While the conventional wisdom argues that in the external labour market skills are distributed by the price of labour, there may be completely different rules at work within the organiza- tion. These rules are known as the internal labour market.
The concept of the internal labour market is based on the idea that sets of rules and conventions form within organiza- tions which act as allocative mechanisms governing the move- ment of people and the pricing of jobs. Such rules are about promotion criteria, training opportunities, pay differentials and the evaluation of jobs, but most importantly, they are about which jobs are ‘open’ to the external labour market. It is the concept of openness which represents the interface between what goes on inside the organization and the external labour market.
Management have a choice as to what rules they use to govern internal affairs, but should they choose not to use rules then they open up their organization to the influence of the external labour market. Like everything else, it is a question of degree. It is possible to envisage two extremes - a strong and a weak internal labour market. Figure 16.2 illustrates the dimen- sions of an internal labour market.
It is important to add that the appellations strong or weak, are purely descriptive; there is nothing intrinsically meritorious about ‘strong’ or pejorative about ‘weak’. The question arises as to why managers should direct their policies in a particular direction. The arguments in favour of a strong internal labour market revolve around the benefits of stability.
There are three basic conditions which promote the forma- tion of strong internal labour markets; all are concerned with stability. First, and above 911, such markets are likely to form
~ ~~
Strong Weak
Structural features Structural features
Specified hiring standards 0 Unspecified hiring stan-
0 Single port of entry 0 Multiple ports of entry High skill specificity 0 Low skill specificity Continuous on-job training 0 No on-job training
0 Fixed criteria for promotion 0 No fixed criteria for
0 Strong workplace customs
0 Pay differentials remain
dards
and transfer promotion and transfer
0 Weak workplace customs
0 Pay differentials vary over
fixed over time time
Figure 16.2 Dimension of internal labour markets
where the technological process decrees that skills in the organ- ization are very specific to that organization. The effect of this is to throw the burden of training on the organization, because at best, the external labour market can only provide a general- ized or approximate capability.
Second, where the type of skills lend themselves to being learnt more easily and cheaply by on-the-job training, the burden of training is taken up by existing employees. Hence management will need stability.
Third, where jobs are not easily definable and output not yet open to exact measurement, or where discretion and judgement by employees are unavoidable, then custom and practice with its continuity becomes important. Here again, stability is a desirable state. In these circumstances, in addition to the intrin-
sic benefits of stability, management also make gains through Y
8
2
reduced labour turnover and recruitment costs, together with efficient and cheaper training. For the workforce there is greater job security, open promotion channels, better training opportu-
3
w Y
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2 a
3
nities and pay enhanced by training responsibilities.
Such cosiness could be upset by the external labour market supplying better and cheaper people. Basically, if it could it
would. It is only when it simply cannot, because the skills
4
needed are so organization specific, that internal labour
markets become dominant.
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If all these benefits are going to be realized, then it is essen- tial for a strong internal labour market to keep the external labour market out of the picture. If every job in the organiza- tion is a ‘port of entry’, i.e. open to outsiders and there are no hiring criteria, then the organization is totally ‘open’ to the outside world. Conversely, if ports of entry are restricted to a few jobs and strict hiring standards applied, then the organiza- tion is fairly ‘closed’ to the vagaries and caprice of the external labour market.
Once entry is restricted, then allocation of people and skills within the organization is based on the training capacity of existing resources and on rational progressions strongly related to the technological process. In other words, with restricted and controlled entry the organization can build on the job pro- gressions and promotion sequences based on technological and functional priorities, both arranged with suitable incentives. As long as technological priorities remain the same we would expect to find pay differentials remaining fixed over time.
If,
on the other hand, an organization does not need the benefits of a stable workforce, then the merits of a weak inter- nal labour market become apparent. These merits include granting a degree of flexibility of response to fluctuations in demand, a strong emphasis on training the unskilled and the injection of new blood.If
the problem is to assess an organization on the strong- weak dimension, an obvious clue would be the rate of labour turnover.If
internal labour markets are about restricting the power of the external, or about ‘locking employees into a bureaucratic employment relationship, we would expect to find low rates of labour turnover associated with strong inter- nal labour markets and high with weak. This, however, can only be a rough indication. Basically, there are five areas of measurability: the specificity of selection criteria; the degree of openness; the extent of on-the-job training; the rate of internal promotions; and the fixity of pay differentials over time. This information could be collected directly using a variety of methods. It is also possible to collect data on management practices in relation to manpower as these are linked to the‘rules’ existing in the internal labour market. The rationale for this is that, in theory, management have a complete range of
options open to them with respect to the external market, such as:
Alter pay and conditions.
Alter hiring standards.
Alter training policies.
Use overtime and other forms of increased labour supply.
Alter promotion criteria.
Extend ports of entry, redesign jobs.
There are others, but the point here is that choosing to foster a strong labour market may subsequently constrain manage- ment's use of these alternative options. In this way, manage- ment behaviour at the interface of two labour markets is a good general indicator of the character of the organization's internal labour market.