Internal Promotion and External Recruitment: A Theoretical and Empirical Analysis

Abstract

A crucial personnel decision employers face is whether to fill a limited number of managerial positions with internal hires or external recruits. We present a theoretical and empirical analysis of this decision and how it relates to wage setting and the provision of general training. The theoretical framework is a promotion tournament involving M competing firms with heterogeneous productivities, two-level job hierarchies, and a fixed number of managerial positions. Employers provide general training to their workers, some of whom are promoted internally or raided by competing firms. We also consider an alternative model based on variation in the quality of the worker-employer match. Both models predict the following results: As the number of workers at the lower level of the hierarchy increases, holding fixed the number of managers at the top, 1) internal promotion increases relative to external recruitment, 2) employers provide more general training, 3) the percentage of employees in the upper tail of the wage distribution decreases, 4) profitability increases. We test these predictions using data from the 2004 wave of the WERS, a nationally-representative cross section of British establishments. The empirical results are supportive and contribute to the literature some new stylized facts concerning how key employer decisions vary with both the size and shape of the organizational hierarchy.

Internal hiring or external recruitment?

“…Much of the empirical research on internal and external hiring simply documents their relative prevalence, describes how observable characteristics differ between internal and external hires, and identifies the types of firms that tend to rely heavily on internal hiring [6], [7], [8]. The empirical evidence covers a variety of contexts (different countries, occupations, and so on), and these differences should be kept in mind when drawing conclusions.…”

“…Companies with more "bottom-heavy" hierarchies (with many workers distributed at the lower levels of the job hierarchy and few at the top) exhibit a greater tendency to hire internally [8].…”

“…Recent empirical evidence is consistent with the hypothesis that training policies and internal hiring policies are complementary in some firms. Evidence from a 2004 cross-section of British establishments reveals that larger, more bottom-heavy employers were more likely to rely on internal hiring policies and, simultaneously, to do more training [8].…”

Internal Labor Markets in Equilibrium

“…Throughout the paper I will refer to establishments that report favoring internal candidates as "internally focused", which I equate to the promotion-promise firms in my model. This same question was previously used by DeVaro and Morita (2013) to ascertain an establishment's promotion practices.…”

“…The model is also robust to controlling for the top-heaviness of the hierarchy through the fraction of workers who are employed as managers at the establishment. This was previously noted as a difference between establishments with different promotion practices by DeVaro and Morita (2013). 44 The education controls include 6 dummies to represent, from lowest to highest achievement: No academic qualifications, GCSE grade D-G equivalent, GCSE grade A-C equivalent, 1 GCE A-level equivalent, 2 or more GCE A-level equivalents, Bachelor's degree equivalent, and graduate degree.…”