The internal labor market literature has its roots in the industrial rela- tions-labor economics literature of the 1950’s and early 1960’s. The important contributions in this area include the work of Dunlop ( 1957; 1958), Kerr ( 1954), Livernash ( 1957), Meij ( 1963), Raimon ( 1953), and Ross ( 1958). This work, which is descriptively oriented, has since been developed and extended by Doeringer and Piore (1971).
The distinction between structured and structureless labor markets is especially notable. Whereas spot market contracting characterizes the latter [as Kerr puts is, the “only nexus is cash” ( 1954, p. 95)], structured markets are ones for which a large number of institutional restraints have developed. Outside access to jobs in structured markets is limited to specific “ports of entry” into the firm, which are generally lower-level appointments. Higher- level jobs within the firm are filled by the promotion or transfer of employees who have previously secured entry. Training for these jobs involves the acquisition of task-specific and firm-specific skills, occurs in an on-the-job context, and often involves a team element. The internal due process rules, which develop in these internal markets, “are thought to effectuate standards of equity that a competitive market cannot or does not respect” ( Doeringer and Piore, 1971, p. 29).
Though coming from a somewhat more theoretical tradition, the study of human capital represents a second and related approach to labor market analysis. It likewise makes the distinction between specific and general training. Incumbent employees who have received specific training become valuable resources to the firm. Turnover is costly, since a similarly qualified but inexperienced employee would have to acquire the requisite task- specific skills before he would reach a level of productivity equivalent to that of an incumbent. A premium is accordingly offered to specifically trained employees to discourage turnover, although in principle a longterm contract would suffice (Becker, 1962, pp. 10-25).
The present analysis is both similar to and different from each of these traditions. It relies extensively on the institutional literature for the purpose of identifying the structural elements associated with internal labor markets. Also, my interpretation of the institutional restraints that have developed in such markets is consonant with much of this literature. What distinguishes my treatment from prior institutional discussions is that it is more micro- analytic — it expressly identifies and evaluates alternative contracting modes and employs the organizational failures framework apparatus throughout.
Like Becker, I am greatly concerned with the organizational implications of task-specific training. But whereas he finds that long-term contracts are vitiated because the courts regard them as a form of involuntary servitude (Becker, 1962, p. 23), I emphasize that the transaction costs of writing, negotiating, and enforcing such contracts are prohibitive.
Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.