Traditional economic theory held that the labor market acted as a high-turnover spot market where at least one side of the market –either employers or employees– saw few advantages in maintaining stable employment. In the 1950s, 1960s, and early 1970s however, the rival Internal Labor Market (ILM) theory gained acceptance. ILM theory argues that labor markets tend to be made up of distinct noncompeting groups, while a “port of entry” separates work within the firm and from the external labor market. Labor markets inside the firm are governed by a unique set of rules and actions unlike those found in conventional markets. This essay presents the development of ILM theory since its inception, and offers an integrative theory of how ILMs evolve.
