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". It is an area of applied microlabor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel managementwithin firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal. In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers. 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. For example, an alternate compensation package that provided a risk-free benefit might elicit more work effort, consistent with psychologically-oriented prospect theory. But a personnel-economics analysis in its efficiency aspect would evaluate the package as to cost–benefit analysis, rather than work-effort benefits alone. Personnel economics has its own Journal of Economic Literatureclassification code, but overlaps with such labor economics subcategories as. Subjects treated include:
firm employment decisions and promotions, including hiring, firing, turnover, part-time and temporary workers, and seniority issues related to promotions
compensation and compensation methods and their effects, including stock options, fringe benefits, incentives, family support programs, and seniority issues related to compensation
training, especially within the firm
labor management, including team formation, worker empowerment, job design, tasks and authority, work arrangements, and job satisfaction
labor contracting devices, including outsourcing, franchising, and other options.
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 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.
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. and company records on their suppliers' performances. 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., Personnel Economics, Elgar, with 43 articles dating from 1962 to 2000. Two millennial articles by a contributor to the subject argued in the course of review and assessment to the conclusions that:
