The labor market is viewed as a market for labor contracts. A firm is identified as having an internal labor market if the efficient mode of production requires that it employ heterogeneous worker types by offering a wage structure as a set of subsidizing contracts. If the firm is free to offer its choice of wage structures, and if the Wilson notion of equilibrium is considered, then certain irreducible combinations of wage-job contracts will obtain. Depending upon the distribution of worker types, wages in these equilibrium wage structures may not correspond to the marginal productivities of individual workers, but the firm breaks even because the wages of high productivity types subsidize low productivity types within the firm. The theoretical framework of our model is based on recent contributions to the theory of self-selection screening.
