Internal Labor Markets and the Structure of Wages and Employment with Respect to Qualifications: A Survey of the Recent Literature.

The existence and development of internal labor markets has a strong impact on the structure of wages and employment. The paper discusses three important aspects of internal labor markets. Firstly, segregation due to qualification has been growing between establishments during the last years, accompanying the growing wage inequality between skills. Recent theoretical work trying to explain these combined facts refers to the properties of the production function. This leads to the following question: When do establishments choose a high wage strategy combined with a highly trained workforce and when do they opt for a low wage strategy employing a poorly trained workforce? Secondly, the measurement of qualification can be improved by using more establishment oriented variables that capture the interaction of qualification, information technologies and organization of work. The investment in information technologies has the strongest positive impact on productivity in firms with a high human capital endowment and a decentralized organization of work. Thirdly, some important restrictions for the adjustment of wage and employment structures are due to the existence of internal labor markets, and they are very similar across countries. Under specific conditions these restrictions can create incentives for firms to invest in the human capital of less qualified workers improving their wage and employment opportunities.