83-778: 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 micro labor economics , but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within 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
166-1007: A research fellow at the Stanford Institute for Economic Policy Research , Center for Corporate Performance at the Copenhagen Business School in Copenhagen, Denmark , and the IZA Institute for the Study of Labor in Bonn, Germany . He was the Astra-Erikkson Lecturer and the 1993 Wicksell Lecturer in Stockholm, Sweden . He had also been a research associate at the National Bureau of Economic Research since 1974. He had also been
249-700: A spurious relationship where two variables are correlated but causally unrelated. In a study of the use of econometrics in major economics journals, McCloskey concluded that some economists report p -values (following the Fisherian tradition of tests of significance of point null-hypotheses ) and neglect concerns of type II errors ; some economists fail to report estimates of the size of effects (apart from statistical significance ) and to discuss their economic importance. She also argues that some economists also fail to use economic reasoning for model selection , especially for deciding which variables to include in
332-456: A British economist, suggested that within the labor market equilibrium, a trade-off between a worker's wages and non-monetary working conditions could exist. However, Personnel Economics did not gain prominence until 1987, when the Journal of Labor Economics published 10 articles on the field. During the 1990s, Personnel Economics gradually became more empirical-based, whereas previously the field
415-458: A balance between costs and benefits, with the goal of offering the best mixed package of pay and benefits to entice workers. The final package is determined by the preferences of the employees, the cost structure of the firm, and the firm's desire to hire employees. The model also predicts that there is a negative trade-off between wages and "positive" job attributes, such as a desirable work location or enjoyable working environment. Each firm offers
498-695: A complementary set of practices are likely to be more productive than those that adopt only one or two practices. This emphasises the need for firms to consider a set of practices over an individual practice when implementing new HR practices. In human resource management, organisations use two types of practices: skill-enhancing practices and motivation-enhancing practices. Motivation-enhancing practices are designed to motivate and engage employees in order to improve their performance and productivity. The following are some motivation-enhancing practices that organisations commonly use: Skill-enhancing HR practices refer to policies, practices, and procedures used to enhance
581-418: A complementary set of practices are more productive than those that adopt a limited set. For example, a study conducted by Ichniowski, Shaw, and Prennushi in 1997 found that steel mills that used a complementary set of practices were substantially more productive than those that used a limited set. In conclusion, the success of HR practices depends on their complementarity with other practices. Firms that adopt
664-533: A contributor to the subject argued in the course of review and assessment to the conclusions that: The Gift Exchange Theory, also referred to as the fair-wage theory, applies when employees are provided with better wages than they could receive at another firm in exchange for a higher work standard. In 1993, a laboratory experiment was conducted to test the effects that the Gift Exchange Theory had on employee effectiveness. Contrary to predictions, it
747-592: A correlation between successful entrepreneurs and skill acquisition. In a paper in the Journal of Labor Economics in 2005, he states that successful entrepreneurs would need to be broad based in their skills or 'jacks-of-all-trades,' rather than excelling in any one specific skill. With data from Stanford alumni , he draws a correlation between students who have had a diverse work and educational backgrounds being more likely to be successful entrepreneurs than those who have focused on one role or on one subject. Lazear won
830-416: A decrease in the unemployment, as hypothesized . If the estimate of β 1 {\displaystyle \beta _{1}} were not significantly different from 0, the test would fail to find evidence that changes in the growth rate and unemployment rate were related. The variance in a prediction of the dependent variable (unemployment) as a function of the independent variable (GDP growth)
913-405: A high skill set are more expensive to hire. Disadvantages of Team Production: Despite the benefits, team production has its disadvantages. The time it takes to organise teams and have them cooperate can be time-consuming. Additionally, there is a potential risk of having a free-rider problem , where individuals within a team can get away with no contribution to the work and still be compensated
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#1732783110426996-425: A larger pool of potential trading partners. Assimilation is less likely when the incoming population's culture and language is broadly represented in the larger society. He goes on to say that in a pluralistic society, governmental actions that encourage diverse cultural-immigration over concentrated immigration can increase societal welfare. Attempting to identify attributes that enable entrepreneurship, Lazear drew
1079-572: A number of awards over his career. Among those are: His book, Personnel Economics (MIT Press, 1995) was selected as a MIT Press Outstanding Book in 1996, and as one of the ten most important books in Labor Economics by Princeton in 1996. Professor Lazear had also received honorary degrees from Albertson College of Idaho (1997), Aarhus School of Business (2006), the University of Zurich (2010), and Copenhagen Business School (2013). Lazear
1162-457: A quality and producing a quantity of output that the organization deems desirable. Compensation is also not necessarily determined by the conception of productivity. Employees are promoted based on their relative position within the organization and not by their productivity. However, productivity does hold some weight when considering promotion. Advantages of Tournament Theory: Disadvantages of Team Production: The Principal-Agent Problem
1245-593: A regression. In some cases, economic variables cannot be experimentally manipulated as treatments randomly assigned to subjects. In such cases, economists rely on observational studies , often using data sets with many strongly associated covariates , resulting in enormous numbers of models with similar explanatory ability but different covariates and regression estimates. Regarding the plurality of models compatible with observational data-sets, Edward Leamer urged that "professionals ... properly withhold belief until an inference can be shown to be adequately insensitive to
1328-454: A set of HR practices that work in tandem with each other to produce better results. For instance, a firm that adopts a system of teamwork, incentive pay, and training is likely to perform better than a firm that only adopts one or two of these practices. Economists and non-economists alike acknowledge the importance of complementary practices in HR management. Studies have shown that firms that adopt
1411-399: A situation where wage or salary levels are indistinguishable between long-term employees and newly hired employees, and this issue develops over time. If left unresolved, organisations run the risk of turnover as long-term employees may feel undervalued and start looking for work elsewhere. However, a certain degree of pay compression may lead to an efficient market outcome. Organisations with
1494-407: A team-based work environment may consider a certain degree of pay compression. This would make equity more relevant in close comparisons, boost morale and worker efficiency, and provide insurance to employees during uncertain outcomes, such as bad market conditions. However, pay compression leaves employees vulnerable to moral hazard problems, and they may put less effort into their work. According to
1577-476: A transformative paper in the American Economic Review , in 2000, he studied the relationship between incentive-based pay and productivity and concluded that a shift towards incentive-based attracted more efficient workers and contributed to an increased worker output. In a case study that examined management and workers at Safelight Glass Company, he noted that when the company moved towards
1660-416: A variable and incentive based pay from the earlier hourly pay, the company saw an increase in worker output and productivity by about 44%. He argued that this increase in productivity and output was not driven by workers just working harder, but, it also included substitution of the labor force, with the company attracting and holding on to more efficient workers. In a paper earlier in his career in 1979 in
1743-992: A visiting professor at the Center for the Study of New Institutional Economics at the University of the Saarland in Germany, the Institut d'Etudes Politiques in Paris, and at the Institutes for Advanced Study in Vienna and Jerusalem. He had delivered lectures across Australia, England, India, Finland, the Netherlands, Norway, and Spain. Since leaving his post as chairman of the Bush Council of Economic Advisors, Lazear made regular appearances on CNBC and Fox Business News. He
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#17327831104261826-432: Is "the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference." An introductory economics textbook describes econometrics as allowing economists "to sift through mountains of data to extract simple relationships." Jan Tinbergen is one of the two founding fathers of econometrics. The other, Ragnar Frisch , also coined
1909-476: Is a corresponding 18% increase in incomes of the poor. In a commentary on the job growth in 2018, when the jobless growth rate was below 4%, he had said that the Federal Reserve did not need to intervene on fears of the economy overheating, and had suggested that economists didn't need to worry if the job growth could continue much further. The job growth went on for an additional year and a half before
1992-485: Is a method used to estimate the value of compensation for a worker beyond just their wage or salary. This model is based on the revealed preference theory, which states that individuals reveal their preferences through their choices. Employees value aspects such as flexible work hours, a comfortable working environment, health insurance and pension benefits, and recognition and mentoring from bosses, in addition to monetary compensation. The Hedonic Model helps firms to strike
2075-453: Is based on the relationship between an employer (principal) and an employee (agent). In this case, the employer relies on their employees to maximize the firm’s utility. In practice, incentives are sometimes misaligned between the principal and the agent. This occurs due to differing goals between the two, this can lead to adverse selection for the principal when hiring an agent, they cannot fully evaluate an agent's skills and moral hazard for
2158-452: Is better to keep the locations a secret, resulting in higher compliance levels across all locations. Similarly, with the introduction of costs of learning and costs of monitoring, he goes on to say that high cost learners will learn more when they are told of the contents of the exam. He further goes on to make a case that tests should be well defined for younger students and more amorphous for advanced students. Lazear also attempted to study
2241-464: Is estimated to be 0.83 and β 1 {\displaystyle \beta _{1}} is estimated to be -1.77. This means that if GDP growth increased by one percentage point, the unemployment rate would be predicted to drop by 1.77 * 1 points, other things held constant . The model could then be tested for statistical significance as to whether an increase in GDP growth is associated with
2324-425: Is given in polynomial least squares . Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods. Econometricians try to find estimators that have desirable statistical properties including unbiasedness , efficiency , and consistency . An estimator is unbiased if its expected value is the true value of the parameter; it is consistent if it converges to
2407-451: Is known as Insider Econometrics. 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
2490-465: Is mentioned that he was a regular at Camp David , and accompanied President George W. Bush on bike rides in the country retreat, and had been nicknamed as 'stork' by the president. Prior to serving as chairman of the Council of Economic Advisors, Lazear was a member of Bush's President's Advisory Panel for Federal Tax Reform , established in 2005. He had worked with nine other members on reforms to
2573-468: Is not a one-size-fits-all solution, and organisations must carefully consider the potential benefits and drawbacks before implementing it. In some cases, pay compression may lead to turnover or reduced effort, while in others, it may lead to increased morale and productivity. By analysing their specific situation and goals, organisations can determine whether pay compression is a viable solution for their compensation issues. The Hedonic Model of Compensation
Personnel economics - Misplaced Pages Continue
2656-548: 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
2739-480: Is that it can be more productive than individual production. Work can be distributed between employees based on each of their specific skill sets, which makes the overall process more efficient. Many projects require a wide variety of skill sets, and it is unlikely that one individual will have all the required skills to complete the project by themselves. By working in a team, members with complementary skill sets can benefit from each other, allowing for more efficiency in
2822-444: Is the multiple linear regression model. In modern econometrics, other statistical tools are frequently used, but linear regression is still the most frequently used starting point for an analysis. Estimating a linear regression on two variables can be visualised as fitting a line through data points representing paired values of the independent and dependent variables. For example, consider Okun's law , which relates GDP growth to
2905-429: Is to estimate the parameters, β 0 and β 1 {\displaystyle \beta _{0}{\mbox{ and }}\beta _{1}} under specific assumptions about the random variable ε {\displaystyle \varepsilon } . For example, if ε {\displaystyle \varepsilon } is uncorrelated with years of education, then
2988-531: The Council of Economic Advisers from 2006 to 2009. As chairman, he was the chief economic advisor to President George W. Bush , holding a cabinet-level post as part of the White House team that led the response to the 2007–2008 financial crisis . Lazear has been called the founder of personnel economics a field of economics that applies economic models to the study of the management of human resources in
3071-592: The Economic Stimulus Act of 2008 which provided the first rounds of economic stimuli intended to boost the United States economy in the face of unprecedented shocks to the financial and housing sectors. The bill was implemented rapidly: passing the U.S House of Representatives on January 29, 2008, and then the U.S Senate on February 7, 2008, to be signed into law on February 13, 2008 by President Bush with bi-partisan support. During this period it
3154-557: The Internal Revenue Code to provide policy options without impacting the revenue collections. In a paper in 2001, in the Quarterly Journal of Economics , Lazear introduced the idea of an education production function in a classroom. He stated that an optimal classroom size is larger for well behaved students, with the argument that classrooms had a public good element to them and when one student disrupts
3237-605: The Journal of Political Economy , titled, "Why is there Mandatory Retirement?," he had explored the driving motivations behind mandatory retirement. In this paper he argued that companies should adjust the payout structures to pay less during workers' younger days when their productivity is presumably higher and they are worth more to businesses, and pay more to workers in their older days. He goes on to say that while this would mean that employees would hold on to their jobs, mandatory retirement would help solve this problem. The Congress outlawed this practice in 1986. Lazear built on
3320-625: The University of Chicago School of Business as an assistant professor. He went on to be the Gladys J. Brown Professor of Urban and Labor Economics from 1985 to 1992. During his time at the University of Chicago, he collaborated with Gary Becker in applying economic tools to alternate domains. He worked here for twenty years before joining the faculty of the Stanford Graduate School of Business . At Stanford University , he
3403-493: The coronavirus disease 2019 pandemic hit the world. Lazear served as the chairman of the Council of Economic Advisors during the 2007–2008 financial crisis and through the Great Recession . As the chief economic advisor to President Bush, he joined the White House economic team that orchestrated the policy response to the 2007–2008 financial crisis and that restructured the financial system. Lazear's team developed
Personnel economics - Misplaced Pages Continue
3486-499: The natural logarithm of a person's wage is a linear function of the number of years of education that person has acquired. The parameter β 1 {\displaystyle \beta _{1}} measures the increase in the natural log of the wage attributable to one more year of education. The term ε {\displaystyle \varepsilon } is a random variable representing all other factors that may have direct influence on wage. The econometric goal
3569-596: 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. (2004), Personnel Economics , Elgar, with 43 articles dating from 1962 to 2000 (link to contents link here). Two millennial articles by
3652-589: The Tournament Theory, employees may improve their image not only by making themselves look better but also by making their rivals look worse. Pay being based on relative performance may cause some issues within the workplace, as co-workers will be less likely to cooperate with each other if there is an opportunity to outshine each other. Pay compression can help in this case by closing the salary gap between job levels, which in turn gives less incentive for employees to sabotage their co-workers. Pay compression
3735-409: The agent when presented with more information than the principal. Shirking : If agents are guaranteed pay, they may lack the motivation to act in the best interest of the principal/firm. This can lead to the agent not performing at the expected level or engaging in behavior that is not aligned with the principal's goals. Monitoring Costs : Monitoring and measuring agent performance can be costly for
3818-400: The benefits may outweigh the potential disadvantages. Team production is suitable for many projects that require a variety of skill sets, and it enables firms to produce high-quality work while remaining cost-effective. Additionally, teamwork offers a chance for individuals to learn from each other and develop new skills, leading to better job satisfaction and morale. Pay Compression refers to
3901-755: The benefits that attract its most valued type of worker, and while these benefits are costly for the firm, they can also boost productivity. Older workers tend to favour health insurance or pension benefits more than younger workers, and the Hedonic Model can help firms to design compensation packages that cater to the preferences of different employee segments. By understanding what employees value beyond just their wage or salary, firms can create more tailored and attractive compensation packages that help to attract and retain high-quality talent. Human Resource Practices in Personnel Economics refer to
3984-475: The case that free markets contribute to increased well-being of the poor. In an article for National Review 's "Capital Matters" two months prior to his death, he goes on to quote President Kennedy to state, "a rising tide lifts all boats," implying that general economic growth benefits all population. His study also found interesting findings including the fact that when a country changes its name to drop terms like "democratic", "people's", or "socialist", there
4067-631: The choice of assumptions". Edward Lazear Edward Paul Lazear ( / l ə ˈ z ɪər / , lə- ZEER ; August 17, 1948 – November 23, 2020) was an American economist , the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution at Stanford University and the Davies Family Professor of Economics at Stanford Graduate School of Business . Lazear served as chairman of
4150-403: The class, learning is reduced for all students. He introduces an educational production function that maps student discipline to class size and says that this may explain why Catholic schools despite their larger sizes might outperform public schools. Lazear also studied high-stakes testing, and educator fears that high-stakes testing will create incentives to focus on learning to the tests at
4233-411: The correlation between output and pay is not properly calibrated. Compensation : Compensation is an approach where the principal may have to provide agents with a risk premium as they bear a risk with payment. This approach acknowledges that agents take on some risk in their work and may need to be compensated accordingly. However, this approach may not always be feasible as it may increase the costs for
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#17327831104264316-558: The cost of not learning aspects that are less likely to be included in the tests. In a paper in the Quarterly Journal of Economics in 2006, he compares this to deterrents that deter drivers from speeding, and emphasizes the costs of learning and of monitoring. When police locations are mentioned to drivers on a freeway, speeding occurrences are reduced. So, when the fines from speeding tickets are higher relative to benefits from speeding and there are sufficient police personnel, it
4399-493: The design of observational studies in econometrics is similar to the design of studies in other observational disciplines, such as astronomy, epidemiology, sociology and political science. Analysis of data from an observational study is guided by the study protocol, although exploratory data analysis may be useful for generating new hypotheses. Economics often analyses systems of equations and inequalities, such as supply and demand hypothesized to be in equilibrium . Consequently,
4482-808: The effect of education on wages. The most obvious way to control for birthplace is to include a measure of the effect of birthplace in the equation above. Exclusion of birthplace, together with the assumption that ϵ {\displaystyle \epsilon } is uncorrelated with education produces a misspecified model. Another technique is to include in the equation additional set of measured covariates which are not instrumental variables, yet render β 1 {\displaystyle \beta _{1}} identifiable. An overview of econometric methods used to study this problem were provided by Card (1999). The main journals that publish work in econometrics are: Like other forms of statistical analysis, badly specified econometric models may show
4565-453: The equation can be estimated with ordinary least squares . If the researcher could randomly assign people to different levels of education, the data set thus generated would allow estimation of the effect of changes in years of education on wages. In reality, those experiments cannot be conducted. Instead, the econometrician observes the years of education of and the wages paid to people who differ along many dimensions. Given this kind of data,
4648-454: The estimated coefficient on years of education in the equation above reflects both the effect of education on wages and the effect of other variables on wages, if those other variables were correlated with education. For example, people born in certain places may have higher wages and higher levels of education. Unless the econometrician controls for place of birth in the above equation, the effect of birthplace on wages may be falsely attributed to
4731-411: The field of econometrics has developed methods for identification and estimation of simultaneous equations models . These methods are analogous to methods used in other areas of science, such as the field of system identification in systems analysis and control theory . Such methods may allow researchers to estimate models and investigate their empirical consequences, without directly manipulating
4814-416: The firm. His research advanced new models of employee incentives, promotions, compensation and productivity in firms. He is also credited with developing a theory of entrepreneurship and leadership that emphasizes skill acquisition. In addition to personnel economics, Lazear was a labor economist known for his work on the educational production function, and the importance of culture and language in explaining
4897-639: 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 Literature classification code , JEL: M5 but overlaps with such labor economics subcategories as JEL: J2, J3, J4, and J5 . Subjects treated (with footnoted examples below) include: The field can be traced back to 1776 when Adam Smith ,
4980-408: The knowledge, skills, and competencies of employees. Organisations use skill-enhancing practices to increase the productivity and effectiveness of their employees. Here are some examples of skill-enhancing HR practices: Econometric Econometrics is an application of statistical methods to economic data in order to give empirical content to economic relationships. More precisely, it
5063-881: The lifetime payout thinking, and working with Professor Sherwin Rosen from the University of Chicago, introduced tournament theory as a way to allocate wages and compensation where wage differences are based not on marginal productivity but instead upon relative differences between the individuals. In a paper titled "Rank-Order Tournaments as Optimum Labor Contracts" in Journal of Political Economy in 1981, Lazear and Rosen analyzed compensation schemes in which workers' compensations are determined not by their output, but by their rank in their organization. They go on to show that in certain conditions compensation based on rank can result in efficient allocation of resources and also serve as an incentive for workers as they look to advancing through
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#17327831104265146-448: The methods and techniques that firms use to manage their workforce. Over time, the HR practices have evolved to focus more on teamwork and incentive pay. However, not all firms have been successful in implementing these changes. The success of a new practice depends on its complementarity with other practices. Firms run the risk of not reaching optimal output if they choose to adopt only one or two practices. Complementary practices refer to
5229-465: The principal being left with lower quality agents who are willing to work under these conditions. Inequitable Pay : Fixed payment with monitoring can be prone to delays and interruptions, making it unreasonable to punish agents for issues outside of their control. This can lead to inequitable pay and compensation for agents who are performing well but face delays or interruptions. Additionally, incentive pay without monitoring can lead to inequitable pay if
5312-469: The principal, as it requires additional resources and time. The costs associated with monitoring can also be a disincentive for the principal to invest in monitoring, leading to a lack of oversight and potential issues with agent behavior. Adverse Selection : If the principal heavily monitors and controls agent behavior, highly skilled agents may choose to work elsewhere where their skills are better appreciated and they have more autonomy. This can result in
5395-409: The principal/firm. In modern times, firms have increasingly adopted team production instead of pursuing individual production. Team production is a form of production where a group of individuals with complementary skills work together to produce a final product. This approach offers several advantages and disadvantages. Advantages of Team Production: One of the key advantages of team production
5478-439: The project. Teamwork offers different perspectives, and each member may have a different way of handling the project. By sharing ideas, teams can produce better quality work than if the project was done by an individual. Furthermore, it is easier for firms to hire people with less skill, each specialising in a few skills than hiring an individual with a wide variety of skills. This approach is more cost-effective as individuals with
5561-485: The ranks. He was a proponent of market dynamics and efficiency and argued in favor of market-driven actions rather than wage guarantees like minimum wages and other governmental interventions. At the same time, he also argued that European state policies toward job stability among workers did not necessarily mean higher unemployment and lower productivity levels in the European labor markets. He further went on to make
5644-440: The rise of multiculturalism and linked it to the importance of the linkages between culture and language to the overall population. In a paper in the Journal of Political Economy , he considers culture and language as means to facilitate trade between people and goes on to state that minority populations have incentives to be better assimilated to the larger society and learn the majority language and cultural elements so as to have
5727-521: The rise of multiculturalism. Lazear was born on August 17, 1948, in New York City. He grew up in a Jewish family in Brooklyn , New York, before moving to Los Altos, California . His father was a shipyard worker during World War II , and had also been a janitor at a hospital, while his mother was a salesperson at a jewelry shop. As a high school student, he worked at a hospital mailroom and
5810-404: The same amount as their peers. However, free-riding can be eliminated by organising set protocols. This allows for easier communication and decision-making, giving each member of the team responsibilities and requirements that are agreed upon. Punishing free-riders is another way to deter them from repeating the offence. In conclusion, even though free-riding is an issue when working as a team,
5893-464: 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
5976-544: 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: 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 (e.g. golf tournaments and horse racing). and company records on their suppliers' performances (e.g. raising broiler chickens). From
6059-441: The system. In the absence of evidence from controlled experiments, econometricians often seek illuminating natural experiments or apply quasi-experimental methods to draw credible causal inference. The methods include regression discontinuity design , instrumental variables , and difference-in-differences . A simple example of a relationship in econometrics from the field of labour economics is: This example assumes that
6142-614: The term in the sense in which it is used today. A basic tool for econometrics is the multiple linear regression model. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods. Econometricians try to find estimators that have desirable statistical properties including unbiasedness , efficiency , and consistency . Applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models , analysing economic history , and forecasting . A basic tool for econometrics
6225-1261: The true value as the sample size gets larger, and it is efficient if the estimator has lower standard error than other unbiased estimators for a given sample size. Ordinary least squares (OLS) is often used for estimation since it provides the BLUE or "best linear unbiased estimator" (where "best" means most efficient, unbiased estimator) given the Gauss-Markov assumptions. When these assumptions are violated or other statistical properties are desired, other estimation techniques such as maximum likelihood estimation , generalized method of moments , or generalized least squares are used. Estimators that incorporate prior beliefs are advocated by those who favour Bayesian statistics over traditional, classical or "frequentist" approaches . Applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models , analysing economic history , and forecasting . Econometrics uses standard statistical models to study economic questions, but most often these are based on observational data, rather than data from controlled experiments . In this,
6308-835: The unemployment rate. This relationship is represented in a linear regression where the change in unemployment rate ( Δ Unemployment {\displaystyle \Delta \ {\text{Unemployment}}} ) is a function of an intercept ( β 0 {\displaystyle \beta _{0}} ), a given value of GDP growth multiplied by a slope coefficient β 1 {\displaystyle \beta _{1}} and an error term, ε {\displaystyle \varepsilon } : The unknown parameters β 0 {\displaystyle \beta _{0}} and β 1 {\displaystyle \beta _{1}} can be estimated. Here β 0 {\displaystyle \beta _{0}}
6391-496: Was a frequent contributor to the Wall Street Journal op-ed pages. Lazear was considered one of the pioneers of labor economics , and personnel economics , branches of economics that studies market dynamics between wages and labor. His 1995 book, Personnel Economics , was a seminal work that in addition to introducing the topic, encouraged a wave of subsequent research into labor and management relations. In
6474-403: Was also a member of the school cross-country running team. Lazear received a Bachelor of Arts and a Master of Arts in economics from the University of California, Los Angeles in 1971. His wife said he struggled at first, until he took an economics course and did well. He received a Doctor of Philosophy in economics from Harvard University in 1974. Lazear began his career in 1974 at
6557-726: Was an elected fellow of the American Academy of Arts and Sciences, the American Association for the Advancement of Science, the Econometric Society, and the Society of Labor Economists. He had also been the recipient of numerous National Science Foundation grants. Lazear was married to his wife Victoria, a litigation consultant, and had a daughter. He was known to enjoy outdoor activities, and
6640-457: Was found that most employers were offering higher (sometimes by more than 100%) than market clearing wages. On average, the higher wage was requited by a higher output, often making it very profitable for employers to offer high wage contracts. Paying for an employee's performance can lead to increased productivity and higher competition surrounding highly skilled workers who will want to work for employers who pay for performance. Tournament Theory
6723-464: Was more heavily theoretical. Personnel Economics is now considered a branch of Labor Economics . In 1998, Edward Lazear described it as "the use of economics to understand the internal workings of the firm." With the availability of new data, the field has evolved to have more practical use. Econometric techniques have played a significant role in the field's development, with data being used to analyze personnel records and other human resource data. This
6806-521: Was proposed by Edward Lazear and Sherwin Rosen . The theory addresses how pay raises are associated with promotions. The theory’s main point is that promotions are a relative gain. Regarding compensation, the level of compensation must be strong enough to motivate all employees below the level of compensation who aim to be promoted. If the pay spread between promotions is larger, the incentive of employees to put in effort will also be larger. The desired outcome from this would be to see employees performing at
6889-552: Was the Jack Steele Parker Professor of Human Resources Management and Economics from 1995 to 2017, and he went on to be the Davies Family Professor of Economics in 2017. He had also been the Morris A. Cox Senior Fellow at the Hoover Institution since 1985. During his time here, he was the founding editor of the Journal of Labor Economics , and the founder of the Society of Labor Economists. He served as
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