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Internal labor markets are an administrative unit within a firm in which pricing and allocation of labor is governed by a set of administrative rules and procedures. The remainder of jobs within the ILM is filled by the promotion or transfer of workers who have already gained entry. Internal labor markets are shielded from the competition of external labor markets (ELM). However, competition of ILM exists within the firm in the form of job promotions and pay.

The main reasons why internal labor markets were developed are as follows:

Skill specificity

Skill specificity has two effects important to the generation of the ILM: it increases the proportion of training costs borne by the employer, as opposed to by the trainee and it increases the absolute level of such costs. Companies are ever more seeking individuals with specific talents that can be an asset to their organization. Firms that require specifically trained individuals look for a stable labor force.

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