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  • Empirical Analysis of Economic Institutions Discussion Paper Series


    Horizontal Transfer, Vertical Promotion and Evolution of Firm Organization

    Kenn Ariga

    December 27, 2003

    This discussion paper series reports research for the project entitled “Empirical Analysis of Economic Institutions”, supported by Grants-in-Aid for Scientific Research of the Ministry of Education and Technology.

  • Horizontal Transfer, Vertical Promotion and Evolution of Firm Organization∗

    Kenn Ariga [email protected] Institute of Economic Research, Kyoto University Yoshida Honmachi Sakyoku Kyoto 6068501 Japan

    December 27, 2003


    This paper investigates interactions among horizontal transfer, promo- tions across ranks, and creations and destructions of jobs inside a large Japanese manufacturing firm. In this sample firm, we find that job de- structions and creations accounts for the majority of horizontal transfers of employees within the firm. This is in sharp contrast to a popular per- ception that employees move according to a well-defined career path in a stable organization with internal labor market. Instead, we find that units and jobs are constantly created and destructed at this firm and that individual career paths are far more dynamic, and, state and path dependent.

    The econometric analysis on determinants of promotion policy con- firm these findings, as well as predictions based on multi-skilling model of human capital. First of all, transfers to a functionally similar units which enable employee to acquire multiple skills do enhance the promotion prob- ability. On the other hand, transfers to functionally or geographically different units are often detrimental to the promotion prospect, especially those at earlier stage of career. In general, an employee career at this firm is significantly influenced by the success and failure of units, and, in particular, we find that promotion probability for some type of employees is significantly higher for those transferred from destructed sections, and also for those transferred into newly created sections.

    Journal of Economic Literature Classification Numbers: J24, J41.

    ∗I benefitted from valuable comments by Giorgio Brunello on earlier drafts of the paper. Two anonymous referees and Mark Rebick, representing this Journal, also helped me in cor- recting errors and improving presentations. I thank all of them. They are not responsible for any remaining errors. This paper is based on the research conducted jointly with Giorgio Brunello and Yasushi Ohkusa. We acknowledge financial support from Nihon Syoken Syogaku Zaidan.


  • 1 Introduction Recent empirical researches on job flows highlight the critical role of demand side disturbances in reallocating jobs across industries, firms, and occupations. Matching and reallocation of workers to jobs are intricately interwoven with the process of creation and destructions of jobs. In spite of the obvious and paramount importance of the impact of demand side disturbances, the analysis of internal labor market has hardly paid any attention to it, due, perhaps, mainly to the lack of supporting empirical data1. We believe that the analysis of internal labor market should benefit from incorporating this facet of worker mobility, in a manner that has become a standard in the analysis of external labor market2. In this paper, we use unique data set taken from the personnel file of a

    large Japanese manufacturing firms in order to explore the complex interactions among organization changes, job creation and destruction, and vertical and lateral transfer of employees. The data offers us an unique opportunity to investigate the relationship between lateral transfer, promotion, relocation of workplace, and firm re-organization. The observed relationships can be cast in a variety of theoretical perspec-

    tives. First of all, the relation between lateral transfer and vertical promotion can be analyzed as the processes of skill formation within a firm, especially those facilitating multi-skilling and its impact on productivity growth. Regu- lar job rotation is often cited as a standard practice of human resource man- agement (HRM) among Japanese firms and regarded as a principal means to achieve multi-skilling among employees. To the extent that such a lateral trans- fer is an integral part of HRM policy, mobility across sections and departments within an establishment should be treated as a positive signal regarding the fu- ture prospect of promotion3. In a previous paper [Ariga, Brunello, and Ohkusa (1999)], we documented and demonstrated that the sample firm used in this and previous papers does employ ‘fast track’ policy in the sense that the promotion probability is higher for those who were promoted to the current position within shorter period. It is of considerable interests to see if ‘fast track’ can be charac- terized by specific types of lateral transfers: i.e., to see if those on ‘ fast track’ exhibit distinctive pattern of lateral transfer compared to the others. Related to this issue is a popular folklore among the Japanese workers that a transfer to a functionally different section is often a bad signal in that it reflects relatively poor performance at the current job as evaluated by management. This line of logic can be also cast in a framework of multi-skilling.

    1Belzil (2000) is the only paper that I could find which incorporate job creation/destruction data into microscopic analysis of internal labor market. He uses Swedish data on gross and net job creations at establishment level in individual wage regressions.

    2The standard reference is Davis, Haltiwanger and Schuh (1996). Davis and Haltiwanger (2000) contains rich international comparisons. Japanese data are explored in Genda (1998), and Higuchi(1998).

    3Lateral transfers are analyzed in detail by Imada and Hirata (1994) using personnel data similar to ours, although they do not explicitly incorporate their findings in lateral transfers to vertical promotion. See also Matsushige (1995a,b) and Kusunoski and Numagami (1997).


  • Another strand of issues stems from the literature on job creation and de- struction. In our data, we keep track of the deaths and births of the sections. Our record shows that this firm constantly slashes units with poor performance and creates a large number of new units every year. Gross rate of job creation at section level in this firm is more than 30% per year. To the extent that job creations and destructions are the other side of the coins of employment and unemployment in the context of economy wide labor market, our data can be used as such corresponding to the internal labor market. We could ask a variety of questions in this context. For example, do employees suffer from job destruc- tions within a section in the sense that their subsequent career is negatively influenced by such events? We can look at the other side of the coin and ask: do employees fare better by being positioned in sections that grow faster in size? Devereux (2000) analyzes the impact of negative demand shocks on task assign- ments in the context of specific human capital model. He finds that the negative demand shocks induce reallocation of workers to tasks that require less skills in order to retain senior workers with larger amounts of specific human capital. This line of reasoning suggests that the workers with shallow tenure (and hence smaller amount of specific human capital) are more likely to be transferred to accommodate shifts in demand across different units of a firm. In Airga, Brunello and Ohkusa (1999) we found that the promotion patterns

    differ significantly between two types of employees, i.e., between those who are hired in regular hiring cycle and mostly new graduates from schools, and those who are hired on ad hoc basis, mostly with workers with previous work experience4. One reason behind the observed difference can be the extent in multi-skilling. Those hired on ad hoc basis have previous work experience and they are hired mainly for specific positions that need to be filled. Then we would expect that such workers will experience less frequent transfers, across functionally different sections. In what follows, we will conduct a series of statistical analysis to see how

    each of these predictions fares with our data. The sequel of the paper is or- ganized as follows. In the next section, we briefly review the recent literature on internal labor market as it relates to the horizontal transfers and job de- struction/creations. Section 3 introduces the data and we provide a variety of descriptive statistics on lateral transfers and organizational changes. Section 4 is the main body of the paper. First, we will focus on the multi-skilling and its relation to promotions. We find that transfers to neighboring units in terms of principal function and department affiliation do indeed have positive impact on promotion. On the other hand, transfers to functionally different units or those across departments or divisions often have negative impact on promotion. Sec- ond, we also find that the impact on promotion varies across recruitment types

    4The data file contains information on recruitment type for each employee. Most of new school graduates are hired in regular recruitment cycle and the employment starts typically at April 1 of each year. Firms also post vacancies on ad hoc basis. Those recruited in this way are typically not new graduates but tend to have some previous work experiences. Although not perfect, we use recruitment type as an important measure to distinguish between those with prior work experience (irregular recruits) from those without (regular r

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