Internal Labor Markets in Equilibrium

Abstract

Traditional models of promotion have difficulty explaining why many firms do not favor internal employees for advancement. I develop a new model to explain this phenomenon. My model generates an equilibrium where some, but not all, ex ante identical firms recruit strictly internally. These firms employ higher quality entry-level workers, since they hire supervisors exclusively from their lower ranks. The scarcity of high-quality workers limits the use of this strategy. I derive several testable predictions on wage-tenure profile differences across firms with varying recruitment practices and confirm these predictions using matched employer–employee data from the United Kingdom. (JEL M50, J31)