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Working Paper

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

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.


Suggested Citation

Kannan, Bharadwaj, Roberto B. Pinheiro, and Harry Turtle. 2022. “A Spanner in the Works: Restricting Labor Mobility and the Inevitable Capital-Labor Substitution.” Federal Reserve Bank of Cleveland, Working Paper No. 22-30. https://doi.org/10.26509/frbc-wp-202230