A Theory of Wage and Promotion Dynamics in Internal Labor Markets

43 Pages Posted: 9 Jul 2000 Last revised: 9 Oct 2010

See all articles by Robert S. Gibbons

Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)

Michael Waldman

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: March 1998

Abstract

We attempt to explain employment practices in internal labor markets using models that combine job assignment, on-the-job human-capital acquisition, and learning. We show that a framework that integrates these familiar ideas captures a number of recent empirical findings concerning wage and promotion dynamics in internal labor markets, including the following. First, real wage decreases are a minority of the observations, but are not rare, while demotions are very rare. Second, there is significant serial correlation in wage increases. Third, promotions are associated with particularly large wage increases, but these wage increases are small relative to the difference between average wages across levels of a job ladder. Fourth, on average, workers who receive large wage increases early in their stay at one level of a job ladder are promoted more quickly to the next level. Fifth, individuals promoted from one level of a job ladder to the next come disproportionately, but not exclusively, from the top of the lower job's wage distribution (and arrive disproportionately, but not exclusively, at the bottom of the higher job's wage distribution).

Suggested Citation

Gibbons, Robert S. and Waldman, Michael, A Theory of Wage and Promotion Dynamics in Internal Labor Markets (March 1998). NBER Working Paper No. w6454. Available at SSRN: https://ssrn.com/abstract=226199

Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )

E52-432
MIT
Cambridge, MA 02142
United States
617-253-0283 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Waldman (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-8631 (Phone)

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