Insurance between firms: the role of internal labor markets

We explore how business groups use internal labor 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 technical managers 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 organization 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 organizations to bypass hiring and firing frictions; they provide job stability to employees as a byproduct. (first published January 2015 This version January 2020)