Organizational Performance Implications of Internal Labor Markets

• In Event: 2451 - Section on Organizations, Occupations, and Work Refereed Roundtables (1 hour)
  In Refereed Roundtable 60min: Table 10. Labor Market Entry/Re-Entry

Abstract

We investigate the relationship between internal labor markets (ILM) and firm performance. Earlier studies have revealed the key features and determinants of ILMs. However, empirical studies that treat ILM features as independent variable are relatively few, and have focused for the most part on individual outcomes. Given the tradeoffs between internal versus external labor markets and closed versus open systems, the question of how the ILM affects the firm’s bottom line remains elusive.
We employ a panel sample of 168 of the largest law firms in the U.S. from 2001-2012. In the past 30 years, the U.S. law firm industry has evolved from a professional logic field that was almost exclusively ILMs to a field where corporate logic and external labor markets are pervasive. Law firms very rarely diversify outside of the legal industry and are classic professional services firms with human capital as their core asset; confounding empirical factors of diversification and significant non-human co-specialized assets are absent.
Results show that hiring more frequently from the internal labor market does indeed improve firm performance as measured by revenue per lawyer (RPL) and profit per partner (PPP). Specifically, firms perform better when lawyers are hired straight out of law school than when they are hired laterally. Firms also perform better when partners are made through internal promotion than through lateral hires.
Given previous findings on the relative firm value of an internal versus external individual hire (Bidwell 2011), our study corroborates that firms may also realize overall firm performance benefits with higher degrees of ILM use. Our study suggests that firm benefits of stable and continuous employment relationships gained through internal staffing override the merits of lateral acquisitions.

Authors

• Rhett Brymer, University of Cincinnati

• Hiroshi Ono, Hitotsubashi University Business School