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

2. 1. ILM versus competitive market Competitive Competitive –pay determined by market forces –pay = MP L = f(worker characteristic) –Relative pay (in firm) = relative pay (market) Practice Practice –Pay rises at intervals - scale - seniority, length of service –Internal promotion

3. ILM (cont.) ILM - subject to different forces ILM - subject to different forces Dual, or segmented, labour market Dual, or segmented, labour market –Primary LM v. secondary LM –Type of worker –Mobility ILM similar to primary sector ILM similar to primary sector –Career labour markets

4. Doeringer & Piore (1971) An ILM is 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 Examples: nursing, teaching, professions

5. 2. Predictions of ILM (i) Pay not determined by market forces (i) Pay not determined by market forces D L = MRP L MLI SLSL MC L H1H1 HFHF W1W1 WFWF A B Outcome A to B - bargaining

6. (ii) Promotion from within (tournaments) (ii) Promotion from within (tournaments) job ladders job ladders (iii) Low turnover \ long job durations (iii) Low turnover \ long job durations insiders v. outsiders insiders v. outsiders (iv) Specific skills rise with tenure (iv) Specific skills rise with tenure tenure-earnings profile tenure-earnings profile earnings rise with promotion earnings rise with promotion resolves agency problem resolves agency problem –Pay < MRP L = early career –Pay > MRP L = later career –Quits fall, effort rises (avoid layoff)

7. 3. The assignment problem Job slots & worker skills = productivity Job slots & worker skills = productivity –Workers vary in their comparative advantage –Which slots are workers allocated to? Asymmetric information Asymmetric information Learning – stochastic process Learning – stochastic process –Probationary periods –Temporary contracts Matching workers to slots to maximise Q Matching workers to slots to maximise Q

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