Görkem Bostancı, Economics, University of Pennsylvania
Abstract: Need for high-skilled labor changes over time but firms cannot adjust perfectly due to several adjustment costs of hiring and firing. The Professional Business Services (PBS) sector alleviates this problem by allowing high skill labor to move across firms, pooling idiosyncratic part of labor demand risk. This allows for better utilization of high skill talent and increases their productivity. This paper aims to show that improvements in intellectual property rights protection in the late 1970s alleviated concerns regarding sharing sensitive data with 3rd party firms, thus helped the PBS to thrive in the following decades. Better utilization of high skill increased productivity in the economy. By increasing the compensation of professionals, it also contributed to the increased earnings inequality since 1980. A panel data analysis using time variation in the U.S. states’ adoption of the Uniform Trade Secrets Act shows a positive association between the trade secrets protection and the PBS employment, where adoption is associated with 10% higher employment on average. We build a model that is able to match the qualitative characteristics of the evolution of earnings inequality in the U.S. since 1980, using this mechanism.