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Replacing labour with capital: Evidence from aggregate mobility shocks

Author

Listed:
  • Kannan, Bharadwaj
  • Pinheiro, Roberto
  • Turtle, Harry J.

Abstract

Do firms respond to labour mobility shocks? We construct an overlapping generations model where policies restricting labour mobility present firms with an important trade-off. Firms leverage their monopsony power to reduce late-career wages while early-career workers demand a wage premium to join the restricted sector. In response to higher labour turnover costs, firms alter their optimal capital–labour ratio. We confirm these predictions in the data by exploiting the statewide adoption by state supreme courts of the inevitable disclosure doctrine (IDD) as a valid legal doctrine intended to protect trade secrets by restricting labour mobility. Post-IDD, early-career workers receive higher starting wages, late-career workers experience slower wage growth, firms raise investment by 3.5%, and their capital–labour ratio by 5.5%. Our results suggest that firms respond meaningfully to labour mobility shocks by replacing labour with capital.

Suggested Citation

  • Kannan, Bharadwaj & Pinheiro, Roberto & Turtle, Harry J., 2026. "Replacing labour with capital: Evidence from aggregate mobility shocks," Labour Economics, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:labeco:v:98:y:2026:i:c:s0927537125001563
    DOI: 10.1016/j.labeco.2025.102832
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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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