When a company persuades a court that a departing employee might inevitably spill its trade secrets to a rival, something shifts in the labour market. Not in a dramatic way. You won’t find engineers surrounded by lawyers or memos stamped “classified.” The shift is quieter than that, and it shows up mostly in the numbers: a 3.5 percent rise in capital investment, a 5.5 percent increase in the ratio of machines to people, and a subtle flattening of what workers can expect to earn across the arc of a career.
Those figures come from a new study in the journal Labour Economics, and they’re part of a growing body of evidence suggesting that policies intended to protect intellectual property are doing something quite different in practice.
The policy in question is called the inevitable disclosure doctrine, or IDD. It’s a legal instrument adopted state by state through decisions of US supreme courts, and it allows companies to block former employees from working for competitors on the grounds that their new role would, in effect, inevitably require them to disclose trade secrets. Crucially, firms don’t have to prove any wrongdoing actually took place. The threat alone can be enough to keep someone out of a job. By the end of the study’s observation window in 2011, fifteen states still recognised the doctrine; twenty-one had adopted it at some point, and six had since reversed course.
What the researchers wanted to know was: once you put that kind of restriction in place, how do firms actually behave?
The Price of a Captive Workforce
Bharadwaj Kannan, associate clinical professor of finance at Penn State’s Smeal College of Business, led the research alongside colleagues at the Federal Reserve Bank of Cleveland and Colorado State University. They pulled data on more than 106,000 firm-year observations from the CRSP/Compustat database, tracking capital expenditure and workforce composition before and after states adopted the IDD between 1977 and 2011. Their model had a fairly bleak prediction, and the data, roughly, confirmed it.
“The policy is sold as protecting innovation, but we don’t see that in the data,” Kannan said. “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.”
What makes that finding worth sitting with is the mechanism underneath it. When labour mobility is restricted, firms gain something economists call monopsony power over their existing employees: workers who might ordinarily jump to a competitor become effectively captive, and companies can take advantage of that, depressing their wages later in their careers. But there’s a cost. Younger workers, who haven’t yet committed to the firm, can see what’s coming; they know the deal they’re entering, and they want a premium for it. So firms end up paying more upfront, cutting wages on the back end, and, perhaps most interestingly, investing more heavily in machinery and equipment to compensate for the friction that’s been introduced into their workforce.
The industries hit hardest were those with a lot of human capital and relatively low labour intensity to begin with, which rather suggests that the IDD isn’t so much protecting knowledge workers as reshaping how companies in knowledge-heavy industries staff and invest. In those sectors, average capital expenditures rose by around five percent after adoption, and capital-to-labour ratios climbed by more than seven.
No Innovation Dividend in Sight
On the question of whether any of this actually spurred innovation, the findings are fairly damning. The researchers found no statistically significant increase in research and development spending post-IDD, and no improvement in firms’ growth prospects as measured by Tobin’s Q. The doctrine’s stated purpose was to give companies breathing room to invest in trade secrets, safe in the knowledge that rivals couldn’t simply recruit their way to those secrets. That doesn’t appear to be what happened.
There’s a distributional wrinkle here that deserves some attention. The study’s model suggests that earnings profiles change shape after an IDD adoption: the peak of the gap between IDD-state and non-IDD-state wages for the same cohort appears around the mid-career mark, roughly age 37, before the profiles converge and then cross later in life, around the mid-50s. In other words, workers in restricted states are, in a sense, trading future earning power for a bigger paycheque in their 20s, without necessarily being fully aware of the bargain.
None of this is to say that trade secret protection is inherently harmful. What the research does suggest is that blunt instruments, especially ones that restrict movement without requiring evidence of actual wrongdoing, tend to produce unintended consequences that accrue primarily to shareholders and fall disproportionately on workers who’ve spent the most time building their skills inside a company. The FTC moved to ban most non-compete agreements in the US in 2024, though that rule has faced legal challenges; the IDD operates in a somewhat different legal space, but the underlying logic of the research applies across most forms of labour mobility restriction. More machines, flatter careers, and no obvious innovation dividend. Quite the bargain.
DOI: 10.1016/j.labeco.2025.102832
Frequently Asked Questions
Does restricting where workers can go actually help companies innovate more?
Not according to this research. The study found no meaningful increase in research and development spending in states that adopted the inevitable disclosure doctrine, and no improvement in firms’ growth prospects. The policy’s rationale is that protecting trade secrets encourages investment in new knowledge, but the data over a 34-year period suggest that’s not what companies actually do with the extra leverage they gain over their workforce.
Why would younger workers earn more under a system that’s supposedly bad for workers?
Because they can see the deal they’re being asked to accept. Younger workers who haven’t yet locked themselves into a firm know that once they’re in a restricted state, their employer will have more power to hold wages down later in their careers. They demand a higher starting salary to compensate for that future risk. The catch is that over time, those higher early wages tend to be outweighed by slower wage growth in mid-to-late career, so the overall effect on lifetime earnings is negative.
Why do firms invest more in machines when they can’t lose workers to rivals?
Ironically, restricting labour mobility makes labour more expensive to manage, not less. When turnover costs rise and firms become wary of replacing departing workers, capital investment starts looking relatively more attractive. Machinery doesn’t ask for a wage premium, doesn’t need to be persuaded to stay, and doesn’t have a career trajectory to negotiate over. The 3.5 percent average rise in capital expenditure after IDD adoption in this study is essentially firms voting with their chequebooks.
Could repealing these laws actually improve wages for experienced workers?
The research suggests it might. The study’s authors argue that eliminating the IDD would be expected to increase labour mobility, improve wage signals across the market, and raise wages for late-career workers specifically, since those are the workers most harmed by the monopsony power the doctrine creates. Whether the effect would be large enough to notice in practice is an open question, but the direction of the effect seems fairly consistent across their model and empirical tests.
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