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A Theory of Wage and Promotion Dynamics in Internal Labor Markets

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  • Robert Gibbons
  • Michael Waldman

Abstract

We attempt to explain employment practices in internal labor markets using models that combine job assignment, on-the-job human-capital acquisition, and learning. We show that a framework that integrates these familiar ideas captures a number of recent empirical findings concerning wage and promotion dynamics in internal labor markets, including the following. First, real wage decreases are a minority of the observations, but are not rare, while demotions are very rare. Second, there is significant serial correlation in wage increases. Third, promotions are associated with particularly large wage increases, but these wage increases are small relative to the difference between average wages across levels of a job ladder. Fourth, on average, workers who receive large wage increases early in their stay at one level of a job ladder are promoted more quickly to the next level. Fifth, individuals promoted from one level of a job ladder to the next come disproportionately, but not exclusively, from the top of the lower job's wage distribution (and arrive disproportionately, but not exclusively, at the bottom of the higher job's wage distribution).

Suggested Citation

  • Robert Gibbons & Michael Waldman, 1998. "A Theory of Wage and Promotion Dynamics in Internal Labor Markets," NBER Working Papers 6454, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6454
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    Cited by:

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    2. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2005. "Comparative Advantage, Learning, and Sectoral Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 681-724, October.
    3. Lalith Munasinghe, 2005. "A Theory of Wage and Turnover Dynamics," 2005 Meeting Papers 924, Society for Economic Dynamics.
    4. LLUIS, Stéphanie, 2001. "Wage Policy of Firms: an Empirical Investigation," Cahiers de recherche 2001-18, Universite de Montreal, Departement de sciences economiques.
    5. Sang-Hyop Lee & Sumner La Croix, 2014. "Does Versatility Matter in Match-Play Sports? Evidence from Sumo Wrestling," Working Papers 201411, University of Hawaii at Manoa, Department of Economics.
    6. Daniel Parent, 2009. "The effect of pay-for-performance contracts on wages," Empirical Economics, Springer, vol. 36(2), pages 269-295, May.
    7. Ariga, Kenn & Ohkusa, Yasushi & Brunello, Giorgio, 1999. "Fast track: is it in the genes? The promotion policy of a large Japanese firm," Journal of Economic Behavior & Organization, Elsevier, vol. 38(4), pages 385-402, April.

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