The Prevalence of Internal Labour Markets - New Evidence from Panel Data

In recent years, a small but growing literature concerned with the empirical analysis of the workings of internal labour markets has emerged. These studies, which have almost exclusively been based on personnel records data from single firms, notably Lazear (1992) and Baker, Gibbs and Holmström (1994), have begun to provide some empirical evidence on many of the issues raised by the primarily theoretical field of personnel economics. Instead of one further single firm study, this paper uses an employer-employee linked data set based on 222 Danish private sector, medium-sized or large firms during the period 1980 to 1995. The principal aim of the study is to look for evidence of internal labour markets by focussing on whether there are stable careers, whether being an incumbent has advantages for one’s subsequent career, and on to what extent and how wages are set within the firm. We also examine the influence of the external labour market on wage setting within firms. The data set allows us to examine whether firms differ, and if so, if there are industry-specific differences or differences between growing, stable, and declining firms. Moreover, our study provides insights different from those of earlier work by comparing the internal labour markets of managerial employees with those of the much less studied non-managerial workers