Career Blocker

Wage inequality has increased over the last few decades, particularly between high- and middle/low-educated workers (see e.g. Acemoglu and Autor, 2011; Autor, 2019; Dustmann et al., 2009). Recent work has documented the key role of firms in explaining pay differences between similar worker and how changes in the wage structure between different firms as well as changes in the sorting pattern of different worker- and firm-types contribute to the rising wage inequality Card et al., 2013; Song et al., 2019). What underlies these pattern is less well understood. While a number of explanations have been put forward, including declining bargaining coverage, technological change, and an increase in outsourcing, less is known about the role of changes in firm policies and in particular how changes to the design of internal labor markets (ILMs) affect worker outcomes.
The absence of evidence is surprising given that ILMs constitute an important source of wage growth (Doeringer and Piore, 1985; Baker et al., 1994; Huitfeldt et al., 2023), especially for workers who have been trained at the firm and exhibit a high degree of firm-specific human capital – typically middle/low educated workers without a college. Yet, such positions are usually slot constraint (Bianchi et al., 2023), and firms have discretion over whether to fill such positions internally vs. externally.
This paper proposes and tests the slowdown of internal career-progression caused by firms increasingly filling mid-management and management positions externally with high educated external workers instead of workers trained at the firm, as an alternative explanation for the recent rise in wage inequality between high and low wage workers. We examine this idea based on complementary datasets sourced from a large linked-employer-employee administrative data set from Germany which are representative on the plant level. We construct a measure of hiring policy based on the actually observed propensity to fill top positions externally instead of internally and cross-validate it using linked survey information on hiring policies. Using this measure, we document a decline in internal career progression and a simultaneous rise in filling these top positions externally, often stemming from firms that place many of their workers in external management positions such as consulting firms. To link these trends causally, we propose an identification strategy built around changes in firm policies to examine the worker-level consequences of changes in firms hiring policies for top positions. Non-top workers face lasting career penalties, especially among middle- and low-educated workers.