Five years ago, I
posted a blog on award-winning research showing that firms pay more and get less when hiring from the external labor market. The reason is that managers
know more about their current employees, and they overestimate the value of
external hires because they focus on their formal qualifications. When it comes
to filling jobs internally in the organization, a manager still has to choose
between placing a known worker into a job or posting the job and assessing
applicants, who may or may not be familiar to the manager. With internal
hiring, do managers still undervalue the workers they know?

So how wrong is it to
fill an internal hire through posting instead of slotting? Here is the
surprise: It is not worse to fill by posting, but better. Posting means higher
job performance, both absolute and compared with others. It means lower chance
of leaving the job, except for leaving for a promotion, which is more likely
when filling through posting. Oh, and it also means higher pay for the employee
filling the job. So, for the employee this looks like a good thing; more pay
and better chance of a promotion. For the firm, it looks like paying more to
get more, so the net effect depends on how much more the firm is getting. In
this case the answer is easy because the lower turnover from the job alone
shows that the firm benefits from using posting. The better job performance is
icing on the cake.
But this raises the
question of why markets work better inside an organization than outside it.
What is it that the manager can see better when posting internally? The answer
is, nearly everything. Organizations know a lot about their employees, and this
knowledge is readily available when filling jobs through posting. Not only
that, the posting process forces the hiring manager to think carefully about
what information to use and how to weight it in the decision, giving a more
systematic and higher quality choice. All the information is there, and posting
gives more choices and a better choice process.
There is an important
lesson in this that goes beyond filling positions. We often have beliefs about
the benefit of markets relative to social arrangements like networks. We forget
that there are many kinds of markets and many kinds of social arrangements, and
ultimately decision making comes down to what to choose from and how to make
the choice.