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Internal Labour Markets Notes

PPE Notes > Labour Economics: Internal Labour Markets Notes

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Internal Labour Markets Revision Contents
- Definition
- Features
- Theoretical Background
- Extent
- Advantages
- Disadvantages
- Job tenure
- Overriding paradigm
? Permissive Conditions
? Information Costs
? Mobility Costs
? Efficiency Wages
? Deferred Compensation - Becker and Stigler (1974)
- Evidence:
? Medoff & Abraham (1981): pay rises more with tenure than productivity
? Lazear (1979): earnings increases are slower for the self-employed
? De Oliveira (1989): wages increase more slowly than MP for short-term workers. Wages increase more rapidly than MP for long term workers.
- Theoretical Context:
? PA Theory
? Williamson, Wachter & Harris (1975) o Practice Essay Plan: Why do firms internalise some workers and not others Definition
? DOERINGER & PIORE (1971): 'an administrative unit within a firm in which pricing and allocation of labour is governed by a set of administrative rules and procedures.' Features
? Remainder of jobs filled by promotion/transfer of workers who have already gained entry.
? Long-term employment relationships and promotions within firm.
? Distinct ports of entry for hiring
? Wages tied to jobs not individuals. Weakly influenced by ELM.
? Eg. Civil servants Theoretical Background
? Vertical internalisation: by firm (more common in Britain), eg branch banking. Focus here.
? Horizontal internalisation: by occupation (more common in Germany), eg gourmet cooks
? Institutional viewpoint: job and pay structures within ILMs are significantly affected by ongoing bargaining between firm and workers/organisations.
? Rationale of ILMs: reflect customary quasi-legal legitimacy attached to workers' desires for security and advancement, backed up by ability of work groups to inflict damage upon enterprise if prevailing norms are violated.


Impact? Specific form of incentive structure. Means strong competition for promotion as don't want to be fired but as get higher up hierarchy competition may decrease, due to lack of external competition.

- Problems of measurement impede successful intertemporal or crossnational comparisons
- SIEBERT & ADDISON (1991): about half the labour market in the UK and 40% in the US
- Rhetoric: job insecurity post Thatcher etc. Paradox: not apparent in literature (eg. GREGG & WADSWORTH 2002).
- Japan: lifetime employment in large Japanese corporations
- DOERINGER & PIORE (1971): distinction between primary and secondary sectors. ILMs: common in primary sector (natural resources); absent in secondary sector (short-term employment relations (production/construction) with no promise of promotion; wages fully determined by market forces)
- Not necessarily a whole firm phenomenon
- Some regard ILMs as linked with size of firm. Potentially misleading.
- Gauge from firm size - only large firms can/need to develop own enterprise markets. An over-simplification but useful empirical handle.

- Solves problem of reproducing skill
- Motivates workers to move up - better performance and commitment
- Efficient response to specific training and moniroting problems
- Improve turnover and morale
- See seniority pay

- Can't respond easily to rapid growth
- Vulnerable to demographic gaps Length of stay
- Mainly on the length of a job
- Turnover in manufacturing high: in 70s average job 3.5 years for men and 2.2 years for women.
- Gregg & Wadsworth (2002): surprisingly little change in job tenure. Though, relative stability may be masking considerable change either between groups or between different components of the distribution. Results need breaking down:
? For men and women without dependent children, job stability has fallen and share of long-term jobs has fallen
? Chances of being in job for more than 10 years fallen by c.15% since

1985. ? But, needs breaking down. Masked by rising job stability amongst women with dependent children (regulation & maternity leave). Median job tenure for men fallen by c.20% since 1975. Misleading - brought down by mobile sector of workforce. Average job short but job held by average person long. Siebert & Addison (1991): average length of job is

3.8 years. But job tenure, ie job of average person, lasts 21 years.

? Explanation:Partly explained by ageing of workforce: concentrated in men over 50 and caused by job separations rather than moves
? Changing nature of jobs on offer, movement from full-time to higher turnover part-time, temporary jobs, self-employment &
changing industrial structure of work accounts for 25% of change (flexible firm)
? More frequent job to job moves.
- MARSHALL & ZHARKIN (1987): cast doubt on existence of seniority pay. Earlier econometric methods were biased up because researchers could only observe accepted wage offers, not all offers. Is a sample selection problem.

Stage 1: PERMISSIVE CONDITIONS Possible when employer is not completely a wage taker - has some discretion from external labour market forces. Diverges from classical hedonic model where W = MRP.

1. Supply a. b. c.

response is muted by: Information costs Mobility costs Efficiency wage considerations i. Efficiency wages argument (Shapiro/Stiglitz 1984)

1. Support: Siebbert & Addison (1991): plants in UK employing 1,000 or more pay 8% more than small plants (employing 100 or less), even after controlling for human capital, occupation and industry

1. Information costs Micro market restricted to small group of labour Imperfect information. Deviation from perfectly competitive labour market, transparency and free entry (and exit). Marginal cost and marginal gain of acquiring information. As long as MC of acquiring information is positive, homo economicus will rationally not do so -> never going to get a perfect labour market. Some industries close (where low MC eg banking) MC, MG

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