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Institutions and Wage Formation in the New Europe

Edited by Gabriel Fagan, Francesco Paolo Mongelli and Julian Morgan

Institutions and Wage Formation in the New Europe addresses the role played by institutions in European wage formation with a focus on EMU and institutional change in labour markets.
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Chapter 4: Moving from the external to an internal labour market: job tenure, cycle and wage determination

Leandro Arozamena and Mário Centeno


Leandro Arozamena and Mário Centeno 1 INTRODUCTION Ever since Doeringer and Piore’s (1971) seminal study, considerable attention has been devoted to the analysis of wage determination within firms. The main observation in the resulting literature is that wage setting in such ‘internal’ labour markets differs substantially from the predictions that stem from regarding the labour market as competitive. As a consequence, research has focused on the reasons why these internal labour markets exist and on how they function. In broad terms, they are characterized by long-term relationships, and these in turn are usually explained by the existence of some form of firm-specific human capital that bonds the worker and the employer together. These explanations can also include issues relating to information and learning, as Gibbons and Katz (1991) and Gibbons and Waldman (1999) have recently shown. Naturally, however, a worker that could be but has not been hired by a given firm has not entered that firm’s internal labour market yet: she is taking part in a competitive, ‘external’ labour market, one that is much more similar to the analysis in standard, competitive models. Once the worker has been hired, then, a process must occur whereby she moves from the external to an internal labour market. Little effort has been made in attempting to describe and explain this transition. This chapter tries to fill that gap. Specifically, we analyse the shift from the external to an internal labour market as it is reflected in changes in the wage determination...

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