In this article, we analyze how a transaction cost and information economic theoretical analysis of two archetype employment systems can enhance our understanding of a firm's knowledge governance mechanisms and capability development. We especially analyze the question of how two distinctive employment systems internal labor markets and high-commitment work systems differently govern the availability and effectiveness of human capital, on the basis of their specific human resource management (HRM) practices (recruitment, training, staffing and rewards), as well as corresponding learning modes. We, therefore, seek to contribute to current research on organizational capabilities in three ways. We aim to foster the integration of a governance perspective and a capabilities-based perspective through our analysis of employment systems as knowledge governance mechanisms for human capital building and capability development. On the basis of a fully macro-micro-macro' analysis, we explicitly account for disregarded micro-mechanisms of current knowledge constructs and, furthermore, facilitate the link between capabilities-based and (strategic) HRM research for a better understanding of organizational capabilities and human capital pools.