A Spanner in the Works: Restricting Labor Mobility and the Inevitable Capital-Labor Substitution

Bharadwaj Kannan, Roberto Pinheiro and Harry Turtle (harry.turtle@colostate.edu)
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Harry Turtle: https://biz.colostate.edu/about/directory/colostate-hjturtle

No 22-30, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We model an environment with overlapping generations of labor to show that policies restricting labor mobility increase a firm's monopsony power and labor turnover costs. Subsequently, firms increase capital expenditure, altering their optimal capital-labor ratio. We confirm this by exploiting the statewide adoption of the inevitable disclosure doctrine (IDD), a law intended to protect trade secrets by restricting labor mobility. Following an IDD adoption, local firms increase capital expenditure (capital-labor ratio) by 3.5 percent (5.5 percent). This result is magnified for firms with greater human capital intensity. Finally, IDD adoptions do not spur investment in either R&D or growth options as intended.

Keywords: Labor Mobility; Capital-Labor Ratio; Inevitable Disclosure Doctrine (search for similar items in EconPapers)
JEL-codes: G31 J42 (search for similar items in EconPapers)
Pages: 83
Date: 2022-11-08
New Economics Papers: this item is included in nep-dge and nep-lma
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DOI: 10.26509/frbc-wp-202230

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