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Personnel Economics - Summary of All Compulsory Articles

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Vak
Personnel Economics (EBM678A05)

Instelling
Rijksuniversiteit Groningen (RuG)

All the compulsory articles of the course Personnel Economics in one summary. This summary consists figures, tables and personal notes. Articles of: Van der Meer, Wang et al. Glebbeek & Bax, Dur & Van Lent, Cassar & Meier, Lazear and many more.

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personnel economics hrm summary all compulsory articles
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Rijksuniversiteit Groningen (RuG)
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Human Resource Management
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Personnel Economics (EBM678A05)

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Articles Personnel Economics
Van der Meer (2011) – Educational credentials and external effects: a test for the Netherlands.

There are 3 explanations for the correlation between wages and education:
1. Human capital theory
2. Credentialism = belief in reliance on academic qualifications as the best measure of a
person’s intelligence or ability to do a particular job.
3. Signaling/screening: workers know what type they are and share this information honestly
with employees / learning about a workers productivity.
The main difference between these 3 models is not how employers reward education at the
individual level, but that the main differences are at the societal level. HC predicts that external
effects are absent. Signaling and credential model suggest that the social return on education is
lower than its private return.
This article proposes and applies a test of the credential hypothesis against the human capital model.
He uses two sources of variation:
1. The variation between students who spend the same number of years in education, but
obtain different degrees.
2. Variation between students obtaining the same degree but spending a different number of
years in education.
Signaling is an extension of the human capital model. The years spend in school increase someone’s
productivity. The degree obtained is a signal to the employer about the ability and therefore the
productivity of the future employee. The human capital model states that it is the years spend at
school that increase the productivity. Each year longer in school increases the level of HC and
therefore the productivity and wages. Degrees have no additional effect (according to HC model!)
Signaling will lead to an overinvestment in education because the wage increase due to obtaining the
degree in the final year of study reflects not only the marginal effects of the last year of study but
also incorporates the total value of the degree. Students who love to study are most likely to
overinvest. This overinvestment causes the private rate of return (= annual income from an
investment) to be higher than the social return and is a sign of negative external effects.

The private rate of returns to education is the increase in the earnings from an additional year of
education for an individual who makes the investment decision on education. It depends on labour
supply and demand (if supply increases, the rate of return will decrease  more students are willing
to invest in education  increase of supply of high educated labour  lower the wages).
The social rate of returns to education measures the increase in national income resulting from the
same year of education. Social returns are lower than private returns because researchers can
account for full social costs, but they do not include social benefits. The costs of higher levels of
schooling are much higher, hence the lower returns.

According to the HC model, education is a private investment in human capital and does not have
spillover effects on other people. Not all signaling models predict that the social rate of return will be
higher than the private rate of return. Because signaling improves the quality of the match between
employee and employer, the labour market will be more efficient and the overall productivity will
increase: the best employees will be matched to the employers who can best use these employees.
The social rate of return will be higher than the private rate.

In this article, the distinction is made between the actual years spend in school and the degree
obtained within the educational careers.
 Variation among degree holders in the number of years they spend in school.
 Variation in the degrees obtained given the years spend in school

,In this article, van der Meer distinguished between 7 degrees:
1. Primary education (6 years)
2. Lower vocational education (4 years after 1.)
3. Lower general education (4 years after 1.)
4. Higher general secondary education (6 years after 1.)
5. Intermediate vocational education (4 years after 2. Or 3.)
6. Higher vocational education (4 years after 4.)
7. University (11 years after 1.)

The years at present firm is coded in 6 categories:
1. < 6 months
2. 6 months – 1 year
3. 1 year – 2 years
4. 2 years – 5 years
5. 5 years – 10 years
6. > 10 years

The mean of years spend in education is slightly higher than is necessary to obtain the degree of the
highest level of education attended. The percentage of persons holding a degree higher than primary
school adds up to 168%, meaning that many persons have obtained more than 1 degree. This shows
the stacking of educational degrees in the Netherlands.

Results
Employees with a university degree earn a 10% higher wage than employees with a higher vocational
degree. Degree starts to pay off from the higher secondary level. Only degrees obtained after school
age are rewarded by the employers. Only those degrees have a value as a signal, because education
at these levels is no longer compulsory and can indeed be used as a signal. Only education beyond

, the school age differentiates between more and less able employees. These results strongly support
the signaling model and the credentialists.

There is no effect for additional years spend at school. There is a negative effect for drop out years.
These results refute the HC model that predicts that all effects have the same size. The employees
who spend less time in school than necessary earn less than those who took all the years necessary
to get the degree. Degrees matters most, additional years do not matter and leaving school early is
punished, although less then not going to school altogether. So the type of school someone has been
going to gives a meaningful signal about someone’s ability.

Signaling model is favored against the HC model. In the Netherlands, the signaling model is also more
correct than the HC model. The degrees onward from higher general education show a positive
effect, and the additional years have no effect on wages. The dropout years show a negative effect.
Signaling causes the social returns to be higher because of the improved matching of employees and
employer.

Degrees obtained during compulsory education have no effect on wages. Also the years spend in
education longer than is necessary to obtain a degree have no effect on wages. Students who spend
less years in school than necessary are punished (lower wage). These results do not support the HC
model, but do strongly support the signaling model and the credential model who argue that degrees
are more important than years spend in school.

According to van der Meer, the social return to education is higher than the private return. This
result rejects the credential model (this model said that an expected overinvestment in education
lowers the social return on education). The signaling model predicts a higher social return on
education because the improved match between employees and employers due to signaling.
Education is a very informative signal on the labour market that improves the match between
employer and employee and thereby enhances the social return to education.

Wang et al. (2009) – Firm specific knowledge resources and competitive advantage: the roles of
economic- and relationship based employee governance mechanisms.

Resource-based view: a firms ability to achieve and sustain a competitive advantage is related to the
strength of isolating mechanisms that protect the firm’s valuable and rare resources from imitation
by rivals. Resources need to be difficult to trade and redeploy outside the firm. Firm-specific
knowledge has the greatest potential to serve as a source of sustainable competitive advantage. Such
firm-specific knowledge may include the ability to operate and maintain customized equipment and
familiarity with specialized practices for developing and manufacturing unique products (know-how).
Firms require its employees to make complementary investments in human capital. The employees
FSHC is imperfectly redeployable: it is valued less in the external labor market  the absence of
complete contracting give the firm opportunities to hold power of lower wages and extended work
hours  key employees with foresight might be reluctant to make such firm-specific investments
that would place them in a weak bargaining position.

Without (1) trust and (2) effective safeguards the firm might not be able to realize the potential
economic rents that can be generated from its firm-specific knowledge resources. A firm need to
adopt effective employee governance mechanisms to reduce its employees concerns and align their
goals with those of the firm. There are 2 governance mechanisms:
1. Economic-based mechanisms (employee stock ownership)  is intended to secure
employees’ economic gains against ex post value appropriation.
2. Relationship-based mechanisms (long term relationships)  focuses on fostering trust
between the firm and its employees.

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