People By the Numbers

Edward Lazear, who casts an economist's eye at human resource management, wrote the book on personnel economics. Both of them.An MBA "poet" finds sense---if not sensibility---in surrendering to the jargon of the executive suite.

By Janet Zich

When I interview someone, I don't always ask the questions I'm thinking. For example, here I am sitting across the desk from Edward Lazear and I am having a Dilbert moment. Between us are the only two books in the world on something called "personnel economics," and he wrote them both. I know Lazear to be not only an eminent scholar but also a man possessed of a lively sense of humor and a gift for teaching (his students named him Distinguished Teacher in 1994). In my mind, that doesn't jibe with being the big man in the field of something called personnel economics.
What on earth does it mean? Every time I come across a new management term, it turns out to be a euphemism for layoffs. The very presence of "economics" next to "personnel" makes me nervous. I want to ask Lazear: What's a nice guy like you doing pushing something called personnel economics? Instead I say, wimpishly, Tell me about your books.
Lazear, who is the Jack Steele Parker Professor of Human Resources Management and Economics, expanded a series of lectures into the book Personnel Economics, which he uses as a primer for PhD students. His new book, Personnel Economics for Managers, is much more of a general interest book, he tells me. Intended chiefly as a textbook for MBAs and upper-division undergrads, it is also aimed at general managers and, to a lesser degree, human resources people. "If you think about it," says Lazear, "the decisions that this book deals with are decisions that are made by general managers alone or in consultation with the human resources people. Rarely are they made by the HR people themselves.
"For example, one of our alums, MBA '68 Garen Staglin, who heads the Safelite Glass Company, and his COO, John Barlow, implemented a program that substitutes piecework pay for pay-by-the-hour [see Stanford Business School Magazine, March 1996]. They did it in cooperation with their HR people, but it was clearly their initiative. Another example: If you're going to lay off 10 percent of your workforce, it's not the human resources department that makes that decision, it's a general management decision. Even the structure of the downsizing is decided by general management. So most of the issues that are extremely important for corporations in dealing with their manpower involve general managers."
Lazear notes that although many HR practices are economic in their basic content, among them pension plans and compensation, this is the first textbook to bring economics into human resource management. In fact, it's not just the first, it's the only.
"People don't pay enough attention to economics," Lazear continues, "because the field has been almost bankrupt in giving practical advice to managers. But it's worth paying a lot of attention because you have to remember that at the typical firm in the United States, 75 percent of cost is labor cost. Suppose you increase your sales by 10 percent. Suppose your sales margin is 20 percent--well, you're going to have about a 2 percent increase in profit. If you can cut your labor costs by 10 percent, you're going to increase profit by 6 percent, or by three times as much. People started recognizing that. I think that's where this whole downsizing idea came from."
So the bottom line justifies all this corporate downsizing that's going on? I ask.
"Look, the downsizing we read about in the news has actually not occurred to any significant degree. But even if it had, downsizing is not necessarily a good thing. You've got to think about who you're laying off, what are the costs of laying these people off, what is the appropriate buyout structure, what to do to protect the jobs of the remaining workforce, and so forth. These things can be thought of in a very analytic and concrete way."
But, does personnel economics have a place for the human aspect--company loyalty, worker morale...?
"It has a place in the sense that you can think about these things analytically. One example is in thinking about industrial politics. The way a firm is structured can have pretty significant effects on morale.
"There's also a large section of my book that deals with the nonmonetary aspects of the job, the human aspects--status, flexibility in hours, location, safety on the job," Lazear says. "All the things that make a person think a job is more or less desirable come into play. Money isn't everything. The question for personnel economics is: How do we think about those things? How do we trade them off against money? How do we quantify them?"
I am somewhat surprised that his book has a chapter devoted to worker empowerment. What does personnel economics have to do with empowerment? I ask.
"Worker empowerment sounds touchy-feely, but it can be brought about in a rigorous way. We can ask: When is it good to empower workers? Under what circumstances is it good to give them authority? What kinds of conditions hold? Why don't firms do this voluntarily?"
I know that Stanford teaches human resource management as an interdisciplinary subject, I tell him, drawing on faculty with backgrounds in sociology, psychol-ogy, and strategy as well as economics. Where do Lazear and personnel economics fit into the human resources area? I wonder. What's left for the other folks?
"There are a lot of things left over, and I wouldn't claim to have answers to all the questions," he says. "The kinds of things my colleague Charles O'Reilly thinks about are very important--for example, how culture can be used to affect
the workforce. There are other things like: How and when does one deliver news? If you're downsizing, do you give notice on a Friday afternoon or on a Monday morning? Well, gosh, I don't know. I don't even want to think about that sort of problem! Personnel economics doesn't deal with these questions because the approach is not particularly good at handling them. I would argue, though, that the psychological approach is probably not as good in dealing with concrete issues like pensions, trade-offs in wages and perks, incentives, and layoffs. Those are probably better dealt with in the context of economics."
Where does personnel economics fit in the whole field of economics? I ask. In partic-ular, how does it relate to labor economics?
"Personnel economics is a relatively new field, but it is a field that has really caught on. It is clearly taking up a great deal of labor economics. In fact, I would say that 25 percent of the articles in the leading journals in labor economics are about personnel economics--and this is a field that didn't even exist 15 years ago. And labor economics is a pretty important field within economics for a couple of reasons. One reason is that it is the first serious empirical field where there are really good data available. Another reason is that labor is such an important part of the cost side, so understanding labor is going to be key to any kind of business."
Then, in the field of personnel economics, you're looking at the organization and the job and you're leaving industries and the workforce as a whole to the labor economists? I ask.
"Right. This is not a macro-level approach. Knowing about rising inequality in the United States, well, that's kind of useful to firms. But it's useful in a very tangential way. What they really care about is: Should I pay my workers hourly wages or should I switch to piecework? What kind of formula should I use to compensate my salespeople? What's the commission rate? What should it be? When should it be high? When should it be low? When should I lay off workers? When should I give big raises associated with promotions? When should I promote more workers? When should I have a flat hierarchical structure? Those are the kinds of questions that come up in the individual company. The stuff about what's the aggregate unemployment rate and what effect it has, while of interest in a general way, is probably of less use to an individual manager.
"The field of personnel economics is a response to dissatisfaction with the way that labor economics has been taught in business schools. I got involved in the field--and it's the field which I think of as most closely associated with my own work--after I moved from the economics department of the University of Chicago to the Chicago Business School. That move forced me to think about these issues because I was teaching standard labor economics to my MBA students, and it was clear that old-style labor was just not what they were interested in."
One last question: I've read that you're considered the founder of personnel economics. Is that true?
"Well, that's not for me to say. Just say I've written the only two books in the field."
Nicely put. The books are Personnel Economics for Managers (John Wiley & Sons, 1998) and Personnel Economics (The MIT Press, 1995). The man makes sense. I'll put Dilbert away for another day.

PHOTOGRAPH BY SAUL BROMBERGER AND SANDRA HOOVER

The downsizing we read about in the news has actually not occurred to any significant degree.