Insurance Between Firms: The Role of Internal Labor Markets

Insurance Between Firms: The Role of Internal Labor Markets

Giacinta Cestone, Chiara Fumagalli, Francis Kramarz, Giovanni Pica

Series number :

Serial Number: 

Date posted :

November 01 2016

Last revised :

November 04 2016
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  • Internal Labor Markets • 
  • Organizations • 
  • business groups
We investigate how Internal Labor Markets (ILMs) allow organizations to accommodate shocks calling for costly labor adjustments. Using data on workers' mobility within French business groups, we find that adverse shocks affecting affiliated firms boost the proportion of workers redeployed to other group units rather than external firms.
This effect is stronger when labor regulations are stricter and destination-firms are more efficient or enjoy better growth opportunities. Affiliated firms hit by positive shocks rely on the ILM for new hires, especially high-skilled workers. Overall, ILMs emerge as a co-insurance mechanism within organizations, providing job stability to employees as a by-product.