Internal Labor Markets and Diversification Strategies in Financial Services

Abstract

This paper assesses the fit between firm-level Internal Labor Markets (ILMs) and firm diversification in the U.S. financial services sector. The sector comprises a number of related sub-industries and recent deregulation has allowed firms to construct increasingly diversified portfolios of activities across these sub-industries. Recent deregulation, particularly in banking, has also loosened geographic restrictions on firm activities. Drawing on the “resource-based view” of firm strategy, we hypothesize that firms with stronger ILMs are more likely to diversify. We find support for this view in analysis of data from the Longitudinal Household-Employer Dynamics program matched to the Longitudinal Business Database. Firms with lower net turnover, lower wage dispersion, and greater opportunities for workers inside the firm tend to be those that diversify more subsequently.