Many firms that once relied primarily on internal labor markets (ILMs), employment systems primarily governed by a set of organization-specific internal rules and procedures, have shifted to greater use of external markets to meet their employment needs. Some argue that ILMs have become an outdated HR strategy because the use of ILMs may inhibit the firms’ capabilities to adapt to the changing environments. In this paper, I challenge that conventional wisdom and propose that ILMs have the potential to enhance a firm’s adaptability to uncertain environments by facilitating its knowledge creation process. Drawing on panel data from 271 manufacturing firms, this study demonstrates that firms making greater use of ILMs in competitive industries exhibit more effective implementation of organizational learning practices – leading to higher knowledge creation.