From Personnel Economics to People Analytics

As we count the days to the end of a momentous yet eminently forgettable year and turn our thoughts to a brighter future, let's pause to remember Edward Lazear, who passed away from pancreatic cancer last month, and celebrate his immense but unheralded contributions to people analytics.

Lazear’s 1995 book Personnel Economics founded a labor economics subfield. Personnel economics examines how firms attract, motivate, and retain employees. Lazear brought economics to bear on the analysis of human resource management, which had been the domain of industrial psychologists and organizational development specialists. Lazear collaborated with Gary Becker, who introduced the economic notion of human capital with his 1964 book Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education.

Personnel economics applies the economist's heavily quantitative toolkit to the improvement of the HR function. I gravitated naturally toward Lazear's work when I found myself working in HR at Lehman Brothers after stints as a World Bank development economist and Towers Perrin compensation consultant. As an applied labor micro-econometrician, I was interested in empirical work rather than theory and the workings of the firm rather than the economy. I was also well versed in econometrics.

As a newcomer to HR, I instinctively relied on my economics graduate school training. I carefully observed the organization and characterized its constituent parts: business units, functions, geographies, hierarchies, roles, programs, policies. I worked hard to understand the economics of the business. How did the organization make money and grow? Were there any inefficiencies in the way employees were hired, onboarded, organized, developed, evaluated, motivated, and rewarded that might impact customer and financial outcomes? It was a target-rich environment for a self-styled personnel economist.

Personnel economics was a pre-cursor of people analytics, and there are several parallels in the emergence of each field.

They had shared goals. People analytics, "the systematic identification and quantification of the people-drivers of business outcomes, with the purpose of making better decisions," as succinctly defined by van den Heuvel and Bondarouk, owes its intellectual underpinnings to personnel economics and industrial-organizational psychology. Lazear's 1998 book, Personnel Economics for Managers, spoke to the importance of evidence-based and data-driven decision making for organizations, teams, and individual workers—arguably the same goal of people analytics.

The increasing availability of data was critical early in their evolution. Lazear ascribed the emergence of personnel economics to several factors, including developments in economic theory (such as agency and contract theory), advancements in econometrics (solutions to sample selection and omitted variable biases and endogeneity), and the increasing availability of firm-level panel data sets. With all these tools, economists were able to apply the rigor of economic analysis—including formulating and testing models—to the practice of HR. The emergence of people analytics was similarly influenced by the advent of big data and its associated technologies and the application of decision science, data science, and people sciences to the practice of HR.

The rise of finance (as modern finance in economics and as a strategic function in organizations) served as a model for their emergence. Lazear also ascribed the emergence of modern finance as a model for the rise of personnel economics. According to him, finance was primarily an institutional field lacking theoretical and empirical underpinnings until the work of Nobel laureates Miller, Markowitz, Sharpe, Fama, Scholes, Merton, and others. They transformed finance into a sub-field of economics by identifying principles with general applicability, such as arbitrage theory. It is not a giant leap to ascribe HR's transformation into a strategic function akin to corporate finance and marketing to people analytics's influence.

The academic press’s early recognition spurred their growth. Almost a decade before the emergence of personnel economics, the Journal of Labor Economics published a 1987 special edition on "the new economics of personnel," presaging personnel economics' eventual arrival as a formal sub-field of labor economics. Similarly, HR journals are publishing special issues on people analytics: People & Strategy (2011 and 2018), The Journal of Organizational Effectiveness (2017), Human Resource Management (2018 and 2021), and the International Journal of Human Resource Management (2021). A Journal of People Analytics and an authoritative People Analytics textbook cannot be far away.

"Ed was a pioneering labor economist, a gifted teacher, an accomplished public servant and an extraordinary colleague," according to Condoleezza Rice, director of the Hoover Institution at Stanford University, where Lazear was the Morris Arnold and Nona Jean Cox Senior Fellow and the Davies Family Professor of Economics at the Stanford Graduate School of Business (GSB).

One of the foremost labor economists in the world, Lazear founded the Society of Labor Economists and served as the Journal of Labor Economics' founding editor. Labor economics studies the interaction of employers and employees in the production of goods and services within the contexts of economies, markets, and organizations. Lazear also founded the working group on Personnel Economics at the National Bureau of Economic Research.

Lazear was a gifted and widely admired teacher. Jonathan Levin, the dean of Stanford's GSB, said that "Eddie brought a love of economics to generations of students and colleagues. His classes invariably were oversubscribed, and Stanford GSB students recognized him with both the MBA and Ph.D. teaching awards. His infectious enthusiasm for ideas made him an all-time great seminar participant and an active convener of his colleagues.

Lazear also served his country as a dedicated public servant, chairing the Council of Economic Advisers from 2006 to 2009. In this cabinet-level post, Lazear was a member of the White House economics team that devised a response to the global financial crisis. Prior to this, Lazear was a member of the President's Advisory Panel for Federal Tax Reform, charged with developing policy options that did not reduce revenue collection.

As I’ve reflected on Lazear’s work and its impact on my career, I can thank him for yet another inspiration. One of my New Year’s resolutions is to add a segment on personnel economics to my people analytics courses, starting with the January-March online Stanford Continuing Studies course and assign one of Lazear's seminal personnel economics/people analytics papers, "Performance Pay and Productivity," as an optional reading. I hope you will look at it, too, as well as his other work, be inspired, and welcome Ed Lazear into the people analytics pantheon.

Be safe and be well, and best wishes for a safe, healthy, and prosperous New Year.

Note: the Venn diagram image is adapted from Grund et al. (2017).

References

• Grund, C., Bryson, A., Dur, R., Harbring, C., Koch, A.K., & Lazear, E. P. (2017). Personnel economics: A research field comes of age. German Journal of Human Resource Management: Zeitschrift für Personalforschung, 31, 101–107.
• Lazear, E. P. (1995). Personnel economics. MIT Press.
• Lazear, E. P. (1998). Personnel economics for managers. John Wiley & Sons.
• Lazear, E. P., & Shaw, K. L. (2007). Personnel economics: The economist's view of human resources. Journal of Economic Perspectives, 21(4), 91–114.
• Lazear E. P. (1999). Personnel economics: Past lessons and future directions presidential address to the Society of Labor Economists, San Francisco, May 1, 1998. Journal of Labor Economics. 17(2), 199–236.
• Lazear, E. P. (2000). Performance pay and productivity. American Economic Review. 90(5), 1346–1361.
• Lazear, E. P. & Gibbs, M. (2009). Personnel Economics in Practice (4th ed.). Wiley.
• Porter, E. (2020, November 20). Edward P. Lazear, economist and presidential adviser, dies at 72. New York Times.
• School News. (2020, November 25). Trailblazing economist and presidential adviser Edward Lazear dies at 72. Stanford Graduate School of Business. https://www.gsb.stanford.edu/newsroom/school-news/trailblazing-economist-presidential-adviser-edward-lazear-dies-72
• van den Heuvel, S., & Bondarouk, T. (2017). The rise (and fall?) of HR analytics: A study into the future application, value, structure, and system support. Journal of Organizational Effectiveness, 4(2), 157–178.