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: 
489/2016

Date posted :

November 01 2016

Last revised :

April 17 2018
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Keywords

  • Internal Labor Markets • 
  • Organizations • 
  • business groups

We investigate how internal labor markets (ILMs) affect labor adjustments and performance in business groups. We show that group-affiliated units faced with positive shocks to growth opportunities rely on the ILM to ensure swift hiring, especially of managers and other high-skilled workers.

A closer access to the group's human capital facilitates employee relocations and causes additional productivity and market-share gains in the aftermath of the shock, suggesting that ILMs help group members fully exploit growth opportunities. Adverse shocks affecting one unit in the organization increase workers' mobility to other group units rather than to external firms, with stricter employment protection causing an additional increase in internal mobility. Overall, ILMs emerge as a co-insurance mechanism, allowing organizations to bypass hiring and firing frictions and providing job stability to employees as a by-product.

Published in

Published in: 
Publication Title: 
BAFFI CAREFIN Centre Research Paper
Description: 
No. 2014-162

Authors

Real name: 
Chiara Fumagalli
Real name: 
Francis Kramarz
Real name: 
Giovanni Pica