The true costs of employment restraints
Over the long run information leaks and talent spillovers foster new levels of creativity and innovation that benefit not only the best and most fearless companies but also the economy as a whole, according to Orly Lobel in her book Talent Wants to Be Free: The Upside of Raids, Leaks and Free Riding. The book goes on to challenge conventional wisdom concerning human capital and the economic effects of the free flow of talent from one company to the next.
Companies typically want to prevent their trade secrets leaking to competitors, and they also want to protect the investments which they make in training their employees. Thus employers commonly seek to use trade secret laws and contractual conditions to limit the mobility of employees. The conventional rationale is that investment in improved production methods and employee training is a good thing for the economy as a whole, and such investments by employers need to be protected in order to ensure that they continue.
The evidence proves this argument to be wrong, according to the author, who makes a detailed and persuasive case for abandoning most restraints on employment mobility. This is an area governed in the US by state laws, which vary widely between states, providing a natural experiment in the economic effects of human capital controls. In states where restraints are enforceable, employees tend to stay at their jobs for longer with less pay rises, as would be expected. However, states which do not permit enforcement of restraints attract more investment and brighter talent, leading to increased innovation and higher economic growth.
Although the author argues strongly against the use of trade secret protection to limit employment mobility, she does not appear to be opposed to intellectual property as a whole. Patents encourage the disclosure of information in exchange for a monopoly for a limited period of time, so that public and private benefits are balanced. Trade secrets encourage the non-disclosure of information for an unlimited period of time, so that private benefits have no matching public benefits.
I was initially sceptical about the author’s argument as the opening chapters seemed to contain a number of unsupported assertions. However, the evidence accumulated as the book went on: numerous judicial decisions with seemingly outrageously restrictive outcomes, results of experiments in behavioural psychology, and empirical economic studies. Although written by a law professor, this is not a law textbook; it is a fascinating and timely exploration of the true outcomes of restrictive employment practices.