Internal labour markets & promotion ladders

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

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

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’

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

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

(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 < MRPL = early career • Pay > MRPL = later career • Quits fall, effort rises (avoid layoff)

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

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

Internal labour markets & promotion ladders