Edward Lazear

Edward Paul Lazear (/ləˈzɪər/, lə-ZEER) (born August 17, 1948) is an award-winning American economist, the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution at Stanford University and the Jack Steele Parker Professor of Human Resources, Management and Economics at Stanford Graduate School of Business.

Lazear served as Chairman of the Council of Economic Advisors from 2006 to 2009, replacing Ben Bernanke. As Chairman, he was the chief economic advisor to President George W. Bushholding 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 subfield of economics that applies economic models to the study of the management of human resources in the firm. His research advances 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 is a microeconomist known for his work on the educational production function, teaching to the test, and the importance of culture and language in explaining the rise of multiculturalism.

Born in 1948, Professor Lazear grew up in Los Altos, California. He graduated from the University of California, Los Angeles with AB and AM degrees in 1971. He received his doctorate in economics from Harvard University in 1974.

Edward Lazear is Jack Steele Parker Professor of Human Resources Management and Economics at Stanford University since 1995 and Morris A. Cox Senior Fellow at Hoover Institution since 1985. Previously, he was the Isidore Brown and Gladys J. Brown Professor of Urban and Labor Economics of the Graduate School of Business at the University of Chicago (1985-1992). He is the founding editor of the Journal of Labor Economics, the premier journal in labor economics, and the 15th ranked journal in economics. Lazear is also the founder of the Society of Labor Economists.

Amongst various other appointments, Lazear also serves as a Research Fellow at the IZA Institute for the Study of Labor, the Center for Corporate Performance at the Copenhagen Business School, and SIEPR. Professor Lazear has also been a Research Associate at the National Bureau of Economic Research since 1974. Lazear is a past visiting professor at the Institutes for Advanced Study in Vienna and Jerusalem, the Institut d'Etudes Politiques in Paris, and the Center for the Study of New Institutional Economics at the University of the Saarland in Germany. He has lectured by invitation at other premier institutions worldwide, including Norway, Finland, the Netherlands, England, Spain, Australia, and India. A frequent keynote speaker, he was the Astra-Erikkson Lecturer and the 1993 Wicksell Lecturer in Stockholm, Sweden.

Since leaving his post as Chairman of the Bush Council of Economic Advisors, Lazear makes regular appearances on CNBC and Fox Business News. He is a frequent contributor to the Wall Street Journal op-ed pages.

Academic contributions

Lazear has written or edited 9 books, and published more than 100 papers. Most of his prominent research is in personnel economics, the field he is credited with founding. When asked about how he got into personnel economics, Lazear responded that it was because he wanted to teach his business school students what they needed to know as managers and future business leaders. However, his research expands beyond personnel economics to a broad range of topics in microeconomics. Together with Sherwin Rosen, Lazear is one of the founding fathers of “tournament theory.” His most cited article “Rank-Order Tournaments as Optimum Labor Contracts” (Journal of Political Economy, 1981) with Sherwin Rosen was the seminal paper in this field. The paper analyzes compensation schemes which pay according to an individual’s ordinal rank in an organization rather than output level. Such schemes can lower the cost of measurement and the nature of risks borne by workers. The theory explains that large salaries of executives are not compensation for their output, but are meant to incentivize other individuals in the firm to work hard and try and attain such a position in the future. The theory has been applied to sports, law, writing, and many other fields.

His paper “Performance Pay and Productivity,” (American Economic Review, 2000), points out that a cornerstone of economics is the theory that monetary incentives are effective in raising workers’ output, but little research has identified why and how much output would rise. Lazear uses data from Safelite, a large autoglass installation company. He follows workers before and after the company puts in place a piece rate pay plan. He find that productivity rises 44 percent, but most importantly, half the gain comes from workers on the job working harder, and half the gain comes from the pay plan attracting a more able workforce. This study has implications for personnel practices that go beyond pay plans, suggesting that the personnel practice the firm chooses will cause workers to sort to the firm.

The focus above is on how workers respond to incentive pay, but an alternative way of raising worker performance may be to assign the worker to a good boss. There is an old adage, “workers don’t leave bad firms, they leave bad bosses.” Is there empirical evidence that some bosses raise the performance of workers relative to other bosses? In Lazear, Shaw, and Stanton (“The Value of Bosses,” Journal of Labor Economics, 2015), the data set is from a technology-based company that measures the performance of every worker. Being assigned a better boss can crucially raise the performance of a worker. When a good boss supervises a team of nine workers, the boss adds enough value to be equivalent to adding another worker to the team.

One of his early papers “Why is there Mandatory Retirement” (Journal of Political Economy, 1979) is one of the first papers on implicit incentive pay under asymmetric information – subjects that have since been studied profusely. He explains that companies write implicit contracts in which they pay their employees less when they are young and more than they are old. To cap the amount they will have to pay, companies need mandatory retirement rules. A second personnel economics paper is “The Peter Principle: A Theory of Decline” (Journal of Political Economy, 2004). The original Peter Principle argued that people are promoted to their level of incompetence. Lazear presents an alternative view. Instead, he argues that people are promoted only after a standard of performance has been met, and regression to the mean implies that future performance will be lower, on average. This theory extends to other situations: for example, it addresses why movie sequels are worse than original films. One puzzle in personnel economics is why we see so many incentive pay schemes in which a group is paid for their output, rather than an individual. In many firms, production is team-based, so it is natural to measure and reward team output. The often identified problem is that there are free-riders – some will shirk with team rewards. Kandal and Lazear in “Peer Pressure and Partnerships,” (Journal of Political Economy, 1992) suggest that firms have it in their interest to set norms of behavior in which workers monitor each other (through peer pressure) when the firm cannot monitor individuals.

More recently, Lazear turned his attention to studying entrepreneurs. In a paper “Entrepreneurship,” (Journal of Labor Economics, 2005), is very widely cited because it is one of the few papers that offers an economic model why some people become entrepreneurs and some do not. The tendency to become an entrepreneur originates with one’s training: people who can build their experience as a jack-of-all-trades will rationally become entrepreneurs, and specialists will work as employees. Lazear has continued to work on the problem of entrepreneurship, and explores the relationship between older workers and entrepreneurs with James Liang and Hui Wang in “Demographics and Entrepreneurship,” (NBER Working Paper, 2015). He argues that having too many older workers slows entrepreneurship. Older workers are less innovative, but more importantly, older workers can linger in key positions and block younger workers from acquiring sufficient business experience to innovate effectively. Lazear presents a formal theoretical structure and tests it using Global Entrepreneurship Monitor Data and finds that “a one-standard deviation decrease in the median age of a country increases the rate of new business formation by 2.5 percentage points -- about 40% of the mean rate.”

Lazear is also well known for his work on the educational production function and teaching to the test. In his paper “Speeding, Terrorism, and Teaching to the Test” (Quarterly Journal of Economics, 2005), The worry with paying teachers for test results in the classroom is that teachers will focus on the test content and ignore other untested topics. Lazear points out that under some conditions this is optimal. In classrooms where students have trouble learning, it is better to focus on the test. For students who learn easily, it is better to concentrate on the more amorphous standards. In “Educational Production,” (Quarterly Journal of Economics, 2001) begins by pointing out that there is a controversy as to whether class size matters in determining the performance of school students. He presents a model that explains why it is hard to detect class size effects in student performance data. His theory posits that learning is a public good and when one students acts up, it impedes the learning of all others in the classroom. Therefore, class size is a choice variable, and it is efficient to have a higher student-teacher ratio when students are better behaved. Class size matters, but the conditions under which it matters vary.

Over the years, Lazear worked closely with Nobel prize-winning economist Gary Becker, and Lazear’s work follows a similar trajectory: applying economic theories to answer important social questions and analyze un-traditional questions. His paper “Culture and Language” (Journal of Political Economy, 1999) looked at when minorities assimilate in the U.S., which appears to be a sociological phenomenon but can be explained by economic theory. He concluded that the value of assimilation is larger to someone from a small minority than one from a large minority. The reason is that the likelihood an immigrant will learn English is inversely related to the proportion of the local population that speaks his or her native language.

Among the many papers he has written, the following papers are of special note: “The Value of Bosses,” with Kathryn Shaw and Christopher Stanton, Journal of Labor Economics (2015); Hiring, Churn, and the Business Cycle,” with James Spletzer, American Economic Review Papers and Proceedings (2012), “Firm-Specific Human Capital: A Skill-Weights Approach” Journal of Political Economy (2009); “Tenure and Output,” with Kathryn Shaw Labour Economics (2008); “Speeding, Terrorism, and Teaching to the Test” Quarterly Journal of Economics (2006); “The Peter Principle: A Theory of Decline,” Journal of Political Economy (2004); “Economic Imperialism,” for the millennium issue of the Quarterly Journal of Economics (2000); “Culture and Language,” Journal of Political Economy (12/99); “Educational Production,” Quarterly Journal of Economics (2001); “Performance, Pay and Productivity,” American Economic Review (12/00); “Peer Pressure and Partnerships,” with Eugene Kane, Journal of Political Economy (8/92); “Labor Economics and the Psychology of Organization,” Journal of Economic Perspectives (Spring 1991); “Job Security Provisions and Employment,” Quarterly Journal of Economics (8/90); “Pay Equality and Industrial Politics,” Journal of Political Economy (6/89); “Salaries and Piece Rates,” Journal of Business (7/86); “Retail Pricing and Clearance Sales,” American Economic Review (3/86); “Rank-Order Tournaments as Optimum Labor Contracts,” with Sherwin Rosen, Journal of Political Economy (10/81); “Why is There Mandatory Retirement?” Journal of Political Economy (12/79); “Personnel Economics: Past Lessons and Future Direction,” Presidential Address to the Society of Labor Economists, Journal of Labor Economics (1999); and “Globalization and the Market for Teammates,”; Frank Paish Memorial Lecture to the Royal Economic Society, Warwick, England, Economic Journal (1999).

Chairman of the Council of Economic Advisors and the Financial Crisis

Professor Lazear served as the Chairman of the Council of Economic Advisors during the Financial Crisis and through the Great Recession of 2007-2009. As the chief economic advisor to President Bush, he joined the White House economic team that orchestrated the policy response to the financial crisis and that restructured the financial system. Lazear’s team developed 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.

Prior to serving as Chairman of the Council of Economic Advisors, Lazear was a member of President Bush’s President's Advisory Panel for Federal Tax Reform, established in 2005. Lazear worked with nine other members on revenue-neutral policy options for reforming the Federal Internal Revenue Code.

Lazear has won a number of awards over his career. Among those that he has won are:

• 1994 Distinguished Teaching Award, Graduate School of Business, Stanford University
• 1998 Leo Melamed Biennial Prize, for the best research by a business school professor.
• 2003 Adam Smith Prize, European Association of Labor Economists.
• 2004 IZA Prize in Labor Economics, Institute for the Study of Labor.
• 2006 Jacob Mincer Career Achievement Award for Lifetime Contributions to the Field of Labor Economics.

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 has 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 is an elected follow 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 has also been the recipient of numerous National Science Foundation grants.

Lazear is married and has one daughter. Lazear enjoys outdoor activities in his spare time, and is an avid skier and mountain biker.

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• Lazear, Edward et al., ed. (2004). Personnel Economics, Elgar, with 43 articles dating from 1962 to 2000 (link to contents link here).

• Lazear, Edward P. (1979). "Why Is There Mandatory Retirement?" Journal of Political Economy, 87(6), pp. 1261-1284.
• Lazear, Edward P., and Sherwin Rosen (1981). "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, 89(5), pp. 841-864.
• Lazear, Edward P. (1986). "Salaries and Piece Rates," Journal of Business, 59(3), pp. 405-431.
• _____ (1999). "Personnel Economics: Past Lessons and Future Directions," Journal of Labor Economics, 17(2), p. 233 [pp. 199-236. (Presidential address to the Society of Labor Economists.)
• _____ (2000a). "Economic Imperialism," Quarterly Journal of Economics, 115(1), pp. 99-146.
• _____ (2000b). "The Future of Personnel Economics," Economic Journal, 110(467), pp. F611-F639.
• _____ (2000c). "Performance Pay and Productivity," American Economic Review, 90(5), pp. 1346-1361.
• Lazear, Edward P., and Kathryn L. Shaw (2007). "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, 21(4), pp. 91-114.
• Lazear, Edward, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, pp. 380–84]. Abstract.