Introduction
Economics of personnel is an applied field which looks at topics relating to human capital such as hiring and firing, training, compensation methods, job design and worker evaluation. This can be broadly classified into obtaining, organizing and motivating the human resources required by an organization.
In any economic set up, the theory of production establishes how much labour is required, how it should be mixed with capital, how its use ought to vary with wages and other issues that relate to human capital (Lazear, 2002, P.2). Organizations and nations entirely depend on physical and human capital stock for their functioning and prosperity.
Generally, “human capital is the investment people make in them to enhance their economic productivity”. “The theoretical framework most responsible for the wholesome adoption of education and development policies has come to be known as human capital theory”(Olaniyan and Okemakinde, 2008, p.158).
This theory was developed over four decades ago under the sturdy and stirring leadership of Theodore Schultz, Gary Becker and Jacob Mincer. The theory is built on the assumption that formal education is highly influential and contributes to improving the production capacity of a population (Hartog and Maassen, 2007, p. 6). Human theorists argue that a skilled population is productive.
Human capital theory emphasizes how education increases the productivity and efficiency of workers by increasing the level of cognitive stock of economically productive human capability which is a product of innate abilities and investment in human beings (Lazear, 2002, P.2). Since its invention, the theory has been greatly advanced by several theorists. This paper discusses the various aspects of Human capital theory with a lot of emphasis on the theory of compensation.
Human Capital Theory
“Human resources constitute the ultimate basis of wealth of nations. Capital and natural resources are passive factors of production, human beings are the active agencies who accumulate capital, exploit natural resources, build social economic and political organization, and carry forward national development” (Olaniyan and Okemakinde, 2008, p.159). This theory is built on four pillars as discussed below. Theories of compensation are the most expansive and this work will analyze an aspect of the theory of compensation.
Theories of compensation
Economics of personnel relates most directly to compensation. This aspect focuses mostly on methods of pay and specific formulas to be used in computing the pay. There has been no method of pay that has been vented and workers are assumed to be paid competitive wage because labor market is large and impersonal.
However, the form in which competitive wage is paid, its structure over the worker’s life cycle, and its relation to the job or hierarchical position is the firm are areas which have been largely unexplored. Compensation should be seen as an entire structure and not as a collection of separately determined components.
This is for the reason that wage in any occupation is depended on the hierarchy. For instance the wage of a senior economist depends on the wage of an economist. The economic theories are fully capable of consolidating all aspects of compensation into the model (Lazear, 2002, P.9).
There are two major way of coming up with compensation structure, that is, wages can be variable or fixed. Variable rate ties the wage to some out-put based performance. While fixed rate is independent on output it’s mostly used where measuring output can be a problem (Lazear, 2002, P.13).
Job design and definition
Basic economic theory does not put emphasis on the notion of a job. This is because they argue that there is no adequate data to aid in defining jobs and developing job designs. In the theory of production, there is labour and capital and are both treated as variable costs in the long run. Human resource managers and other analysts sees job as a critical unit for analysis but they are unable to discuss the ways in which jobs are created (Lazear, 2002, P.10).
Evaluation
Workers evaluation is a key part of the industrial environment. Firms engage in some form of evaluation process on a timely basis. There are different evaluations behaviors used across firms. Further, different worker attributes are always being evaluated say work effort and work output among others. Firms always devote resources to evaluating the jobs and the worker who occupies it. Job evaluation has become a global ingredient in personnel and firms always benchmark their behaviors with those of the industry norms (Lazear, 2002, P.10).
Law and other institutions
At present, governments have become more aggressive in their regulation of labor market. They issue laws on minimum wage and regulations on desired working conditions which firms have to comply with (Lazear, 2002, P.12).
Variable and fixed pay
As mentioned earlier, variable pay are tied to outcome. The most basic form of variable pay is the piece rate. This work will concentrate on the taxi drivers as an occupation. First, it shall be assumed that taxi drivers are risk neutral, this would imply a linear optimal payment scheme.
Optimal payment scheme using this method should accomplish two things, first it must encourage a worker to put forth the appropriate level of effort and secondly, it must attract the right workers to come to work for the firm. To illustrate this consider a firm deciding on the commission rate to give to a taxi driver.
The firm has to maximize profits at the same time induce the driver to work for it. To achieve this, the firm has to look at the labour supply (number of hours a driver would offer given a structure of compensation) and chose the compensation mix which maximizes profits (Lazear, 2002, P.13).
A taxi drivers wage can be computed in several ways. One way is to rent the cab and allow them to keep everything that they make after paying the rentals or give they can be given the cab and the firm takes half of the meter reading. The first one is considered optimal and can entice the taxi driver to readily work for the firm because he can make up to 75 percent gain.
The second approach is unlikely to allure the taxi driver. If a taxi driver has been working for eight hours a day and is trying to decide on whether to work for an extra hour. He reasons that he is likely to make £100 in that hour. Assume that the value of leisure associated with the extra hour is £70. This implies that at any price greater than £70 the taxi driver would be willing to work for an extra hour because it would be efficient.
The value of driving the extra hour is measured by the price that people are willing to pay for the service that is £100. The social cost of working for the ninth hour is £70, value of leisure to the driver. In this compensation structure both the driver and the firm will gain the driver should work for the extra hour.
Assume the firm compensates the driver half of the taxi fares that is £50. The cost of working for the extra hour, £70, exceeds the benefit, £50, and this structure may not allure the driver because the benefit is lower than his reservation wage.
Therefore, “the standard intuition states that a worker must be made a full residual claimant in order to induce him to put forth the efficient amount of effort” (Lazear, 2002, P.12; United States Department of Labour, 2011). From this example of taxi driving, it is clear how economics contributes greatly in decision making especially decisions which relate to personnel. The concept of fixed and variable rate helps in setting prices for works as demonstrated above.
Conclusion
Human resource capital is vital in an economy because it is a major driving force for growth of a nation. For human resource to be productive and efficient, it is necessary to attract, motivate and retain it. In economic set up labour requirement are determined by the production frontier.
Theories have been put forward to explain the economical way to engage human capital. Human capital theory is major hypothesis that is in use in organizations. The theory was invented several decades ago and it is still being advanced.
It has four main aspects, that is, compensation theories, evaluation, job design and definition and law and regulations. All these aspects are used in building personnel structures. However, more studies have to be carried out to advance on various unexplored aspects of this theory especially in the area of job evaluation, design and definition.
Reference List
Hartog, J. and Maassen, H., B. (2007) Human capital: advances in theory and evidence, 1st ed., New York: Cambridge University press.
Lazear, E., P. (2002) Personnel economics, 4th ed., United States of America.
Olaniyan, D., A. and Okemakinde, T. (2008) Human Capital Theory: Implications for Educational Development. Euro Journals Publishing, Inc. Vol.24 No.2, pp.157-162.
United States Department of Labour (2011) Occupational Employment Statistics. Web.