Peer review, at least in intent, is the way the editors of academic journals attempt to keep the quality of articles in their publications high, and assure that poor or fallacious research does not get published. The process is tied up with political and economic issues involving tenure and pay scales, in that an academic who participates in the peer review process (whether as author, editor, or reviewer) gets rewarded for that participation in an increase in reputation which can lead to an increase in pay scales, rather than direct payment for services rendered.
In other words, none of the people involved in the review process is paid by the journal in question, with the sole exception (maybe) of one or more editorial assistants. The author, editor, and reviewers all do this for the prestige involved in the process; they are generally paid by the university or business that employs them, and in many cases, that pay is contingent upon obtaining publication in peer-reviewed journals. The editorial assistance is generally provided in part by the editor's university and in part by the journal.
The Review Process
The way academic peer review works (at least in the social sciences), is that a scholar writes an article and submits it to a journal for review. The editor reads it over and finds between three and seven other scholars to review it.
The reviewers selected to read and comment on the scholar's article are chosen by the editor based on their reputations in the specific field of the article, or whether they are mentioned in the bibliography, or if they are personally known to the editor. Sometimes the author of a manuscript suggests some reviewers. Once a list of reviewers is drawn up, the editor removes the name of the author from the manuscript and forwards a copy to the chosen stout hearts. Then time passes, a lot of time, generally, between two weeks and several months.
When the reviewers have all returned their comments (made directly on the manuscript or in a separate document), the editor makes a preliminary decision about the manuscript. Is it to be accepted as is? (This is very rare.) Is it to be accepted with modifications? (This is typical.) Is it to be rejected? (This last cases is also fairly rare, depending on the journal.) The editor strips out the identity of the reviewers and sends along the comments and her preliminary decision about the manuscript to the author.
If the manuscript was accepted with modifications, it is then up to the author to make changes until the editor is satisfied that the reviewers' reservations are met. Eventually, after several rounds of back and forth, the manuscript is published. The period from submission of a manuscript to publication in an academic journal generally takes anywhere from six months to over a year.
Problems with Peer Review
Problems inherent in the system include the time sink between submission and publication, and the difficulty obtaining reviewers who have the time and inclination to give thoughtful, constructive reviews. Petty jealousies and full blown political differences of opinion are difficult to restrain in a process where no one is made accountable for a specific set of comments on a particular manuscript, and where the author has no ability to correspond directly with her reviewers. However, it must be said that many argue that the anonymity of the blind review process allows a reviewer to freely state what he or she believes about a particular paper without fear of reprisal.
Recent Findings
The journal
Behavioral Ecology changed its peer review system from one which identified the author to reviewers (but reviewers remained anonymous) to a completely blind one, in which both author and reviewers are anonymous to one another. In a forthcoming paper, Amber Budden and colleagues report that statistics comparing the articles accepted for publication before and after the watershed year (2001) indicated that significantly more women have been published in BE since the double-blind process began. Similar ecological journals using single-blind reviews over the same period do not indicate a similar growth in the number of woman-authored articles, leading researchers to believe that the process of double-blind review might assist with the 'glass ceiling' effect.
Source
Most of this paper comes from personal experience. See my c.v. for specifics if you're interested.
Budden, Amber E., et al. in press Double-blind review favours increased representation of female authors. Trends in Ecology & Evolution
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