The terminology “human resource economics” refers to several techniques and methodologies that address how labor is utilized within the workforce and how that usage affects the overall economic health of a country or other area.
This kind of economics typically takes into account how employee turnover, unemployment, and even the influence of government regulations and labor unions on the effective use of human resources.
Human resource economics frequently analyzes employment issues that impact the larger economy.
The goal of human resource economics is to understand how these factors interact to boost and maintain the use of labor at work for the advantage of both employers and employees and to assess how that interaction affects the economy.
An organization’s main competitive advantage in the market is the development of its human resources.
In the past, a company’s market value was frequently thought to be around twice its net asset value.
Many companies now have market values that are 40 or 50 times higher than their net asset values.
The goal of the HR economy
Human resource economics aims to comprehend and control the efficient use of labor for the benefit of all stakeholders.
This refers to employment that satisfies the requirements of the employee and the employer and offers room for future growth for both.
As a result, legislation that modifies current labor practices or perhaps sets the path for the deployment of new approaches that ultimately benefit everyone involved in that economy is helped by considering how those efforts will affect the economy’s stability.
Resources for people. They are in charge of monitoring and arranging the templates and approaching them from a commercial standpoint.
They conduct a detailed analysis to get the most out of human capital.
Of course, they choose the most qualified applicants for each post. They put their employees through training and start programs to boost their productivity.
As an illustration, consider wage raises, promotions, training, or conciliatory actions.
The only quantifiable and most flexible resource is human resources.
Humans can use their skills to convert to intangible resources even though others may be tangible.
Additionally, none of the other resources can be used without human resources.
Because people can use additional resources to produce sound output, human resources differ from different resources like land and physical capital.
However, resources like land and physical capital depend on how they are used and cannot provide valuable results.
How does the HR economy operate?
Utilizing human resource economics in the context of a company’s operations typically entails trying to match the skill sets needed for a specific work role with the competencies of a particular person.
This procedure entails assessing the employee’s skills, matching them to the available employment, and determining whether the placement will be advantageous to both the business and the employee.
The desirable circumstance is one in which the person enjoys their job, looks forward to going to work, and takes pride in the tasks they complete each day.
At the same time, the employer is content with the worker’s productivity, so there is no need to invest time, money, or effort into finding a replacement.
The Modifying Focus of HR Decisions
Despite the common perception that human resources differ from other profit-generating and economic functions like production, sales, marketing, and core competency-driven work, the HR function is by cost concerns and profitability imperatives.
These concerns include empowering and engaging these employees.
- A materialist perspective on human capital can be used to understand it. In its broadest meaning, capital refers to an investment that has the potential to provide returns throughout its lifetime that go beyond the initial investment.
- For instance, a manufacturing facility could be considered a capital investment that will bring investors profits above and beyond the cost of buying or establishing the facility and other running expenses.
- While human capital refers to returns on investments, one of the duties of human resources is to find potential employees with the kind of capital the company needs. This is one way that human capital and human resources differ.
HR Decisions and the Digital Economy
The hiring, firing, layoffs, downsizing, and employment processes are increasingly based on cost calculations and profitability concerns in addition to the traditional drivers like hiring the best talent, keeping the performing employees, and firing the laggards. Hiring, firing, retrenchment, downsizing, and employment processes are also driven by worries about finding and keeping the most outstanding talent.
- Given the limited resources that many businesses have, In light of the present economic situation, even the reward and recognition systems are now centered solely on cost and profitability considerations.
- Given the recent emphasis on cost reduction and profit growth, HR is progressively becoming profit-driven and cost-aware.
Additionally, most businesses now see their HR divisions as cost centers, which means they must report their spending and the profits they make in the same way that other departments do.
Additionally, as the Digital Economy takes off, the HR function is reinventing itself in terms of operating from economic motivations and profit-driven concerns.
Accordingly, hiring decisions are made based on how much each person will cost the relevant unit, whereas retrenchments and firings are made based on the amount of money that may be saved.
Hiring concerns based on cost and profitability
For instance, many multinational firms treat individual departments as cost centers, where line managers and department heads create budgets for hiring decisions that are then shared with HR managers.
After that, the HR managers create a budget and a plan in collaboration with the line managers and the unit heads, allocating the hiring costs to the HR and the corresponding units and basing the cost of compensation and benefits on the capacity of the units.
Hiring is no longer a standalone or discrete action but involves a multi-leveled coordination and communication process between the line, unit managers, and the HR department.
Most businesses today begin the hiring process by assessing the costs of the recruitment process, which determines which hiring strategy is the most economical.
The hiring process then goes to the following level: tight coordination and collaboration between the units and the HR department are necessary depending on how much the potential hire expects and how much the companies or unit managers are willing to spend.
High-Salary and Low-Salary Employees
Similarly, firing and retrenchment now involve cost calculations.
Unit managers and HR managers meet to decide which employees to retrench based on which quartile or percentile of the Bell Curve the employee belongs to and how much can be saved by reduction instead of how much costs are incurred if the employee must be retained.
Following the Global Economic Crisis and the subsequent economic downturn, most businesses are basing their hiring and firing decisions solely on cost considerations, which means that employees are no longer let go based on the percentiles they fall under but instead on the ones who perform poorly and are more expensive.
Economic Sectors in HR
Economics takes precedence over other considerations. Thus, employees who perform poorly and consume resources are likelier to be let go than individuals in the bottom quartile of performance.
The evolving model of human resources, with its focus on cost- and profit-driven decision-making, might be characterized as this trend.
Three categories of economic activities exist:
Economic activities relating to agriculture, horticulture, animal husbandry, poultry farming, fishing, quarrying, and mining are primary activities. In the case of preparatory activities, natural resources are extracted with little or no alteration.
Manufacturing-related activities are referred to as secondary activities. The natural resources are correctly modified in the secondary action.
- Tertiary activities are those commercial pursuits that assist primary and secondary objectives. Services like banking, transportation, finance, and other services are examples of tertiary activity.
- Market and non-market activities are the categories into which economic activities are further subdivided based on their production objectives.
- Market activities are when a good or service is created to be sold on the market.
Non-market Activities are Producing a good or service solely for personal consumption is referred to as non-market activity.
For instance, a farmer who produces only enough food for his family or a housewife who works solely for the benefit of her family members can be deemed to be engaged in non-activity.
What distinguishes human resources from other resources?
Compared to other resources like land and physical capital, human resources are recognized as one of the best.
Land and physical wealth can be used, but more is needed to be helpful.
Although “human resources” may have been created to refer to more than the transactional activities that support employment, it still irritates me a little.
Resources conjure up images of commodities, assets, or even property.
Therefore, avoid using terminology that can further dehumanize people or their labor. Yet language usage like “human capital management” and “human assets” seems to accentuate this commercialization unabashedly.
The “human” component distinguishes “human resources” from other resources. Employees are people, not something the employer can acquire as in “talent acquisition” and then use, waste, or even “invest” as they see appropriate.
Employees are not things, items, articles, widgets, or units.
Economies of Reward and Recognition Systems for High Performers
As a result, after the evaluation cycle, the unit managers and HR managers sit down to decide on the bonuses and pay raises based on the Bell Curve and the costs and economics of granting incentives.
In addition, the reward and recognition systems are also driven by cost concerns.
This means that when the overall budget has been decided, the unit managers will divide it into individual bonuses, with the top performers being compensated according to their percentile and how much the other top performers are paid compared to them.
The performance bonuses are now based on how “valuable” the employee is to the company and how much the company would lose if the employee left compared to how much the company would earn if the employee received a bonus and stayed on to achieve greater heights.
Economics triumphs in terms of education
Therefore, most HR decisions nowadays are solely driven by economic factors.
Potential and current employees in any firm should be aware of this if they wish to choose their career paths.
This indicates that the economics of managing human resources in the informal sector depends on the labor available at any one time and its current demand.
Consider a construction site where the Mason and the contractors employ workers for the day, the week, and perhaps the entire month.
Indeed, such hiring is never done out of a long-term commitment from the employers but rather to fill an immediate need.
Thus, temporarily hiring casual laborers is referred to as “daily wage workers.”
Introduction of the Precariat Class
One of the primary features of sectors is that labor is constantly on the move in search of locations where there is employment. As a result, they have no loyalty to any particular site.
This makes it more challenging to regulate the informal sector and to create protections for the Precariat to shield them from the uncertainties of seasonal employment.
When it comes to seasonal employment, the informal economy’s economics are such that work is always determined on a seasonal basis.
A contractor will recruit people if needed for a specific month or two and fire them if they are optional.
Multiple Intermediaries in Layers
The informal sector is also distinguished by many layers of go-betweens and brokers, making it challenging to identify the genuine employer of the workers.
For instance, a builder might subcontract the work to a mason at a construction site. The Mason might then delegate the task to another intermediary responsible for locating the required laborers. Points to be considered include
- The manager of the workers, who can deploy such workers from either his own country or through connections with other labor providers, may then be contacted by this individual.
- The employees only receive a small portion of what those in the formal economy make because of the tangle of go-betweens.
- Finally, the workers get a terrible bargain when the numerous intermediaries take their cut.
- Hiring workers from a particular location or from a subcontractor who can supply inexpensive labor and sending them to areas where delivery is expensive is sometimes referred to as employment arbitrage.
- The arbitrage or profit for the ultimate hirer is the difference in the daily pay between these two locations.
Labor Pools Matter More Than Individual Employees
As was already established, these informal sector features entail that labor is constantly in motion and has unstable seasonal employment.
As a result, this Precariat neither has a set place of abode nor has the year-round stable employment.
The informal economy of human resources is such that the total labor force from which such individuals are hired matters more than the individual labor force.
Additionally, with protections, the workers shift from project to project and from contractor to contractor; as a result, they need identity credentials and proof of address, making it easier for them to be included in government programs.
The Future and the Gig Economy
While all of this is typically discussed about workers who perform physical labor, the gig economy, sharing economy, and rising digital economy may function similarly in the future.
In other words, even though Uber drivers and Task Rabbit employees are just getting started.
The informal economy’s human resource economics are such that work is flexible and employment is fungible, which means that nothing is permanent.
The only imperatives are for all parties involved to reduce costs and generate profits in the shortest amount of time.
New Skills Are Required for Modern Jobs
Nowadays, nearly all industries need workers proficient in digital technology, who can successfully communicate vocally and in writing, and who can collaborate with people from different functional areas.
According to LinkedIn’s most recent analysis of skills, oral communication was revealed to be the most in-demand talent in San Francisco, the city with the most significant skills shortages.
HR must actively assist employees in career and technical skill development.
In this economic crisis, HR’s function has changed and expanded. Due to the present financial situation, business executives and HR professionals are under pressure to accomplish more with less.
Businesses everywhere are searching for innovative methods to motivate employees, reward good performance, and keep employees on board, all while easing their worries. Professionals in human resources should use this once-in-a-lifetime chance to help their company navigate this national catastrophe.
They can support the organization’s vision and goal and the health and well-being of its employees by taking suitable economic measures to demonstrate their support for the company and its personnel.
- What Is Human Resources (HR): Here’s The Answer You’ve Been Looking For!
- Human Capital: Definition, Risk, Examples, Theory & History
- Relationship Between Human Capital And Economic Growth:Guide
- Difference Between HRM And HRD With Example
- Exploring The Labor Force Participation Rate: You Must Know
Business, marketing, and blogging – these three words describe me the best. I am the founder of Burban Branding and Media, and a self-taught marketer with 10 years of experience. My passion lies in helping startups enhance their business through marketing, HR, leadership, and finance. I am on a mission to assist businesses in achieving their goals.