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

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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.

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  • Bharadwaj Kannan & Roberto Pinheiro & Harry Turtle, 2022. "A Spanner in the Works: Restricting Labor Mobility and the Inevitable Capital-Labor Substitution," Working Papers 22-30, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:94985
    DOI: 10.26509/frbc-wp-202230
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    More about this item

    Keywords

    Labor Mobility; Capital-Labor Ratio; Inevitable Disclosure Doctrine;
    All these keywords.

    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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