- 2 Internal Labor Markets and Dual Labor Market Theory
Without internalized labor and continuous employment contracts, there would be
little substance to the subject of HRM. The existence of internalized labor and the
development of internalized rules for the management of labor has been explained
within mainstream economics through the transaction costs or new institutional
economics literature, associated with the work of Williamson ( 1975 ) from the 1970 s
onwards. The use of open-ended and incomplete contracts is explained by the costs
of spot contracting, while the presence ofWrm-speciWc skills provides the rationale
for operating internalized labor markets designed to provide incentives to labor
with Wrm-speciWc skills to remain with the organization and cooperate in its
objectives.
Doeringer and Piore’s ( 1971 ) famous institutional analysis of internal labor
markets was not only published eVectively contemporaneously with transaction
costs explanations of similar phenomena but the two approaches also shared some
conceptual similarities, with the identiWcation ofWrm-speciWc skills as a core
rationale for the emergence of structured internal labor markets in both accounts
of hierarchy. However, in objectives and in methodologies the accounts diverge.
Doeringer and Piore’s motivation for the book was to escape from ‘reliance upon
market imperfections or non market institutions to explain deviations from the
results predicted by conventional economic theory’ ( 1971 : 1 ). Instead they started
the analysis with the core institutional structures that shape the operation of the
labor market—Wrms’ internal labor markets—and asserted administrative rules to
be not only present, but also relatively rigid, leading to quantity rather than price
adjustments. Job evaluation and custom and practice took precedence over market
information in shaping internal wage structures. This analysis thus rejects the
notion that institutions and customs in the labor market are dependent upon
their continued compatibility with market needs.
The novelty of their work was in the linkage of the emergence of internal labor
markets with the processes that create social exclusion and disadvantage. Failure to
gain entry to internal labor markets resulted in long-term and often increasing
inequalities as those in the primary market gained access to training and advance-
ment and those in the secondary sector were regarded increasingly as inappropriate
recruits for the primary market, even at times of labor shortage. Thus Doeringer
and Piore did what few HR theorists have done and considered the implications of
organizational HR strategies for the overall functioning of the labor market. They
also broke ranks with mainstream economic theory by pointing to the possibility of
economic or market-based structures contributing to labor market segmentation
and disadvantage. Most economics accounts attribute any segmentation or disad-
vantage to pre-market factors. To some extent, the Doeringer and Piore model
stands unsatisfactorily between the pure transaction costs accounts of the devel-
opment of internal labor markets and more fully developed social and historical
economics and hrm 79