In cases where the use of the external labor market is limited, will state-owned enterprise groups utilize the internal labor market to optimize labor resource allocation? Based on the data of state-owned enterprise group companies listed on the Shanghai and Shenzhen stock exchanges from 2004 to 2020, this study found that there is a significant negative relationship between the employee growth rate of a company and the employee growth rate of other member companies within the group, indicating that state-owned enterprise groups have active internal labor markets. Furthermore, this study examined the scenarios in which the internal labor market within state-owned enterprises plays a role from both the perspective of enterprise characteristics and the external environment. It was found that active internal labor markets are primarily found in local state-owned enterprise groups, where member companies are closer in geographical distance and operate in the same industry. When state-owned enterprise groups are located in regions with high unemployment rates and face high economic policy uncertainty, they are more likely to use the internal labor market to allocate labor resources. In addition, the advancement of reforms in state-owned enterprises has also activated the internal labor market. Finally, this study also examined the direction of internal labor turnover within state-owned enterprise groups and found that employees are more likely to move to member companies with higher growth potential, indicating the overall effectiveness of the internal labor market. At the same time, the optimization of labor resource allocation resulting from internal employee turnover significantly improves the market value and financial performance of the company. This research provides empirical evidence on whether state-owned enterprise groups use and how they use their internal labor market for labor resource allocation. It also offers insights and lessons for the improvement and efficiency enhancement of state-owned enterprises.