Personnel Economics: An Economic Approach to Human Resource Management

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Personnel Economics:

An Economic Approach to Human Resource Management**

The theoretical idea of personnel economics is to apply simple economic principles to the field of human resources management. Personnel economics as a research field has grown rapidly since the first text book on "Personnel Economics" was published in 1998. The development is driven by new theoretical insights based on institutional and behavioural economics and new empirical methods and data sets. Those new theoretical insights are very fruitful to analyze reasons and consequences of various human resource management practices, to understand what actually drives and motivates employees, and what causes organisations to be successful or to fail. With the new data sets and econometric methods the theories that have been laid out in personnel economics either many years ago or very recently can now be tested thoroughly. And the evidence produced by the new data and methods is strongly supportive, which is not only reassuring for researchers, but it also suggests that practitioners can actually rely on the ideas because they are born out in the data. So, personnel economics is not only a vivid research field, but also of great value for human resource managers, particularly for those taking strategic HR decisions. The fruitfulness of personnel economics is demonstrated with four examples: training strategies of companies, recruiting in tight labour markets, career incentives, team size and effort, and entrepreneurial signalling towards employees and creditors.

Key words: Personnel Economics, Strategic Human Resource Management, Training Strategies, Hiring, Career Incentives, Effort in Teams, Entrepreneurial Signalling

1. Introduction Personnel economics is the application of simple economic principles to the field of human resources management. The goal of personnel economics is to find underlying economic principles of human resource management strategies under varying institutional and competitive environments. Personnel economics is not only a promising research field, but it can also serve as a guideline or manual for practitioners because it gives reliable rules, predictions and prescriptions for human resource management. Personnel economics as a research field has rapidly grown over the last one or two decades and several factors have fostered and initiated this development (cf. BackesGellner 1996; Lazear 1995; Lazear 1998).

First, there are the inherent shortcomings of traditional, often eclectic research on human resources management. The questions that have been asked in traditional human resource management were always very interesting and central to business, but the answers were often vague or nebulous and theoretically not convincing but unsatisfactory. One of the consequences was that personnel managers traditionally did not play a central role among high level managers - despite the fact that modern companies always proclaimed that human resources management is the most important part of their business because people are the most important asset of the organisation. As a result people coming from human resources very rarely ended up being the CEO of a company - they come from finance, marketing, or any other field, but almost never from human resources (Backes-Gellner/Krings 1997; Lazear 2001). One of the reasons is that traditional human resources management has not given a solid theoretical and/or empirical foundation for the rules and strategies of personnel managers. It was too vague and too speculative. Contrarily, personnel economics is rigorous in its theoretical analysis and much more precise, and personnel economics is backed up heavily by empirical analyses, using advanced econometric tools that allow to disentangle all kinds of interfering effects of various human resource policies.

Second, in the last decade, there have been important developments and breakthroughs within the field of personnel economics, which have made personnel economics a much more attractive field for researchers analyzing human resource management. …


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