The Firm\u27s Choice of HRM Practices: Economics Meets Strategic Human Resource Management

The authors compare and contrast two theoretical approaches to explaining a firm’s choice of human resource management (HRM) practices—one from strategic human resource management (SHRM) and the other from economics. They present HRM frequency distributions depicting key empirical patterns that both theories must explain and then review and apply SHRM theory to explain these patterns. Since no economic model has thus far explicitly considered firms’ choice of HRM practices, the authors develop one based on standard microeconomic production theory. The model yields a new theoretical construct, the HRM demand curve, and a new empirical estimating tool, the HRM demand function. Together, these provide an alternative explanation of HRM frequency distributions, new insights on the limitations of SHRM theory, and the first alternative to the standard “Huselid-type” regression model. Using recent survey data on HRM practices at several hundred American firms, the authors estimate representative HRM demand functions to illustrate the empirical implementation of the model. They find that although both theoretical approaches have value, the economic model seems superior in terms of generality, logical coherence, predictive ability, and congruence with empirical data