Labor market policies intended to protect trade secrets and spur research and development may instead limit late-career wages and encourage firms to replace human labor with machines and other automation equipment, according to a study in the journal Labour Economics by researchers at Penn State, the Federal Reserve Bank of Cleveland and Colorado State University.
"The policy is sold as protecting innovation, but we don't see that in the data," said study author Bharadwaj Kannan, associate clinical professor of finance at Penn State's Smeal College of Business. "What we see is younger workers getting paid more up front to accept a deal that slows their wage growth later - and firms quietly shifting their production toward capital rather than labor."
The researchers wanted to see how companies that depend on trade secrets manage their workforce and other resources when there are policies in place that restrict labor mobility, or how easily workers can move between competing firms. Specifically, they considered state adoption of the inevitable disclosure doctrine (IDD), which allows firms to protect their trade secrets by preventing employees from working for competitors - without the need for non-compete or non-disclosure agreements and even in other states. The purported benefit of the IDD is to advance research and development and, ultimately, company growth.
The research team assessed firm-level financial and accounting data from the CRSP/Compustat Merged database, which combines stock-price data from the Center for Research in Security Prices with financial fundamentals from S&P Global's Compustat, and industry-level data on total employment and capital stock from the U.S. Bureau of Economic Analysis from 1977 to 2011 across all 50 states. By the end of the study period in 2011, 21 states had adopted an IDD at some point and six had reversed it, leaving 15 states - including Pennsylvania - recognizing the doctrine.
They found that IDD adoption did not result in a boost to research and development and company growth as promised. Instead, the policy resulted in early-career workers receiving higher starting wages, but at the cost of stunted wage growth later in their careers. In addition, firms shifted toward greater use of capital, raising investment in equipment and machinery by 3.5% and the capital-to-labor ratio by 5.5%.
Other co-authors are Roberto Pinheiro, Federal Reserve Bank of Cleveland, and Harry Turtle, Colorado State University.
