From 1985 to 1992, he was a professor of Urban and Labor Economics at the University of Chicago. Since 1992, he has been an economics professor at Stanford Graduate School of Business. Lazear has served as a research assistant at the National Bureau of Economic Research, as well as a research fellow at the Centre for Economic Policy Research and the Institute for the Study of Labor. He is a Senior Fellow at the Hoover Institution. In 1996, he founded the Society of Labor Economists. Prior to his nomination and confirmation as chief economic advisor to the President, Lazear was a member of Bush's tax reform advisory panel in 2005.
Most of his work has to do with motivating and compensating workers. One of his most famous papers, "Rank-Order Tournaments as Optimum Labor Contracts," proves that in certain circumstances, it is in a firm's best interest to rank its employees and pay particularly high wages to the top-ranked employees. This helps explain why the highest jobs, like chief executive officer, often draw paychecks that are much higher than the next-highest jobs, even though the skill differences between those employees are not very high. It also helps explain the partnership structure of law firms, in which associate lawyers compete to become partners and earn a much higher salary. He has also analyzed how peer pressure and mandatory retirement can help reduce principal-agent problems in companies.
Edward Lazear is listed as a coinventor on 5 pending US patent applications. Some of these pending patent applications are considered to be tax patents. This has led to criticism of Lazear by organizations opposed to tax patents, such as Citizens for Tax Justice. Lazear, however, no longer has any ownership rights in these pending applications and cannot receive any royalties from them should they ever issue as valid patents. The full ownership rights to these applications are owned by Liquid Engines.