Internal Labor Markets
Efficiency wage payment generally reflects employers' interest in designing employment arrangements to foster longer-term attachments, so that firms can retain their firm-specific training and reap the benefits of their initial investments in training their employees. These longer term interests have given rise to internal labor markets (ILMs)—which arose in labor markets and workplaces about a century ago, and may have receded somewhat since the 1980s. ILMs refer to a network of connected jobs within one, large administration, often with a "job ladder." In the real world, particularly in larger organizations, the role of the "external" labor market in setting wage rates is quite limited, influencing primarily the jobs that are considered the " entry level." Formal education is often required as credential to gain access to its port of entry, near the bottom of the job hierarchy. With the exception of ports of entry, recruiting occurs with vacancies tending to be filled with internal hires.
After that point, wages are determined more by the firm's internal labor policies. In other words, wages are not determined by the productivity of the individual worker, wages are set according to job descriptions and job categories. Put another way, wages are not attached to the worker, the wages are attached to the job description. Pay rates adhere to jobs and are highly structured, thought-out in relation to one another, vertically and horizontally since "equity" is a chief concern to promote group and individual productivity. Promotions are a key source of effort motivation, filled according to either the seniority principle and/or intensive job evaluation processes. Generally, in the ILM, there is relatively attractive pay, employee benefits, and job amenities. A key feature is the job security provided as an "implicit contract," buffering employees from short-term fluctuations in labor demand.
Dual and Segmented Labor Markets
This theory rose in trying to explain persistent poverty in the inner cities of the U.S. In the construct of "dual labor market," jobs are divided into primary and secondary labor markets. The "primary labor market" includes most white collar, higher-salaried positions. Defined broadly, primary jobs might also include high-wage, craft, or high skilled unionized and blue collar building trades jobs. In the secondary labor market, wage rates are relatively low, often fluctuating, and unstable (determined on "spot market"), few if any employee benefits are provided. Notably, there is little or no job security provided, with the extreme case being the "contingent" ("casual," intermittent including temporary, such as day labor). In contrast to the primary job, there are often short job ladders, or even dead-end jobs, thus, limited upward mobility. There is little reward for workers for longer tenure or self-improvements in human capital, thus little incentive for someone in a landscape or fast food job to take online courses to improve their skills or even credentials to become an assistant manager in the operation. Segmented labor markets are an extension of the dual labor market theory dividing types of labor markets more narrowly.
The important piece of the dual labor market analysis is that there is little mobility for workers between the secondary and primary labor markets. Indeed, workers in the primary labor market only compete with other workers in the primary labor markets for those good jobs. What causes persistent poverty then, is the inability of secondary sector workers to move into the good paying, secure jobs of the primary labor market.