Working Paper: CEPR ID: DP17890
Authors: Giacinta Cestone; Chiara Fumagalli; Francis Kramarz; Giovanni Pica
Abstract: We explore how business groups use internal labor markets (ILMs) in response to changing economic conditions. We show that following the exit of a large industry competitor, group affiliated firms expand and gain market share by increasing their reliance on the ILM to ensure swift hiring, especially of technical managers and skilled blue collar workers. The ability to take advantage of this shock to growth opportunities is greater in firms with closer access to their affiliates’ human capital, as geographical proximity facilitates employee relocations across units.Overall, our findings point to the ILM as a prominent mechanism making affiliation with a business group valuable at times of change. For the ILM to perform its role in the face of industry shocks, group sectoral diversification must be combined with geographical proximity between affiliates.
Keywords: Labor market frictions; Business groups; Internal labor markets
JEL Codes: G30; J20; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| closure of a large competitor (L19) | increase in share of internal hires (M51) |
| closure of a large competitor (L19) | increased reliance on internal labor markets (ILM) (J29) |
| closure of a large competitor (L19) | hiring of skilled managers and technical workers (J24) |
| better access to ILM (Y50) | greater expansion and market share growth (L25) |
| geographical proximity to affiliates (R32) | better access to ILM (Y50) |
| sectoral diversification among affiliates (L22) | better access to ILM (Y50) |