Personnel Economics Articles

Lazear and Shaw, “Personnel Economics: The Economist’s View of Human resources”

Main issue: Looks at differences between Human resources and Personnel Economics. Including looking into the potential benefits of teamwork and individual incentives. Tournament Theory. Pay for performance. What does personnel economics add to human resource management. 

Methodology: Human resource management practices in Large Firms. Pay out for input vs pay out for output. Percentage of individuals covered by employment-based health insurance. When to use teams.

Lazear and Shaw, “Personnel Economics: The Economist’s View of Human resources”

Findings: Personnel can help guide firms in the choice of their human resource management practices. Most models emphasise the importance of fit. Pay for performance induces higher levels of effort but may also induce workers to select firm which best fits their skills. Human resource practices are complements when one practice such as teamwork is combined with another such as group-based incentives such that they raise output more then they would individually. 

Pay for performance used to mitigate against adverse selection and moral hazard. Attract high ability workers. Pay for performance mitigates against moral hazard because pay is directly tied to output, and hence effort. Low effort reduces the disutility of effort, but it also results in lower pay if there is pay for performance.

George Akerlof and Rachel Kranton, “Identity and the economics of organizations”

Main Issue: Look at West Point army camp - want examine how the military can use non-economic motives to align the goals of the candidates and the army. Goal of the paper is to construct an economic model to identify and work incentives and hence capture these missing motivations. 

Methodology: Present a principal-agent model that incorporates the notion of identity, where employees may have identities that affect their connection with organisation. Incorporate identity by creating insiders and outsiders. 

Findings: Indentities of employees, who may identify with their firm are central to the study of work in sociology and psychology. Using the principal-agent model find interactions between identity and traditional economic variables such as pay and disutility from work effort. Identification with firm can lower average wages, a frim could find it profitable to invest in identity of its workers. 

Brown, Setren, and Topa, “Do informal referrals lead to better matches”

Main Issue: Investigate the hiring process and the relationship among referrals, match quality, wage trajectories and turnover for a single US corporation and test various predictions of theoretical models of labour market referrals. 

Methodology: Use panel data from a single US corporation. Includes information on applicants and on employees. Look at the probability of receiving an interview depending on referral status. 

Findings: Find that referred candidates are more likely to be hired: experience an initial wage advantage, which dissipates over time and have longer tenure in the firm. The variance of the referred and non-referred wage distributions coverage over time. Observed referral effects appear to be stronger at lower skill levels. Referral account for 6.1% of applicants but 21.4% of interviews. Job board applicants 60% applicants but only 40% interviews. 

Andrew Weiss, "Human Capital vs. Signalling Explanations of Wages"

Main Issue: Discusses whether various empirical regularities are better expalined by learning or sorting considerations. 'Sorting Model' - focuses on way in which schooling serves as either a signal or filter for productivity differences that firms cannot reward directly. Labour econimists shoudl take into account the distortions induced by signally or screening when estimating social rates of retun to schooling and job experience. 

Methodology: Firms proxy health, absence rate, propensity to quit, ability to learn with education. 

Findings:

Edward Lazear, “Performance Pay and Productivity”

Main Issue: Looks at the differences in worker's effort between hourly and piece-rate pay. How sensitive is worker behaviour to incentives and what specific changes in behaviour are elicited? 

Methodology: Based on data from Safelite Glass corporation- auto glass company. During 1994-1995 moved from hourly wages to piece-rate pay. Look at workers utility function under each pay scheme. In Table 3 Lazear runs a series of regressions. In regression 1 he regresses output on a dummy variable for PPP and finds that output is 44% higher under the PPP plan. In regression 1 he regresses output on a dummy variable for PPP and finds that output is 44% higher under the PPP plan

Findings: Switch to piece-rate significant effect on levels of output per worker- range of a 44% gain. Gain can be split into two components - about 1/2 increase due to workers incentivised to produce more. 1/2 due to hiring more able workers, reduction in employees quitting. None reflect the 'Hawthorne effect'. Firm shares gains with workers - worker receive 10% increase in pay due to switch. Switch increase variance in output. 

Bandiera, Barankay, and Rasul, "Social Connections and Incentives in the Workplace: Evidence from Personnel Data"

Main Issue: Explores the effect of the social relationship between individuals with a firm on the productivity of individuals and on the firm's overall performance. Test whether the output of workers with different levels of ability and social connection changes after the managers’ compensation scheme is changed.

Methodology: Tests whether social connections lead to favouritism by managers and lead to suboptimal decisions. Field Experiment at a farm that produces soft fruit. Halfway through season the manager compensation scheme is changed. Start=fixed wage, second=fixed wage + bonus for output above threshold. Workers paid piece-rate in both. Worker assigned a row, some rows more productive than others. Managers can influence output in two ways 1) by assigning a worker to a better (worse) row 2) by the speed with which they inspect the worker’s output and replace the crate. Expect that managers will favour low ability connected workers over high ability unconnected workers in the absence of incentives. The bonus scheme raises the cost to doing this, so that managers now favour high ability unconnected workers to low ability connected worker. 

Bandiera, Barankay, and Rasul, "Social Connections and Incentives in the Workplace: Evidence from Personnel Data"

Findings: Table 2- fixed wages low ability produce more if they are connected. High ability produce more if they are connected. Performance - connections are not significant. Connected low ability significant decline in output. All high ability increase in output. 

Bandiera, Barankay, and Rasul, "Social Connections and Incentives in the Workplace: Evidence from Personnel Data"

Main Issue: Surveys recent literature which offers a convincing and coherent explanation why firms may find it unprofitable to cut wages in the presence of involuntary unemployment. 

Methodology: Models surveyed are variants of the efficiency wage hypothesis, according to which, Labour productivity depends on the real wage paid by the firm. Looks at the shirking model, labour turnover model and adverse selection. 

Findings:Efficiency wage models provide an explanation for why wages are not reduced in response to a negative demand shock. This is because lowering wages will undo the solution to the basic problems of selecting workers, reducing turnover, or motivating effort. Because wages are not an adjustment mechanism (as would be the case in a standard supply and demand model), a demand shock must lead to unemployment.

Raff and Summers, “Did Henry Ford Pay Efficiency Wages?”

Main Issue: Paper examines Henry Ford's introduction of the $5 day in 1914 in an effort to evaluate the relevance of efficiency wage theories and employment determination. 

Methodology: Examines company net incomes 1910-1915, Monthly cost for the Model T- decreased. Impact of the $5 a day on productivity - estimates based on regression equations including seasonal dummies and a time trend. Looks at annual turnover for the company and absentee rates. 

Raff and Summers, “Did Henry Ford Pay Efficiency Wages?”

Findings: $5 day was not a response to scarcity or a way of getting different workers. Turnover declined by over 80%. Existing workers worked more efficiently and there was an overall productivity increase. Model T prices declined after the implementation of the $5 day. This suggests that higher pay led to increased effort by workers and greater output. The increase in output appears to have been sufficient to have offset the higher wage costs. Effort appears to have increased. Absenteeism declined as did discharges. Commentators noted that Ford turned up the speed of the assembly line and this was not met with any worker complaints.$5 day was not a response to scarcity or a way of getting different workers. Turnover declined by over 80%. Ford was deskilling and did not want high skilled labour. Training costs were very low, so even very high turnover was not a major problem. 

Andrew Seltzer and David Merrett, “Personnel Practices at the Union Bank of Australia: Panel Evidence from the 1887-1893 Entry Cohorts.” 

Main Issue: Uses personnel, payroll and other records from the Union Bank of Australia to examine Internal Labour markets.

Methodology: Examines personnel practices during the last 2 decades of the 19th century and the first 4 decades of the 20th century at the UBA. The UBA's personnel, payroll can be used to construct a more comprehensive picture of personnel practices within a white-collar firm. Contains information on age, prior experience, wages, position and location throughout their tenure, reason for leaving. Looks at job transitions, career path to manager, wage profiles. Regression of Entry Wages on Worker Characteristics. 

Andrew Seltzer and David Merrett, “Personnel Practices at the Union Bank of Australia: Panel Evidence from the 1887-1893 Entry Cohorts.” 

Findings: Employment was characterised by limited ports of entry, impersonal rules for pay and promotion, well-defined career ladders shielding from the external labour market and long term employment relationship. In addition, tenure within the bank was rewarded considerably more than experience elsewhere and compensation increased considerably after 25-20 years tenure. These facts are partially consistent with the human capital, matching, and contracts theory model, but cannot be fully explained by any one model.

Medoff, James L., and Katharine G. Abraham. "Experience, performance, and earnings."

Main Issue: Provides evidence concerning the relationship between experience and performance among managerial and professional employees doing similar work in two major U.S corporations. 

Methodology: Looks at two companies A and B in the manufacturing sector. Each company underwent employee assessments and were asked to rate their employee's performance. However, there were variations in categories between the two companies. Looks at level of education on salary. 

Medoff, James L., and Katharine G. Abraham. "Experience, performance, and earnings."

Findings: Table 1 shows great similarities between the two companies' demographic characteristics. Company B higher proportion of people with advanced degrees. Facts presented indicate that while, within grade levels, there is a strong positive association between experience and relative earnings, there is either no association or negative association between experience and relative performance.