1 Internal Promotion and External Recruitment : a Theoretical and Empirical Analysis

A crucial personnel decision employers face is whether to fill a limited number of managerial positions with internal hires or external recruits. We present a theoretical and empirical analysis of this decision and how it relates to wage setting and the provision of general training. The theoretical framework is a promotion tournament involving M competing firms with heterogeneous productivities, two-level job hierarchies, and a fixed number of managerial positions. Employers provide general training to their workers, some of whom are promoted internally or raided by competing firms. We also consider an alternative model based on variation in the quality of the worker-employer match. Both models predict the following results: As the number of workers at the lower level of the hierarchy increases, holding fixed the number of managers at the top, 1) internal promotion increases relative to external recruitment, 2) employers provide more general training, 3) the percentage of employees in the upper tail of the wage distribution decreases, 4) profitability increases. We test these predictions using data from the 2004 wave of the WERS, a nationally-representative cross section of British establishments. The empirical results are supportive and contribute to the literature some new stylized facts concerning how key employer decisions vary with both the size and shape of the organizational hierarchy.