Internal Labor Markets

1
Chapter 10

• Internal Labor Markets

2
Internal Labor Markets

• Relax two of the assumptions of the supply and
  demand model of labor markets
• Homogenous workers and firms. That is workers
  dont care who they work for and firms dont care
  which workers they have.
• Productivity may be a function of the wage and
  the specific workers hired. (that is productivity
  is not just a function of technology irrespective
  of the wage).

3
ILMs Long Term Employment Relationships

• Relationships between workers and firms are long
  term
• When a firm buys an increment of labor, it
  doesnt immediately sever the relationship, it
  doesnt break the match that is created when it
  buys the next increment.
• Firms realize that employment relationships have
  implications for future productivity, thus they
  are careful about whom they hire
• Firms can nurture the relationship between firms
  and workers, thus decisions made today about
  wages and working conditions affect productivity
  tomorrow.

4
Characteristics of ILMs

• First characteristic ILMs are strongest where
  employment relationships are the longest
• Quits impose costs on the firm because of lost
  OJT
• Firms have an incentive to reduce costs incurred
  from workers quitting
• Example Dishwasher v. Asst. Professor
• Process for dishwasher is not as costly as
  process for an Asst. professor (go through
  processes of job search and costs incurred in
  both instances).
• The work process at a University fits in with the
  ILM model of employment.

5
Universities and ILMs

• How is University employment consistent with ILM
  ideas?
• Commitment of long term employment by employer
• Large investment in learning the job by
  university professor

6
Job Hierarchy and Internal wage Structures

• Second characteristic a well-defined hierarchy
  of jobs are connected to an entry level position.
• Example again the university
• Port of entry
• Asst, assoc, full prof., etc.
• Hiring done mostly at asst prof level
• Third Characteristic pay is related to jobs in
  the hierarchy.
• Increases in pay because of movement up the job
  ladder
• Increases because of compensating differentials
  and need for higher status of supervisors
• Promotions provide incentives for longevity so
  that firms can obtain a return on its HC
  investments

7
Types of ILMs in US Economy

• Dunlop on ILMs
• Little influence on ILMs (workers in small firms,
  about 40 million in 1990)
• Heavy ILM influence (public sector and large
  firms in private sector especially firms with
  market power, about 33 million
• Moderate ILM influence (ILM is relatively small,
  retail, universities, consultancies, etc.. 37
  million in 1990)
• Different types of work organizations, 30 to 60
  percent of workforce in jobs located in some sort
  of ILM

8
Why did ILMs emerge

• Early in 1900s most employment was outside of
  ILMs
• The competitive model describes work organization
  before the emergence of large employers
• Factors leading to emergence of ILMs
• Complexity of production, scientific mgt
• Turnover costs were high (drive system was
  brutal)
• Union militancy
• New Deal Labor Policy
• War time labor policy

9
ILMs and Efficiency

• How can ILMs enhance efficiency? (that is
  maximize benefits that each derives from the long
  term employment relationship)
• Avoids turnover costs,
• offers incentives for workers and firms to
  develop firm specific HC
• Allows firms to observe workers performance on
  long term basis to facilitate promotion of best
  performers
• Promotion from within offers incentives to
  incumbent workers to work harder
• Pay connected to jobs reduces mgrs ability to be
  overly generous with firms funds
• Reduces lobbying on part of workers
• Engenders loyalty by shielding workers from
  external labor market

10
Academic Tenure as a Case Study

• What are the efficiency aspects of tenure
• Incentives to recruit best new faculty
• Principal agent problem
• Faculty need to make credible performance and job
  evaluations. Outsiders cannot suspect that an
  evaluation was based on politics
• Faculty need to make long term strategic
  decisions about research and ed policy even if it
  runs counter to administrators wishes
• Evidence does not support the contention of
  systematic shirking on the part of tenured faculty

11
Implications for Analysis

• Wage set to further long run objectives of firms
  not at intersection of supply and demand
• Easier to see why wages vary by firm industry and
  occupation, holding traditional HC variables
  constant
• The employment relationship generates enough
  rents for firms and workers that ILMs have been
  established as implicit contracts for workers.
  Question of how the rents are divided is open to
  question. Collective bargaining enters here.
• Given that ILMs are set up to provide long run
  incentives for workers, suggests that short run
  changes in labor supply are not going to have
  much of an effect on wages.

12
Labor Market Segmentation

• Relaxing the assumption of homogenous labor and
  connecting it with the notion of ILMs
• Jobs neoclassical economics doesnt accommodate
  the concept well. Workers paid marginal revenue
  product. In whatever job they do.
• Pilot example.
• Suppose workers enter a firm in a port of entry
  job, and then get promoted. Such workers tend to
  stay with the firm because they get higher wages
  by staying than they would by going elsewhere for
  a job.
• These employment relations suggest the primary
  segment labor market

13
Primary Segment

• Primary Segment
• Secure jobs
• Lengthy job tenure
• Well established promotion ladders and pay
  progression
• Supportive employment infrastructure (progressive
  management practices)
• Investment in capital intensive production
  technologies to enhance workers productivity.
• In short a virtuous cycle of progress and
  development.

14
Secondary Segment

• Suppose enter at port of entry job and there is
  no promotion (or you are hired into a job that is
  not connected with a job ladder at all)
• There is no particular advantage to staying with
  the firm (jobs a other firms pay just as much)
• Such jobs are indicative of the secondary labor
  market
• Secondary Segment
• Slim chances of promotion
• Stagnating wages
• High turnover
• Low capital investment (wages low)
• Low capital investment means low productivity
• Vicious circle of underdevelopment and stagnation
  

15
Education, Discrimination, and Dual Labor Markets

• Dual labor markets
• The labor market is composed of a primary and
  secondary segement.
• There is restricted mobility between the segments
• There is a large queue of workers waiting for
  primary segment jobs, thus employers can be very
  choosy.
• Criteria used to choose workers that will best
  fit in the ILM consist of education, race,
  gender, etc. If no access to ILM, then confined
  to secondary segment.
• Thus improving education and job skills in the
  face of discriminitory employment practices will
  not increase mobility into the primary segment.

16
Education, Discrimination, and Dual Labor Markets

• As workers are confined to the secondary segment,
  they adapt by taking on characteristics
  consistent with it, such as high turnover, poor
  work habits, etc., which just reinforce
  employers ideas about workers in secondary
  segment jobs (especially minority workers) and
  makes it even harder to escape
• Workers in the secondary segment are mostly
  young, which suggests that over time it is
  possible to move from secondary to primary
  segment labor markets.