Abstract

We explore how business groups use internal labour markets (ILMs) in response to changing economic conditions. We show that group affiliated units faced with positive shocks to growth opportunities gain market share relying on their ILM to ensure swift hiring, especially of managers, high skill workers and skilled blue collar workers. A closer access to the group’s human capital facilitates employee relocations in order to fully exploit growth opportunities. Adverse shocks affecting one unit in the organisation increase workers’ mobility to other units in the group rather than to external firms, with stricter employment protection causing an additional increase in internal mobility. Overall, ILMs provide an insurance mechanism between firms in a group, allowing such organisations to bypass hiring and firing frictions; they provide job stability to employees as a by product.