l9 - internal labour markets

what is internal labour market

• labour isnt controlled by supply and demand

• operates where pricing and allocation of labour operates under a series of administrative procedures

ilm characteristics

• hiring at limited number of port of entry

• internal promotion

• wages insulated from external shocks

• wages generally above employees reservation wages

• seniority premium

• expectation of long term employment

why would firms bypass the market

• overcoming info asymmetry - firms know far more abt the dependability, motivation and quality pof current emmployees than they do ab outside applicants

• encouraging fshc - ilms provide stability needed for workers to invest in skills that are highly productive within that firm but no value elsewhere

• cost reduction - if promote within, firms avoid the sig costs and risks associated with recruiting screening training external workers for senior roles

• risk sharing

why do some firms not use ILMs

• generic skills - ilms are ill suited for roles requiring generic skills like it where workers can easily move between employers

• inflexibility - admin rules are slow to adapt to rapid technological changes that might degrade specific internal skills

• global competition - intense market pressure often forces firms to tear up these implicit contracts in favour of cheaper outsourcing

whats a promotion tournament

contestants compete for a prize based on relative performance rather than absolute output

for promo to be considered a tournament must have these features

• uncertainty - winner csnnot be predicted with certianty at start

• relative performance - selection based on how a worker performs in comparison to peers

• concentrated rewards - prize" (pay and prestige) is concentrated in the hands of the winner, creating a significant disparity between winning and losing

pros of promotion tournament

• incentive for effort - large prize gap induces workers to expend extra effort to inc prob of winning. a worker will provide this effort as long as the Marginal Benefit (the expected prize) exceeds the Marginal Cost of the added effort or disutility.

• sorting value - effective way for frims to sort most talented indiv for senior leadership positions eg ceos

cons of promo tournament

• sabotage - contestants may decide the easiest way to win is not by inc own output but by reducing output of rivals

• demotivation of losers - once prize is awarded, losers may become disgruntled, less productive

• risky entrants - highly concentrated rewards may attract risky candidates who have high variance in perf, can be dangerous for firm