Managers, Training, and Internal Labor Markets

Guido Friebel, Michael Raith
2013 Social Science Research Network  
We propose a theory that emphasizes the role of managers for the production and allocation of human capital in ...rms. Managers invest time to train junior employees, and acquire information about the juniors'abilities that is valuable for job assignments. This dual role of managers matters especially in the modern, multidivisional ...rm, whose internal labor market can be structured in two distinct ways. In a "silo" or traditional job ladder, junior workers remain in the same division; in a
more » ... e division; in a "lattice," they can also be assigned to another division. The prospect of losing a good worker to another division undermines a manager's training incentives and may give her an incentive to misrepresent the information she provides about her workers. We show that because of these two agency problems, implementing a lattice to achieve better job assignments also leads to higher wage costs for the ...rm. As a result, either silos or a lattice can be optimal. Our comparative-statics analysis suggests that the recent trend for ...rms to implement lattices may be caused by increased product market competition, a tight managerial labor market, skill-biased technological change, and an increasing importance of general human capital.
doi:10.2139/ssrn.2363492 fatcat:byggxbfmr5havpcfjqc5fqe3fu