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This chapter explores the key features of internal labor markets, such as long-term employment relationships, limited ports of entry for hiring, career paths within the firm, promotions from within, and wages determined by job classification. It also discusses the factors that contribute to the efficiency of long-term employment relations, the resemblance of promotions from within to tournaments, and the explanations behind various features of internal labor markets. Lastly, it looks at the concept of up-or-out rules common in professional hierarchies.
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Economics, Organization and ManagementChapter 11: Internal Labor Markets, Job Assignments and Promotions Joe Mahoney University of Illinois at Urbana-Champaign
Milgrom and Roberts (1992): Chapter 11 Economics, Organization & Management • Key features of internal labor markets are: • Long-term employment relationships; • Limited ports of entry for hiring; • Career paths within the firm; • Promotions from within; • Wages determined by job classification.
Milgrom and Roberts (1992): Chapter 11 Economics, Organization & Management • Long-Term Employment • At least three distinct factors contribute to the efficiency of the long-term employment relations of the sort we see in internal labor markets: • Increased opportunities to invest profitably in firm-specific human capital; • Greater effectiveness of incentive contracts; and • Enhanced ability to make an accurate assessment of an employees contributions to long-term objectives by monitoring performance over a longer time period.
Milgrom and Roberts (1992): Chapter 11 Economics, Organization & Management • Promotions from within resemble tournaments. • They require only comparative information about who did a better job; • Relative performance evaluation may be better; • There is less bargaining costs with individual employees.
Milgrom and Roberts (1992): Chapter 11 Economics, Organization & Management • Many of the features of internal labor markets can be explained by the facts that: • Workers vary in their abilities; • Workers’ efforts are subject to moral hazard; and • Workers’ performance can only be judged by insiders and so cannot be a basis for contracts enforceable in court.
Milgrom and Roberts (1992): Chapter 11 Economics, Organization & Management • Up-or-out rules: • Common in many professional hierarchies including law firms, accounting firms, and universities. • Enables entry of new people in the organization; • Designed to identify the best candidates; • Prevents holding talent in lower status positions;
