internal labour market

internal labour market

a MARKET for LABOUR which operates within the organization. In other words, recruits for JOB positions in the organization are sought from within the stock of existing employees. In the ‘pure’ form, recruits from the labour market outside are sought for the lowest level jobs only (‘points of entry’). These individuals then pass up through the organizational hierarchy, filling higher level posts as these become vacant. Economists and sociologists have discerned a long-term trend towards internalization of labour markets during which, as industrial societies and technology have developed, technology has become increasingly firm-specific. It has thus become increasingly difficult to find applicants already possessing suitable skills on the open market. The pay of employees in internal labour markets is set according to the firm's criteria and objectives. Some argue, therefore, that they are not really markets at all; the price of labour is not determined primarily by supply and demand.

The benefits of internalization stem from the individual becoming wedded to the organization by virtue of the fact that his or her skills and knowledge are not saleable elsewhere. The organization can invest heavily in training without fear of ‘poaching’ by other employers. A stock of skills and knowledge can therefore be built up. A potential disadvantage of internal labour markets is that the supply of ‘new blood’ is restricted and the organization may become insulated from new ideas.

Few organizations in the UK adopt the ‘pure’ form, though some have come close to it. Most modern large organizations use a mixture of external and internal labour markets. They have a number of points of entry (for example separate ones for production and managerial jobs) whilst jobs may be advertised both internally and externally, with the former often occurring first. See LABOUR MARKET.

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