The Value of Internal Labor Market

Abstract

This paper argues that an organization's internal versus external hiring could influence its employees' productivity. The more (less) an organization uses internal (external) hiring, the more (less) employees would perceive internal advancement opportunities and become more (less) productive. We collected LinkedIn profiles of 267,887 US inventors and tracked their performance from 2000 to 2020. Using strict fixed effects on inventor-employer-title-location, we find that the same inventors performs significantly better when their firm has higher internal promotion rates, although this pattern largely disappears near the end of their career. This study underscores an important process by which firms' hiring strategies influence workers’ performance. 

Keywords: internal labor market, external hiring, innovation, inventor, career ladders, culture