, 1986b. Prizes and Incentives in Elimination Tournaments, American Economic Review, 76(4),
pp. 701715.
[23] Clive Bull, Andrew Schotter, and Keith Weigelt, 1987.
Tournaments and Piece Rates: An Experimental Study,

Journal of Political Economy, 95(1), pp. Tournamentsand-Piece-Rates-An-Experimental-Study.pdf 133.

Edward L. Deci, Richard Koestner, and Richard M.
Ryan, 1999. A Meta-Analytic Review of Experiments
Examining the Eects of Extrinsic Rewards on Intrinsic
Motivation, Psychological Bulletin, 125(6), pp. 627668.
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. 850873.
Bruce Sheare, 2004. Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment, Review of
Economic Studies,71(2), pp. 513534.
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. 729773.
[24] Ronald G. Ehrenberg and Michael L. Bognanno, 1990.
Do Tournaments Have Incentive Eects?" Journal of Political Economy, 98(6), pp. 13071324.
Sue Fernie and David Metcalf, 1999. Its Not What
You Pay Its the Way that You Pay it and Thats What
Gets Results: Jockeys Pay and Performance, LABOUR,
13(2), pp. 385411.
[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. 155179.
[26] Edward Lazear, 2008. personnel economics, The New
Palgrave Dictionary of Economics, 2nd Edition, v. 6, pp.
38084. Abstract.
Paul Oyer and Scott Schaefer, 2011. Personnel Economics: Hiring and Incentives, ch. 20, Handbook of Labor Economics, v. 4B, pp. 17691823. Abstract and prepub PDF.
Canice Prendergast, 1999. The Provision of Incentives
in Firms, Journal of Economic Literature, 37(1), pp. 7
63.
_____, 2008. contracting in rms, 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. 225264.
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. 881919.
_____, 1994b. The Wage Policy of a Firm, Quarterly
Journal of Economics, 109(4), pp. 921955.
Andrew D. Foster and Mark R. Rosenzweig, 1994. A
Test for Moral Hazard in the Labor Market: Contractual
Arrangements, Eort, and Health, Review of Economics
and Statistics, 76(2), pp. 213227.
Robert Drago and Gerald T. Garvey, 1998. Incentives
for Helping on the Job: Theory and Evidence, Journal of
Labor Economics, 16(1), pp. 125.
Casey Ichniowski, Kathryn Shaw, and Giovanna Prennushi, 1997. The Eects of Human Resource Management Practices on Productivity: A Study of Steel Finish-

ing Lines, American Economic Review, 87(3), pp. 291

313.
Brent Boning, Casey Ichniowski, and Kathryn Shaw,
2007. Opportunity Counts: Teams and the Eectiveness
of Production Incentives, Journal of Labor Economics,
25(4), pp. 613650. Abstract.
Ann Bartel, Casey Ichniowski, and Kathryn Shaw, 2007.
How Does Information Technology Aect Productivity?
Plant-Level Comparisons of Product Innovation, Process
Improvement, and Worker Skills, Quarterly Journal of
Economics, 122(4), pp. 17211758.
Tor Eriksson and Mette Lauste, 2000. Managerial Pay
and Firm Performance: Danish Evidence, Scandinavian
Journal of Management, 16(3), pp. 269286.
Paul Oyer, 2004. Why Do Firms Use Incentives That
Have No Incentive Eects?" Journal of Finance, 59(4),
pp. 16191650.
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. 99133.
[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. 763.
Canice Prendergast and Robert H. Topel, 1993. Discretion and Bias in Performance Evaluation, European
Economic Review, , vol. 37, issue 23, pages 355365.
[28] Edward P. Lazear, 1999. Personnel Economics: Past
Lessons and Future

References
Blank, David M., and George J. Stigler, 1957. The
Demand and Supply of Scientic Personnel, NBER
& UMI. Chapter-preview links.
Hutchens, Robert M., 1989. Seniority, Wages and
Productivity: A Turbulent Decade, Journal of Economic Perspectives, 3(4), pp. 4964.
Montgomery, James D., 1991. Social Networks
and Labor-Market Outcomes: Toward an Economic
Analysis, American Economic Review 81(5), pp.
14081418.
Shapiro, Carl, and Joseph E. Stiglitz, 1984. Equilibrium Unemployment as a Worker Discipline Device, American Economic Review, 74(3), pp. 433
444.

REFERENCES

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