Insurance Between Firms: The Role of Internal Labor Markets

We investigate how Internal Labor Markets (ILMs) allow organizations to accommodate shocks calling for costly labor adjustments. Using data on workers' mobility within French business groups, we find that adverse shocks affecting affliated firms boost the proportion of workers redeployed to other group units rather than external firms. This effect is stronger when labor regulations are stricter and destination-firms are more efficient or enjoy better growth opportunities. Affiliated firms hit by positive shocks rely on the ILM for new hires, especially high-skilled workers. Overall, ILMs emerge as a co-insurance mechanism within organizations, providing job stability to employees as a by-product.