Traditionally, labor economics focused on the labor market rather than looking inside the “black box” of firms. Industrial sociologists and psychologists made the running in Human Resource Management (HRM). This has changed dramatically in last two decades. Human Resource Management (HRM) is now a major field in labor economics. The hallmark of this work is to use standard economic tools applied to the special circumstances of managing employees within companies. HRM economics has a major effect on the world through teaching in business schools, and ultimately what gets practiced in many organizations. HRM covers a wide range of activities. The main area of study we will focus on will be incentives and work organization. Incentives include remuneration systems (e.g. individuals or group incentive/contingent pay) and also the system of appraisal, promotion and career advancement. By work organization we mean the distribution of decision rights (autonomy/decentralization) between managers and workers, job design (e.g. flexibility of working, job rotation), team-working (e.g. who works with whom) and information provision. Space limitations mean we do not cover matching (see Oyer and Schaffer, this Volume) or skill development/training. Second, we will only devote a small amount of space to employee representation such as labor unions (see Farber, this Volume). Third, we should also mention that we focus on empirical work rather than theory (for recent surveys see Gibbons and Roberts, 2008, and in particular Lazear and Oyer, 2008) and micro-econometric work rather than macro or qualitative studies. Fourth, we focus on HRM over employees rather than CEOs, which is the subject of a vast literature (see Murphy, 1999, or Edmans, Gabaix and Landier, 2008, for surveys). Where we depart from several of the existing surveys in the field is to put HRM more broadly in the context of the economics of management. To do this we also look in detail at the literature on productivity dispersion. The structure of the chapter is as follows. In Section 2 we detail some facts about HRM and productivity both in the cross sectional and time series dimension. In Section 3 we look at the impact of HRM on productivity with an emphasis on methodologies and the mechanisms. In Section 4 we 2
discuss some theoretical perspectives, contrasting the usual “Design” approach to our concept of HRM as one example of “management as a technology”. In Section 5 we discuss some of the factors determining HRM, focusing on risk, competition, ownership, trade and regulation. Section 6 concludes. 2. Some facts on HRM and productivity 2.1. HRM practices
In the 1970s the general assumption was that incentive pay would continue to decline in importance. This opinion was based on the fact that traditional unskilled jobs with piece-rate incentives were declining, and white collar jobs with stable salaries and promotion based incentives were increasing. Surprisingly, however, it appears (at least in the US) that over the last three decades a greater proportion of jobs have become rewarded with contingent pay, and this is in fact particularly true for salaried workers. There are two broad methods of assessing the importance of incentive pay: Direct and Indirect methods. Direct methods use data on the incidence of HRM, often drawn from specialist surveys. Indirect methods use various forms of statistical inference, ideally from matched worker-firm data, to assess the extent to which pay is contingent on performance. We deal mainly with the direct evidence and then discuss more briefly the indirect evidence. 2.1.1. HRM measured using direct methods
Individual incentive pay information is available from a variety of sources. Using the Panel Study of Income Dynamic (PSID) Lemieux, McCleod and Parent (2009) estimate that about 14% of US prime age men in 1998 received performance pay (see Figure 2.1). They define a worker as receiving performance...
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