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Personnel economics

Personnel economics is the application of economic and mathematical approaches to traditional topics in the study of human resource management like compensation, hiring practices, pay and incentive structures, teamwork, as well as worker empowerment and motivation.

Workers are mostly paid a fixed wage in exchange for their services; they may also receive incentive pay based on their performance. But, why and by how much should pay vary across employees within firms? Should workers be involved in setting their own working hours and wages? Are bonuses or penalties better tools for worker motivation? Do people work harder when their values are more closely aligned with those of the business? Is having a good boss important for worker performance? Is multiple job-holding, or “moonlighting,” the sign of a failing society or are there more positive career outcomes?

The study of personnel economics can provide policymakers and managers with the guidance that enables them to make the best choices for their firms. Articles on these topics and more are available in our behavioral and personnel economics subject area while a selection of articles is listed below.

  • Bonuses and performance evaluations

    Individual bonuses do not always raise performance; it depends on the characteristics of the job

    Dirk Sliwka, July 2020
    Economists have for a long time argued that performance-based bonuses raise performance. Indeed, many firms use bonuses tied to individual performance to motivate their employees. However, there has been heated debate among human resources professionals recently, and some firms have moved away from individual performance bonuses toward fixed wages only or collective performance incentive schemes such as profit-sharing or team incentives. The appropriate approach depends on each company's unique situation, and managers need to realize that individual bonus plans are not a panacea to motivate employees.
  • Are workers motivated by the greater good? Updated

    Workers care about employers’ social causes, but the public sector does not attract particularly motivated employees

    Mirco Tonin, July 2020
    Employees are more willing to work and put effort in for an employer that genuinely promotes the greater good. Some are also willing to give up part of their compensation to contribute to a social cause they share. Being able to attract a motivated workforce is particularly important for the public sector, where performance is usually more difficult to measure, but this goal remains elusive. Paying people more or underlining the career opportunities (as opposed to the social aspects) associated with public sector jobs is instrumental in attracting a more productive workforce, while a proper selection process may mitigate the negative impact on intrinsic motivation.
  • Internal hiring or external recruitment? Updated

    The efficacy of hiring strategies hinges on a firm’s simultaneous use of other policies

    Jed DeVaro, May 2020
    When an employer fills a vacancy with one of its own workers (through promotion or horizontal transfer), it forgoes the opportunity to fill the position with a new hire from outside the firm. Although firms use both internal and external hiring methods, they frequently favor insiders. Internal and external hires differ in observable characteristics (such as skill levels), as do the employers making the hiring decisions. Understanding those differences helps employers design and manage hiring policies that are appropriate for their organizations.
  • Market competition and executive pay Updated

    Increased competition affects the pay incentives firms provide to their managers and may also affect overall pay structures

    Priscila Ferreira, February 2019
    Deregulation and managerial compensation are two important topics on the political and academic agenda. The former has been a significant policy recommendation in light of the negative effects associated with overly restrictive regulation on markets and the economy. The latter relates to the sharp increase in top executives’ pay and the nature of the link between pay and performance. To the extent that product-market competition can affect the incentive schemes offered by firms to their executives, the analysis of the effects of competition on the structure of compensation can be informative for policy purposes.
  • Bosses matter: The effects of managers on workers’ performance

    What evidence exists on whether bad bosses damage workers’ performance, or good bosses enhance it?

    Kathryn L. Shaw, January 2019
    A good boss can have a substantial positive effect on the productivity of a typical worker. While much has been written about the peer effects of working with good peers, the effects of working with good bosses appear much more substantial. A good boss can enhance the performance of their employees and can lower the quit rate. This may also be relevant in situations where it is challenging to employ incentive pay structures, such as when quality is difficult to observe. As such, firms should invest sufficiently in the hiring of good bosses with skills that are appropriate to their role.
  • Managerial quality and worker productivity in developing countries

    Business consulting and supervisory skills training can improve firm productivity and labor relations

    Achyuta Adhvaryu, February 2018
    Productivity differences across firms and countries are surprisingly large and persistent. Recent research reveals that the country-level distributions of productivity and quality of management are strikingly similar, suggesting that management practices may play a key role in the determination of worker and firm productivity. Understanding the causal impacts of these practices on productivity and the effectiveness of various management interventions is thus of primary policy interest.
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