Internal and External Labor Markets

i) Internal Labor Market

In the Internal labor market, the firm recruits the worker or employee within the organisation using transfer or promotion of the existing employee. Thus, the labor market lies within the organisation. The internal labor market reduces hiring and training costs, as the employee already works for the organisation. It motivates the existing employees to work better and get promotions. In addition, it also reduces the chances of uncertainty as the employer is aware of the employee’s productivity. In this market, wages are determined internally without any market pressure.

For example, An organisation where entry-level jobs advance to mid-level management roles and finally to executive positions, the workers are supported in developing their skills they need for development by training and development programs, and then are encouraged to apply for promotions.

Features:

• Promotes Loyalty: Internal Labor Market promotes loyalty and commitment among the employees.
• Opportunities: With this, the existing employees can capture the promotion and career development opportunities.
• Knowledge Retention: This market hires employees within the organisation which helps in retention of knowledge within the organisation.

Advantages:

• Cost-effective Method: The organisation can save their time, money and efforts in recruiting new employees from outside and promote their existing employees.
• Employee Motivation: In this case, the employee can have various opportunities for growth in the organisation, increasing their morale and performance level.
• Employee Retention: When employee gets recognised for their work and gets promoted to higher positions then employee feel satisfied and do not leave the organisation. Thus, it increases the employee retention.

Disadvantages:

• Limited Talent Pool: Under this method, the organisation completely depends upon the existing employees which can limit diversity of thinking and experience inside the organisation.
• Favoritism: If promotions are not made openly and merit-based, there is a chance of favoritism or bias.
• Lack of Skills: Some positions are unsuitable for internal recruitment, especially if the current employees lack the necessary abilities.

ii) External Labor Market

In the external labor market, the firm recruits workers or employees outside the organisation to fill the vacant position. According to the theory of external labor markets, employees shift between companies without restriction, and salaries are decided collectively, with little control over the wage policy of the firms. The company can hire outside candidates to fill positions at all levels of a company. The positions include CEOs, marketing positions, consultancy, and contractual appointments in government organisations. Many factors can affect the determination of wages such as job mobility and institutional barriers.

For example, To find experienced software developers, a tech firm that has wanted to expand its engineering team to meet project deadlines may look to external labor markets. The organisation can access a diverse pool of people with the particular skills and expertise needed for the roles by utilising job boards, recruiting agencies, and networking events.

Features:

• Specialised Skills: The employees from outside the company can have knowledge or abilities which are not available within the company. It can help the company in making better decisions.
• Reduced Bias: When compared to internal promotions, external recruitment methods can be unbiased and objective.
• Rapid Expansion: External Recruitment promotes rapid growth and expansion by appointing skilled individuals.

Advantages:

• Diverse Talent Pool: Under this method, the organisation recruits employees from external market which allows diversity of thinking and experience outside the organisation.
• Fresh Prespective: This method obtain new perspectives and ideas to the businesses by recruiting the competent employees from external environment.
• Eliminating Groupthink: The external labor market can help break groupthink and question the current situation in the company.

Disadvantages:

• Costly Method: The organisation have to incur huge costs in recruiting new employees from external market.
• Longer Orientation Period: It usually takes longer for new employees to get used to the dynamics, culture, and processes of the organisation.
• Difference in Culture: It can be difficult to determine whether new employees would fit well with the organisation’s culture.

The market that deals with the demand and supply of labor is known as the Labor Market (also known as the job market). In the labor market, employer and worker/employee connect on a common ground, which is wages or salary paid by the employer to the worker or employee for their work. This concept can be applied at the microeconomic or macroeconomic level.

At the microeconomic level, individual organisations take part in hiring, firing, and adjusting hours worked and pay for their employees. The number of hours workers put in and the intersection between supply and demand determines their pay in terms of earnings, salary, and perks. At the macroeconomic level, many factors can influence the supply and demand of labor such as dynamics of the local and international markets, immigration, population age, and level of education.

Geeky Takeaways:

• The supply and demand of labor determines the labor market, in which employers provide the demand and employees provide the supply.
• The labor market can be applied at the microeconomic or macroeconomic level.
• The macroeconomic factors that can influence the labor market are unemployment rates and labor productivity rates.
• The microeconomic factors influencing the labor market are Individual wages and the number of hours worked.