A frequent question in organizations is whether to hire from within or outside the firm when filling job vacancies. The answer matters, because “insiders” and “outsiders” differ in important ways. Research has shown, for example, that outsiders tend to be better educated and more experienced than insiders, suggesting that outsiders are held to loftier hiring standards. The data that have historically been used in research that compares internal to external hires typically reveal little about what external hires were doing in their prior jobs and firms. Recent research based on Finnish data overcomes this limitation and allows for the construction of entire prior work histories of external hires. Results of that research suggest that, compared to workers who enter a job via internal promotions, those who enter the same job via external (lateral) transfer have stronger work histories.
When deciding between internal and external hiring, employers should consider a number of factors. Internal hiring becomes more appealing when the required skills are specific or unique to the firm in question, as opposed to general skills that apply in many different firms, which makes someone who already “knows the ropes” more desirable. Internal hiring is also advantageous when promotion prospects serve as an important means of motivating workers: if workers generally expect that an insider will be promoted into a job vacancy, they have a strong incentive to try to win that promotion and the big salary increase that usually accompanies it.
If workers believe they mostly compete with a vast pool of external candidates, prospects for success seem dimmer, and motivation suffers. In some jobs, the damage caused by a mistaken hire is particularly large, which makes internal hiring appealing. Another consideration that makes internal hiring relatively appealing is when keeping another job vacant (when a worker switches jobs internally) is not too costly; external hiring fills a vacancy, whereas internal hiring simultaneously creates a new vacancy. If the number of employees at the firm is to remain constant, then external hiring must accompany internal hiring because an inflow of fresh workers is needed.
External hiring comes with its own advantages, such as fresh ideas, a larger candidate pool which is more likely to contain a superstar, and the fact that workers may become complacent if they are entirely insulated from outside competition in promotion contests.
Internal hiring policies can complement other human resource management practices, such as training. When skills that are unique to the firm (and that are often acquired by training) are important, internal hiring is common. Recent empirical evidence from British workplaces is consistent with training and internal hiring policies going hand in hand. The same research shows that internal hiring is more prevalent in larger firms that are more “bottom heavy,” with lots of workers in lower-level jobs and a smaller layer of management. Understanding all of the preceding considerations should help employers to design and manage hiring policies that are appropriate for their organizations.
We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.