Internal labour markets

1
Internal labour markets promotion ladders

• Internal labour markets (ILM)
• Predictions of ILM theory
• The assignment problem
• Asymmetric information
• Promotion tournaments

2
1. ILM versus competitive market

• Competitive
• pay determined by market forces
• pay MPL f(worker characteristic)
• Relative pay (in firm) relative pay (market)
• Practice
• Pay rises at intervals - scale - seniority,
  length of service
• Internal promotion

3
ILM (cont.)

• ILM - subject to different forces
• Dual, or segmented, labour market
• Primary LM v. secondary LM
• Type of worker
• Mobility
• ILM similar to primary sector
• Career labour markets

4
Doeringer Piore (1971)

• An ILM is
• an administrative unit within which the
  pricing allocation of labour is governed by a
  set of administrative rules procedures.
• ports of entry v. promotion
• open to closed ILMs
• Examples nursing, teaching, professions

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2. Predictions of ILM

• (i) Pay not determined by market forces

MCL
SL
A
Outcome A to B - bargaining
W1
B
WF
DL MRPL
MLI
H1
HF
6

• (ii) Promotion from within (tournaments)
• job ladders
• (iii) Low turnover \ long job durations
• insiders v. outsiders
• (iv) Specific skills rise with tenure
• tenure-earnings profile
• earnings rise with promotion
• resolves agency problem
• Pay lt MRPL early career
• Pay gt MRPL later career
• Quits fall, effort rises (avoid layoff)

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3. The assignment problem

• Job slots worker skills productivity
• Workers vary in their comparative advantage
• Which slots are workers allocated to?
• Asymmetric information
• Learning stochastic process
• Probationary periods
• Temporary contracts
• Matching workers to slots to maximise Q

8
Conclusion

• ILM are important feature of the labour market
• Systems of incentives to
• Solve the agency problem
• Learn workers productivity
• See tournament theory promotions