Internal labor markets with two types of promotion and two tiers of salary: theory and evidence from China

Jiang, Kun; Wang, Susheng

Abstract

This paper shows the optimality of a two-tier linear salary scheme in internal labor markets and identifies conditions under which discretionary promotion is better than rule-based promotion and vice versa. Our main findings are: (1) regardless of whether discretionary promotion or rule-based promotion is used, a two-tier salary scheme is optimal; (2) the salary is contingent on promotion, which is fixed before and linear after promotion; (3) if the difference in human capital among agents is small, discretionary promotion is superior; (4) if the expected replacement cost of human capital is high, discretionary promotion is superior; (5) if the risk of facing/incurring a high replacement cost of human capital is high, discretionary promotion is superior; (6) if the chance of having a high human capital agent is high, rule-based promotion is likely to be superior; and (7) if the productivity improvement from a job promotion is large, rule-based promotion is likely to be superior. We have also found empirical evidence in support of our theory on the two-tier salary scheme.

Citation

Jiang, K., & Wang, S. (2022). Internal labor markets with two types of promotion and two tiers of salary: theory and evidence from China. China Economic Review, 72, Article 101756. https://doi.org/10.1016/j.chieco.2022.101756

• Journal Article Type: Article
• Acceptance Date: Jan 17, 2022
• Online Publication Date: Feb 23, 2022
• Publication Date: Apr 1, 2022
• Deposit Date: Jan 19, 2022
• Publicly Available Date: Aug 24, 2023
• Journal: China Economic Review
• Print ISSN: 1043-951X
• Peer Reviewed: Peer Reviewed
• Volume: 72
• Article Number: 101756
• DOI: https://doi.org/10.1016/j.chieco.2022.101756
• Keywords: Economics and Econometrics; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/7279658
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1043951X22000141