1 A Theory of the Firm’s Demand for HRM Practices

Abstract. This paper argues that the central empirical phenomena the science of human resource management (HRM) should endeavor to explain is the pattern of HRM adoption among firms. A review of the mainline of HRM theorizing reveals it suffers from significant problems of limited domain and mis-specification. Hence, a new economics-based theoretical framework is advanced that generalizes the HRM concept, models the linkage between HRM practices and firm performance (the “black box”), generates an HRM input demand function and demand curve, and demonstrates how these analytic tools can explain major features of the distribution of HRM practices among firms and over time. Notably, while existing theory predicts that more HRM has a positive effect on firm performance, this model predicts the long-run effect is zero. The most important and attention-getting line of research over the last twenty years in human resource management (HRM) has been on the relationship between an organization’s choice of HRM practices and its operational and financial performance (Boxall and Purcell, 2003; Becker and Huselid, 2006; Allen and Wright, 2007). Although this literature has greatly enriched and strengthened the HRM field, I argue that seriou