Helping Employers Utilize Their Human Talent/Capital: A Case for Internal Labor Markets

By A. Nelse Grundvig

The Need

If you look up “skill shortage” on Google Scholar, you will find 286,000 results (as of July 26, 2016). The continued perception that there is skill shortage suggests employers’ are frustrated when finding someone with the needed skills and experience. While some employers report difficulties hiring the workers they need, there is little economic evidence, i.e., rising wages and falling availability of workers. In fact, the U.S. Bureau of Labor Statistics (2016), Employment Cost Index, reports that the percentage change in wages and salaries for all civilian workers from 2006-2016 averaged 2.2 percent.


Characteristics of an Internal Labor Market

Businesses can get talent by hiring a vendor or consultant, acquiring a business with the needed talent, recruiting externally (job postings), or recruiting and training internally. The military branches are examples of organizations where “internal labor markets” are used successfully to address the need for talent by using promotions, reassignment, training, and career guidance for staff internal to the organization. With few exceptions, career opportunities in the military begin with an entry-level position. Entrants are assessed, given opportunities to develop their skills and abilities in a work setting, and then reviewed to see how their talents fit the organization. The feedback process and having an awareness of available opportunities enable the development of a personalized career development strategy that accommodates both the desires of the individual and the needs of the organization.


There are several advantages of using internal labor markets:

  • Instilling a sense of pride and accomplishment within the organization;
  • Providing an incentive for those considering entry-level positions;
  • Reducing the costs of vetting applicants for higher-level positions; and
  • Not exposing the organization's need for talent to other businesses.


Internal labor markets take advantage of the institutional knowledge of existing employees, which increases productivity and lowers training costs for higher-level jobs. By relying on proven talent, it reduces the likelihood of a bad fit between an employee and the organization. It also reduces potential disruptions of established culture and procedures through socialization, since new hires typically begin at entry-level positions before taking on additional responsibilities. In addition, an internal labor market enables a career lattice by encouraging employees to develop their skills and abilities in a way that helps the business. By identifying likely career paths, employees and their managers/management can identify skills and experiences needed to further the employee’s career with the business.


Creating a System for Career Guidance within an Internal Labor Market

Creating a career lattice requires an understanding of the occupations used by the business or organization. To start, obtain the job titles and position descriptions from the business. Then use the Department of Labor’s occupational dictionary, O*Net (http://www.onetonline.org), to identify needed skills, credentials, abilities, and work values for the positions. In addition, obtaining local wage data by occupation will provide needed context. Create or use a career management information system to record the skills, interests, and abilities required for these positions, and match them to the career assessment results of potential internal candidates. Assessments that may prove helpful include career interests, competencies, work values, and learning styles. Additional expenses would be incurred with the use of a career management system, obtaining up-to-date labor market information including commuting patterns, changes in the jobs found at the business, and the expertise of a professional trained in the interpretation of career assessments.


Cautions of Using an Internal Job Market System

By using a career management system to record the assessments of employees, it is possible to match potential candidates with other jobs in the organization. It is important that all entities involved are aware that career guidance is a process being used within the context of the needs of the business. Asking the question, “Who is the client?” will help clarify the responsibilities and the expectations of the individual, the counselor, and the business. The answer needs to be clearly articulated to address ethical issues concerning confidentiality and conflict of interests. For example, when considering personnel changes, training, and development should management have access to individual career assessments or other measures and if they do, what is the role of the individual administering these assessments and how does management having access influence the responses by individual employees? Other cautions include:

  • Issues, such as the “halo effect,” where an overall impression colors one’s opinion of specific characteristics, as described by Thorndike (1920), may influence both those who counsel employees and those who make hiring decisions needs to be monitored to prevent inadvertent bias.
  • Likewise, not all situations can be addressed with an internal labor market. When a business needs to use skills outside of known skills, abilities and experience of employees then reliance on established criteria may not be appropriate.
  • Additionally, units in the organization may experience decreases in productivity when personnel are reallocated or otherwise unavailable due to training.


Calculating the Costs of an Internal Labor Market

The initial cost of setting up and using an internal labor market needs to be compared against the cost of not using an internal labor market. Focusing solely on the costs of using or establishing a system fails to consider the costs of not filling a position, costs of recruitment, training, and the effect this has on employee morale and productivity. If adopted with the appropriate cautions, an internal labor market with a goal of developing the talent and skills of those who have made a commitment to the business can be a smart investment.



Bureau of Labor Statistics. (2016). Employment Cost Trends. Retrieved from http://www.bls.gov/ncs/ect/


Thorndike, E.L. (1920). A constant error in psychological rating. Journal of Applied Psychology, 4, 25-29.


Nelse GrundvigNelse Grundvig works as Researcher for the Center on Education and Work at the University of Wisconsin - School of Education, home of the career information system, CareerLocker. Prior to his current position, Nelse served as a Policy Initiatives Advisor and Labor Market Information (LMI) Director for the state of Wisconsin. As such, Nelse has served on several committees and policy councils for the US Department of Labor’s Employment and Training Administration, the Bureau of Labor Statistics, and the US Census Bureau. He oversaw the Labor Market and Occupational Research Group for the North Carolina Employment Security Commission and worked as a research analyst for state of North Dakota. He also spent several years, as a principal trainer for the LMI Institute where he taught analysts, economists, counselors, administrators, and businesses how to use LMI and other career tools to address their needs. He is a recipient of the Charles Benefield award, an award given to individuals for advancing both the art and science of labor market information. Nelse is certified public manager and a member of the American Statistical Association and the National Career Development Association. His email address is grundvig@wisc.edu or ngrundvig@charter.net




Printer-Friendly Version