Insurance Between Firms: The Role of Internal Labor Markets

70 Pages Posted: 12 Dec 2014 Last revised: 16 Apr 2018

See all articles by Giacinta Cestone

Giacinta Cestone

Cass Business School, City University London; ECGI

Chiara Fumagalli

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Francis Kramarz

Independent

Giovanni Pica

Idep, facoltà di economia; University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Milan - Centro Studi Luca d'Agliano (LdA); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Date Written: April 2018

Abstract

We investigate how internal labor markets (ILMs) affect labor adjustments and performance in business groups. We show that group-affiliated units faced with positive shocks to growth opportunities rely on the ILM to ensure swift hiring, especially of managers and other high-skilled workers. A closer access to the group's human capital facilitates employee relocations and causes additional productivity and market-share gains in the aftermath of the shock, suggesting that ILMs help group members fully exploit growth opportunities. Adverse shocks affecting one unit in the organization increase workers' mobility to other group units rather than to external firms, with stricter employment protection causing an additional increase in internal mobility. Overall, ILMs emerge as a co-insurance mechanism, allowing organizations to bypass hiring and firing frictions and providing job stability to employees as a by-product.

Keywords: Business Groups, Human Capital, Labor Market Frictions, Internal Labor Markets

JEL Classification: G30, L22, J20

Suggested Citation

Cestone, Giacinta and Fumagalli, Chiara and Kramarz, Francis and Pica, Giovanni, Insurance Between Firms: The Role of Internal Labor Markets (April 2018). BAFFI CAREFIN Centre Research Paper No. 2014-162; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 489/2016. Available at SSRN: https://ssrn.com/abstract=2537290 or http://dx.doi.org/10.2139/ssrn.2537290

Giacinta Cestone

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ECGI ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Chiara Fumagalli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy
+39 02 5836 5311 (Phone)
+39 02 5836 5318 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Francis Kramarz

Independent

No Address Available

Giovanni Pica

Idep, facoltà di economia ( email )

Via Giuseppe Buffi 13
Lugano, Ticino 6900
Switzerland
+41586664784 (Phone)

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

University of Milan - Centro Studi Luca d'Agliano (LdA) ( email )

Via P. Amedeo 34
Milano, Mi 20122
Italy

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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