Internal labour markets promotion ladders Internal labour markets

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 W 1 B WF MLI H 1 HF DL = MRPL

• (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