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The rise and decline(?) of U.S. internal labor markets

  • Erica Groshen
  • David Levine

Many employers adopt practices that insulate their workforces from the outside labor market. One defining characteristic of such an "internal labor market" is a company wage policy that diverges from that of the external market. These divergences may occur for an entire employer on average, or for a subset of occupations at an employer. This paper examines the changing magnitude and persistence of both types of divergence over the last 40 years. We analyze a unique salary survey with detailed microdata on the pay practices of 228 large Midwestern employers. This long time period (the longest extant on a large number of employers) permits an evaluation of the supposed "golden age" of internal labor markets, as well as any recent decline. The results also shed light on several theories that attempt to explain increased pay inequality. We find no evidence of a recent decline in the importance of internal labor markets in large firms, as measured by the magnitude or persistence of deviations in company wage policies from market averages. Moreover, employers in industries that underwent deregulation or that experienced rising imports did not systematically weaken their internal labor markets.

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9819.

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Date of creation: 1998
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Handle: RePEc:fip:fednrp:9819
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  25. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September.
  26. Michael H. Belzer, 1995. "Collective Bargaining after Deregulation: Do the Teamsters Still Count?," ILR Review, Cornell University, ILR School, vol. 48(4), pages 636-655, July.
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  31. Joanne Salop & Steven C. Salop, 1976. "Self-selection and turnover in the labor market," Special Studies Papers 80, Board of Governors of the Federal Reserve System (U.S.).
  32. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
  33. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
  34. Colin Lawrence & Robert Z. Lawrence, 1985. "Manufacturing Wage Dispersion: An End Game Interpretation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 47-116.
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  36. Lazear, Edward P, 1995. "A Jobs-Based Analysis of Labor Markets," American Economic Review, American Economic Association, vol. 85(2), pages 260-65, May.
  37. Christopher L. Erickson, 1996. "A re-interpretation of pattern bargaining," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 49(4), pages 615-634, July.
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