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Wage differences between internal and external candidates


  • Wolter Hassink
  • Giovanni Russo


Purpose - The purpose of this paper is to investigate three hypotheses for the existence of a wage premium between incumbents and employees who are hired from other employers in the external labour market. Design/methodology/approach - The paper presents estimates of wage equations for a sample of externally hired workers and internally promoted employees. It uses an employer-employee matched data set of Dutch firms from all economic sectors (1998). It controls for various observed characteristics of the firm, the worker and the job. Findings - The estimates reject the hypothesis that firms rely more on observable characteristics for wage formation of external candidates. Nor do the estimates favor the prediction that there is a wage premium due to the option value of risky employees. Finally, employees who are recruited internally have on average a 15 percent higher wage (net of tenure) than comparable employees who are hired from other employers. Research limitations/implications - It was found that there was a limited possibility of identifying risky employees. Practical implications - Firms do not reward risky employees; the incumbents seem to be of better quality than the external hirees. Originality/value - Here the focus is on hirees who were previously employed elsewhere. Usually, a broader definition of external hiring is used.

Suggested Citation

  • Wolter Hassink & Giovanni Russo, 2008. "Wage differences between internal and external candidates," International Journal of Manpower, Emerald Group Publishing, vol. 29(8), pages 715-730, November.
  • Handle: RePEc:eme:ijmpps:v:29:y:2008:i:8:p:715-730

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    References listed on IDEAS

    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
    3. Lazear, Edward P. & Oyer, Paul, 2004. "Internal and external labor markets: a personnel economics approach," Labour Economics, Elsevier, vol. 11(5), pages 527-554, October.
    4. Bell, Linda A. & Freeman, Richard B., 2001. "The incentive for working hard: explaining hours worked differences in the US and Germany," Labour Economics, Elsevier, vol. 8(2), pages 181-202, May.
    5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    6. Arulampalam, W. & Robin A. Naylor & Jeremy P. Smith, 2002. "University of Warwick," Royal Economic Society Annual Conference 2002 9, Royal Economic Society.
    7. Stewart, Mark B & Swaffield, Joanna K, 1997. "Constraints on the Desired Hours of Work of British Men," Economic Journal, Royal Economic Society, vol. 107(441), pages 520-535, March.
    8. Booth, Alison L. & Francesconi, Marco & Frank, Jeff, 2003. "A sticky floors model of promotion, pay, and gender," European Economic Review, Elsevier, vol. 47(2), pages 295-322, April.
    9. Gary Chamberlain, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 225-238.
    10. Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-348, June.
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    Cited by:

    1. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, Elsevier.
    2. Bond, Timothy N., 2011. "Internal Labor Markets in Equilibrium," MPRA Paper 64496, University Library of Munich, Germany, revised 20 May 2015.
    3. repec:spr:schmbr:v:18:y:2017:i:4:d:10.1007_s41464-017-0030-2 is not listed on IDEAS
    4. Kampkötter, Patrick & Sliwka, Dirk, 2014. "Wage premia for newly hired employees," Labour Economics, Elsevier, vol. 31(C), pages 45-60.


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