The Future of Personnel Economics
for
IZA European Summer Symposium in Labour Economics
Ammersee, Germany
September, 1999
Edward P. Lazear
Hoover Institution
and
Graduate School of Business
Stanford University
October, 1999
This research was supported in part by the National Science Foundation.
Abstract
Personnel economics has grown over the past twenty years to become a major branch of labor
economics. Beginning primarily as a theoretical field, recent empirical analyses have provided
support for earlier theories. Personnel economics is distinguished from traditional personnel analysis
in that it is economics. As such, personnel economists assume maximizing agents, invoke the concept
of equilibrium, and focus on economic efficiency.
Although much has been learned, many important questions remain. For example, are worker
wage profiles dependent on individual attributes or is the firm more important in determining wage
growth? Why are executives so highly paid and why does the pay take the form that it does? Why has
the use of stock and stock options grown and why is stock sometimes given even to lower level
employees? How can cross-country differences in pay patterns be explained? Does variable pay
provide better incentives than do fixed hourly wages? Under which circumstances is one form of
compensation used over another? These questions and others are investigated and some conjectures
are offered.
Edward P. Lazear
The Future of Personnel Economics
September, 1999
1Early papers in the agency literature include Johnson (1950), Cheung (1969), and Ross
(1973). Contract theory grew out of macroeconomic inquiries, reflected in papers by Baily
(1977), Azariadis (1983) and Gordon (1990). Finally, Alchian and Demsetz's (1972 ) important
work on monitoring helped frame the discussion.
1
Personnel economics is defined as the application of microeconomic principles to human
resources issues that are of concern to most businesses. The field, now about twenty years old, arose
for three reasons. First, thos