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Wage differences between internal and external candidates

Article Information:

Title:

 Wage differences between internal and external candidates

Author(s):

Wolter Hassink, Giovanni Russo

Journal:

International Journal of Manpower

Year:

2008 

Volume:

29 

Issue:

8 

Page:

715 - 730


DOI:

10.1108/01437720810919314

Publisher:

Emerald Group Publishing Limited


Acknowledgements:

The authors are grateful to the Dutch Ministry of Social Affairs and Employment for giving us access to the AVO-data. Two anonymous referees of this journal are gratefully acknowledged for their constructive comments.

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Abstract:

Purpose – The purpose of this paper is to investigate three hypotheses for the existence of a wage premium between incumbents and employees who are hired from other employers in the external labour market.

Design/methodology/approach – The paper presents estimates of wage equations for a sample of externally hired workers and internally promoted employees. It uses an employer-employee matched data set of Dutch firms from all economic sectors (1998). It controls for various observed characteristics of the firm, the worker and the job.

Findings – The estimates reject the hypothesis that firms rely more on observable characteristics for wage formation of external candidates. Nor do the estimates favor the prediction that there is a wage premium due to the option value of risky employees. Finally, employees who are recruited internally have on average a 15 percent higher wage (net of tenure) than comparable employees who are hired from other employers.

Research limitations/implications – It was found that there was a limited possibility of identifying risky employees.

Practical implications – Firms do not reward risky employees; the incumbents seem to be of better quality than the external hirees.

Originality/value – Here the focus is on hirees who were previously employed elsewhere. Usually, a broader definition of external hiring is used.

Keywords:

Internal labour market, Pay, Promotion, Recruitment, Risk management, The Netherlands

Article Type:

Research paper

References:

17 references

Article URL:

www.emeraldinsight.com/10.1108/01437720810919314

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