13. Theory and Evidence in Internal Labor Markets

Abstract

A number of branches of the literature on internal labor markets have matured to the point that there is now a healthy two-way interaction between theory and empirical work. In this survey I consider two of these branches: i) wage and promotion dynamics; and ii) humanresource practices. For each case I describe the empirical and theoretical literatures and also discuss what we can learn by paying careful attention to how theoretical and empirical findings are related. In addition to surveying the literatures on these two topics, my goal is to show how a deeper understanding of internal-labor-market phenomena can be derived from a close partnering of empirical and theoretical research.

Classic promotion tournaments versus market-based tournaments

“…In each stage of that analysis workers compete in pairs, where the winners in each stage proceed to compete in the following stage until only a single winner remains. The main result in that analysis is that the tournament prize structure is convex in the sense that the wage increase 1 Surveys that discuss the tournament literature include Lazear (1999), Gibbons and Waldman (1999a), Prendergast (1999), Lazear and Oyer (2010), and Waldman (2010). associated with winning the last round of the tournament is larger than the increases associated with winning earlier rounds.…”

Career and Wage Dynamics: Evidence from Linked Employer-Employee Data

“…One reason for the significant impact of the single-firm study by Baker et al (1994) on theoretical work was its broad approach to careers in organizations. Indeed, Waldman (2007) argues that studies that consider many related phenomena of careers are especially helpful for theory development, given that a theory of careers in organizations should ideally describe many, if not all, empirical findings. Baker and Holmström (1995), on the other hand, have cautioned against using results from a single case study as a guide to theoretical research.…”

Are starting wages reduced by an insurance premium for preventing wage decline? Testing the prediction of Harris and Holmstrom (1982)

“…They match their predictions with stylized facts, not with new empirical work. 4 suggested by HH in their original paper has never been applied (see also Waldman (2012)). There is much work on the issue of wage rigidity itself and on the effect of product market shocks on wages, but that research has a completely different focus 2 .…”