The role of information in internal labour markets

Labour allocation which is internal to organisations is an important component of the adjustment to changing product and factor market This aspect conditions. of labour allocation has not been subject to the same degree of scrutiny as market place allocation and the resulting labour* mobility between organisations or between employment states. Yet internal labour allocation is important for individual careers and earnings growth. Furthermore, its existence has implications for analyses of market adjustment which consider only stocks and flows as measured in the labour market. Labour allocation takes place under conditions of uncertainty. This uncertainty arises in part from the need for costly information to enable market participants to locate the available market offers and to determine the quality of the offers located. The information required to reduce this uncertainty is both costly to produce and imperfectly available. The research hypothesis developed in this study is that the internal labour market will, in certain conditions, have a cost advantage relative to the external market in the production of information about the quality attributes of labour. Given the distribution of jobs and of labour quality, there are efficiency gains to be captured in such circumstances by organisations which utilize this information to re-allocate internal stocks of labour to job vacancies. These efficiency gains from internal information production must be considered along with skills formation, as a source of the efficiency of the internal market organisation for some jobs and job ladders. It is argued that some of the information which is produced internally will relate to dimensions of labour quality which cannot be acquired on-the-job or through alternative forms of human capital investment. The production of information within organisations is difficult to observe and measure and the costs of information production often cannot be distinguished. On the other hand, labour re-allocation can be observed. The research hypothesis is extended to develop predictions about the hierarchical job and wage structure of organisations and about the movement of labour within that hierarchy in accordance with the information produced. Given that labour is re-allocated within the job hierarchy in accordance with the information on its quality, there will be a measurable impact on the career profiles and earnings growth of employees. In addition, the administrative structure and processes of organisations will be responsive to information production requirements. A set of propositions is developed to differentiate the structure of earnings variance which can result from skills investments which are internal to organisations (human capital investments) from those which would result from an information role for the internal market. A case study was used to determine the extent to which these propositions can be used to distinguish the human capital development and the information function of the internal labour market. The case study firm provided detailed career histories and current information for its management level personnel. These data were used to explore earnings variance through a series of earnings functions related to the hypothesis. A comparison was made of different job ladders identified within the firm. Information gathered through interviews, published data and organisation charts were used to determine the structural relations and administrative processes within the firm. In this exploratory study, the patterns of earnings variance both for cross-sectional and longitudinal data were consistent with the propositions advanced. The structural and operational features of the organisation, the differentiation between occupational job ladders, and the structure of these job ladders were also in accordance with the overall hypothesis