Productivity Gains From Labor Outsourcing: The Role of Trade Secrets

Görkem Bostancı, Economics, University of Pennsylvania

Abstract: How quickly producers can adjust their workforce with changing demand is important for aggregate productivity. Labor outsourcing allows quick adjustments but potentially exposes sensitive information to outsiders, which may deter producers from outsourcing if the legal system does not adequately protect secret information. I quantify the impact of trade secret protection on labor outsourcing, and consequently, on aggregate productivity. First, using event studies and difference-in-differences around the staggered adoption of the Uniform Trade Secrets Act, I show that better trade secret protection leads to increased outsourcing. Second, to quantify the resulting gains in productivity, I build a structural model of outsourcing and multi-industry dynamics and estimate it with data from the U.S. manufacturing sector. I decompose the cross-state differences in labor outsourcing into differences in firing cost, industry composition, demand volatility, and trade secret protection. Strengthening trade secret protection for all states to match the state with the strictest protection would increase outsourcing employment by 29% and aggregate output by 0.8%.

Read the working paper here.