Internal Labour Markets in the Context of the Global Economic Changes - Essay Example

Internal Labour Market In economics, theory of labor and internal labor market and its analysis are more important and relevant considering therecent past and the present economic condition. Before a detailed discussion of internal labour market an appropriate definition of it must be considered; where Doeringer and Piore (1971, pp. 1-2) has defined it ‘an administrative unit such as a manufacturing plant, within which the pricing and allocation of labour is governed by a set of administrative rules and procedures’ (Economics of Labour 2008). There are some very special and identical characteristics, which are identified for internal labour management. As per the set of characteristics, there are limited avenues of entries in an organisation at its lower level, where posts are filled up by gradual promotion, wages are measured in accordance with job and create a stable and long lasting employment structure (Economics of Labour 2008). Now the question is why do ILMs exist? It is because of the ILM’s status as a mentor of job skills and training. ILM helps in continuous growth of skills. Custom is another field where ILM works as ‘an unwritten set of rules based largely upon past practice of precedent’ (Economics of Labour 2008). The theory of social custom fair habit, employment relationship in a long run and combined authorities of wage consideration are surely surrounded by the presence of high percentage of unemployment, decentralisation in wage and salary pay consideration. An important feature of capitalist employment is internal labour market, along with the close relationship with the economic theories of ILMS. Efficiency centric theories of the ILM face difficulties in discussing the quick changes in employer’s strategies and labour market structures and classification of firms and employees. The theories, which are based only on classification of firms and employees; highlight mainly to those theories which are depending upon the distinctions of firms into either primary sector, where employees are offered developed, internal carrier options and they are surely characterized by firm specific skills., or secondary sector, where firm needs low skilled, un-united workers through labour market. (Nolan and Slater, 2003) The theory and its argument do not state that with the help of ideal type of ILM structures, the labour market has got no importance to act over employer’s potential power. The problem is not that the ILM system has no importance in the labor market but the lack of specification of the formulation of the ILM. In the general characterisation, institutional economists have indicated those organisations, which act to protect employees from competitive market conditions. At the same time it is also necessary to detect those organisations that work to create and force a divided labour force and to check the influence of the external labour market on the area of internal employment system. For instance, analysis of the relationship in between sex divisions in the labor market and employer’s habits indicate a series of 12m systems staying between ‘Strong’ and ‘Weak’ (Creedy & Whitfield 1988). In general, the aim of the perfect type of ILM structure is employee commitment and low labour termination. It could have got in spite of ‘Strong’ ILM tricks, the payment of comparatively high wage percentages or employer investment in training and carrier models. Without such an alternative way, the economists may get influenced to take wrong decision in the absence of traditional ILM structures and at the approximate rise in atomistic bargaining in the labour market causing the renewed completion in the relevance of neoclassical analysis. (Fine, 1980) With comprehension to the cause and the nature of existence it is now to rationalize the truth of its existence. The matter of existence is highly constructive in the personnel level of the organisation. Here the room for job creation is narrow and is controlled by the concern by the virtue of the work force contribution, delivery and seniority. And precisely this is the concept in vogue, in the present market work force and payroll management system. It is again indicating the internal labour management’s entity in terms of wages and compensation. Like any contemporary payroll practice, ILM follows the philosophy of compensation as per the job profile and the responsibilities of the individual assigned by the firm; not as per the individual and then its roll. This reflects the ILM’s point of view of considering the status of the job in the firm rather than the individuals performing it. This is a straight cut approach of respecting the job or the position, which will be served by many individuals over the time. This is the concept widely followed by the Military Organisations across the world (Williamson, Wachter and Harris 1975). The above mentioned does not mean that it holds a one way vertical where the employees are left alone or the turnover rate is high. To settle this issue firms are following the performance based economical matrix where stability and long-term employment are the prime concern. Here firms are concentrating on the relativity of in house worker’s performance, rather than pay structure in the same line of firms. The performance status in turn leads to the permit of workers training programme. The process takes time and thus a longer tenure for the workers with the firm. It counts the individual outcome that finally delivers a mass or force outcome as it includes both the individual and the group behaviour. Reconsidering the compensation factor, by design it is a long-term structure where the wages increase as the work force oppose attrition. It controls the fixed employment cost of the firm, which is a mirror effect of the present time concern of the cost cutting. (Economics of Labour 2008) Features of internal labour market then are interpreted as ensuring low turnover for which the fixed employment costs can be recouped. This is because, the firm has the interest to retain the employment to recover training cost and further workers have the interest to retain the employment for career oriented training for self- development, resulting higher productivity. Bellow shown is a graphical presentation of the deferred compensation, which is a perpetual issue of fixed employment cost. •Assume for simplicity that worker’s MRPL remains constant throughout lifetime •Lifetime earnings are equal to lifetime marginal product in total but firm pays wage below MRPL initially, and above in later years (beyond T*) –this is ‘deferred compensation’. Therefore area of triangle A equals that of B Thus it shows the ROI of both employer and employee that every firm practice at present. Existence of this model in ILM reflects its credence and the worth of its existence in the labour economy. From numerous personnel point of view the concept of ILM is a master plan governing work force appraisal, avoiding clash and setting win-win situation for the worker and the master. Osterman (1984) developed the three ring analogy is a starting point for a framework to understand changing systems of ILMs. Given is the ILM structure and its practice, it is necessary to mention how external and internal competitive pressures mutually interact upon firms and to assess the implications for different groups of workers; thus creating a special set of expertise and the ports of job too. In the present External Labour Market one goes through this maze often, but fails to see its governance structure. Firms might have problems to satisfy coming needs for firm specified skills given the well spread disbelief on the search of a work for lifetime, and the time taken for remodeling such a faith can be a decade rather than years (Siebert & Addison 1991). The socio political processes those, which are not suitable for the firms and show the ways of dependent nature, might be termed as intra firm; and acts considering the traditional ways of working habits and employment relationship. This adds the tradition of industrial relationships and experience of disputes. The historically derived structure of wage differentiates between different occupational levels and grades within the firm that rules the job demarcations, the form of division between ‘insiders’ and ‘entrants’ and differentiates norms of fairness. The socio – political rules are abnormal to the firms, which act as an additional controller in the creation or transformation of the ILM system. This demand results a long standing debate in economic theory that has recently seen a revival of interest in the boundless effects of fairness on the wage setting process or a ‘gift exchange ‘ and as an extra working factor in ‘ insider – outsider ‘ models of unemployment. The traditional neoclassical view to the character of customary and organisational factors shows faith on Marshall’s distinction between the short run and the long run. For example in ‘the theory of wages’, Hicks (1966) attempted to veil the social, historical and political dimensions to the employment relation behind the omnipotent power of market trends. It is true that a theory of the ILM is able to explain that how ILMs have changed, along with the changing nature of external options of the wages (Grimshaw & Rubery 1998). Creating a powerful economic and social influence, which acts upon the long-term development of a firm’s ILM system, Osterman analyzed the changing patterns of ILM system in the 1980s in terms of a procedure of change through a set of ‘three rings’. Here the first ring represents changes in firms, termination of employment systems, caused by technological change or new competitive performance consideration, the middle ring consists of customs, norms and politics that are historically considered for a particular firm. And the third and outermost ring shows the external labor market institutions such as minimum wage legislation and the social security systems. Though Osterman stated the influence of the external conditions in discussing the patterns of ILM systems within a country, he indicated an important development in social structural literature, of which identity is ‘imitation’ as an important controller of firm’s decision taking. New institutional theoretical performance to an economic analysis of employment relationship does not produce a perfect and satisfactory framework which helps to discuss the recent changes which are also connected with up to date topic. With a brief description of Williamson’s analysis of ILM and reconstruction of some well known economic theories, the relationship between ILM and ELM, labour and different forms of employment organisation, the narrow characterisation of labor skills and wage bargaining, the factors, the influence, the changing picture in labour market come forward with enough clarity. So we can easily notice what the trend of the recent past in ILM is. Here one thing needs to be said that, it is also the trend of the some conservative government to decide on evading national wage in favour of the institutional wage setting in health sector and in many sectors where workers are away from competition of economic pressure. This kind of change is very much needed for a radical shake up of public sector pay policy. Keeping eye on global economic changes this topic surely reveals that approaches to internal and external labor market and their integration are one of the important economic issues today. A theory of changing ILM systems cannot be limited in observing the shifting balance of idiosyncratic skills, the changing composition of full time and part time workers, or the rise of the firm. Theoretical frame works that posit static, dualistic models of wage and employment relation encourages evaluation of this type. The logic of ILM structure is explained as an efficient functional outcome of the internal matrix of technical conditions (Williamson, Wachter and Harris 1975). On the contrary it can be said that the aim of accounting for institutional structures through efficiency optimisation fails to consider the ‘Suboptimal’ outcomes that result from situations involving inertia, mimicry, or cumulative causation. The ILM structures are theorised independently over the changing organisational conditions in the external labor market. In the alternative dynamic approach, which along with these paper has been developed states that internal and external competitive pressure primarily react to make the design of the employer strategy and the labor market positions of employees, changes the level of unemployment and the number of alternative job opportunities, and employee expectations regarding pay and job security. It indicates the probability of a diversity of ILM systems, which helps the processes of change those are needed. Unconstrained capacity to adjust wages in response to changes in the reservation position (Grimshaw & Rubery 1995). Such flexibility implies a continuous adaptation of internal wage differentials, as different employee groups experience changing patterns of alternative job opportunities. This unearths viability of this system and the maturity the same has gained over the time. For the job market and for the industries too, the system has got room to alter and accommodate the structural shift. It is based on a cyclic and relative order where one helps other for the self-help. The reason being in this order is because; here all the aspects are set and viewed on a long-term basis. But on the contrary, many factors combine to contravene the assumption of high responsiveness. Societal norms which link wage security with seniority, for example, suggest that despite a typically negative relation between an employees age and reservation position, internal wage differentials reflect a consensus that wages should not decline with age. This is the basic challenge for the traditional payroll system, where gaining seniority was a compensation incremental factor. But, as per ILM slabs pre-exists and with working tenure an employee learns more, escalates in position and finally earns more. In this contemporary system there is hardly any space for performance ceiling. In brief, the system has rationalised its existence with a perpetual association in the market with all its constructions and deconstruction over and again. From the days of barter system to the age of globalisation, market has been on the side for different parties. Keeping in mind the priorities the market has formulated its fishbone structure to source the major parties. There was time when the system was more inclined to employers, but now times they have changed. With the introduction to open door policy, the choice factor for both the parties has become ample. With increasing ports of job creation the effect had cast a spell on both the side where both employer and employee are in a win-win position. But to retain this position, it is favourable on both the side to understand and practice the internal system of the market economy in order to create a niche in the external system. Thus it is self- explanatory that for any economist approving the existence of the Internal Labour Market is a very obvious thing to realise. References 1. Creedy, J and Whitfield, K 1988, ‘The economic analysis of internal labour markets’ Bulletin of Economic Research, vol. 40, no. 4, pp.247-269 2. Economics of Labour 2008. “Lecture 4: The internal labor market”, ID 4219M 3. Fine, B 1980, Economic Theory and Ideology, London: Edward Arnold 4. Grimshaw, D and Rubery, J 1998, ‘Integrating the internal and external labour markets’ Cambridge Journal of Economics vol. 22, no.2, pp.199-220 5. Hicks, J R 1966, The Theory of Wages, second edn, Macmillan, London. 6. Nolan, P and Slater, G 2003, ‘The labour market: History, structure and prospects’, in P.K. Edwards (ed.) Industrial Relations: Theory and Practice 7. Osterman, P 1984, Internal Labour Markets, MIT Press, Cambridge, Mass. 8. Siebert, W and Addison, J 1991, ‘Internal labour markets: causes and consequences’ Oxford Review of Economic Policy vol.7, pp.76-92 (e) 9. Williamson, O; Wachter, M and Harris, J 1975, ‘Understanding the employment relation: the analysis of idiosyncratic exchange’, Bell Journal of Economics, Vol. 6 No. 1 pp.250-79 Read More