Chapter 5: Understanding Your Internal Labor Market

Overview

The starting point for a human capital strategy is a clear understanding of the workforce, both what it is today and what it is becoming. Like a living organism, a workforce evolves constantly as new people enter, others leave, and employees acquire new skills and experience. Thus at any moment in time an organization’s workforce is the outcome of the following three interrelated labor “flows” and the effectiveness with which they are managed:

• Attraction. Who comes into the organization? How successful is the organization at drawing in the kinds of people it needs to achieve its goals?

• Development. How do people move through the organization, through different assignments, jobs, and levels of responsibility? How successful is the organization at growing and nurturing the kinds of human capital it needs to execute its business strategy?

• Retention. Who is staying and who is leaving? How successful is the organization at retaining people who have the “right” capabilities and produce the highest value?

Attraction, development, and retention interact in a dynamic process that over time determines the characteristics and effectiveness of the workforce. The dynamics are influenced by both management practices and external market conditions. In other words, they operate in an open system. Because that system governs labor transactions inside an organization, we call it an internal labor market, drawing on a concept that is well developed in the research literature. We will return to that concept below.

As in any system, changes in one component produce changes in others. For instance, changes in labor market conditions, such as local unemployment rates, typically produce changes in an organization’s retention rate, although the degree of change varies from organization to organization. So if labor markets tighten, turnover is likely to rise to some degree as employees take advantage of growing opportunities elsewhere. Changes in retention in turn affect the pace and pattern of hiring as well as the rate at which incumbents are promoted. These outcomes also may affect the ways in which those incumbents develop and the kinds of experiences they acquire in moving from job to job. This chain of events also is influenced by the level and pattern of rewards, which signal the capabilities, behaviors, and attitudes the organization truly values. These affect how employees value the employment relationship, and so on.

The point we are making should be clear. The workforce is always in flux, always in the making. The way a company manages these dynamics determines the kind of workforce it will have and how that workforce will perform.