Managers, Training, and Internal Labor Markets
57 Pages Posted: 5 Dec 2013 Last revised: 18 Feb 2014
Date Written: December 19, 2013
We propose a theory that emphasizes the role of managers for the production and allocation of human capital in firms. Managers invest time to train junior employees, and acquire information about the juniors' abilities that is valuable for job assignments. This dual role of managers matters especially in a multidivisional firm, whose internal labor market may be structured in two distinct ways. In a "silo," junior workers are eligible only for a transfer or promotion in the division they currently work in; in a "lattice," they can also be assigned to another division. The prospect of losing a good worker to another division undermines a manager's training incentives, and may encourage her to misrepresent the information she provides about her workers. We show that because of these agency problems, implementing a lattice to achieve better job assignments also leads to higher wage costs for the firm. As a result, either silos or a lattice can be optimal. Our comparative-statics analysis suggests that the recent trend for firms to facilitate cross-divisional mobility may be caused by product market competition, a tight managerial labor market, and skill-biased technological change.
Keywords: human capital, internal labor markets, agency problems, multi-divisional firm, intra-firm mobility, careers, training, war for talent
JEL Classification: D2, D8, L2, M5
Suggested Citation: Suggested Citation