Overview

In chapter 3, we developed an empirical measure to classify occupations between internal and occupational labor markets by contrasting tenure with an employer with tenure within an occupation. The measure was then applied to a subset of the 141 occupations available in the dataset.

In this chapter we focus on ranks or job levels rather than occupations, and study from an empirical viewpoint the relationship between seniority and earnings. Jobs that do not have a well defined occupational content but fit into a ranking hierarchy – such as department head, section head, subsection head, and foreman – are usually organized in Japan into ILM employment systems. A key feature of internal labor markets is the frequency of long-term employment relationships, that help to foster the accumulation of human capital.

Seniority affects earnings not only directly, by influencing productivity, as predicted by human capital theory, but also indirectly, by sorting individuals into different tasks, that are often ordered by degree of responsibility, skills, and authority. When earnings are partly attached to jobs, the allocation of workers to jobs has important implications for earnings growth, because individuals can earn more not only by staying longer on a job but also by moving to a more important job, either within the firm (internal promotion) or between firms (inter-firm mobility). In internal labor markets, internal promotion is important and the relationship between seniority and earnings is partly accounted for by the fact that seniority can affect promotion prospects.