DP11336 Insurance Between Firms: The Role of Internal Labor Markets
We investigate how internal labor markets (ILMs) allow business groups to accommodate positive and negative shocks calling for labor adjustments. Group-affiliated units faced with positive shocks rely on the ILM for new hires, especially managers and other high-skilled workers, thus overcoming human capital bottlenecks that may curb growth. Adverse shocks affecting one unit in the organization increase workers' mobility to other units rather than external firms, with stricter employment protection causing an additional increase in internal mobility. ILMs emerge as a co-insurance mechanism, allowing organizations to bypass firing and hiring frictions and providing job stability to employees as a by-product.