Productivity Gains from Labor Outsourcing: The Role of Trade Secrets
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 differences-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 the outsourcing employment by 24% and aggregate output by 1.7%.
An earlier version was presented at: St. Louis Fed (2020), EEA-ESEM (2019), Annual Meeting of the Society for Economic Dynamics (2019), GCER Alumni Conference (2019), Midwest Macroeconomics Meetings, (2019), 3rd GW Student Research Conference in Economics (2019), XII. Winter Workshop (2018), Young Economists Symposium (2018), and Mack Institute Fast Takes (2018, 2019) under the title “Intellectual Property Rights, Professional Business Services and Earnings Inequality”.
Macroeconomics, Firm Dynamics, Labor Economics, Economics of Information
Harold L. Cole
My research interest lies in Macroeconomics, with a particular interest in firm dynamics, labor economics, and economics of information. I study how frictions at the firm level impact aggregate productivity by distorting input allocation in the economy. I hold a Special Sworn Status (SSS) at the U.S. Census Bureau as the principal investigator for the project "Causes of the Major Growth of Professional Business Services and Its Macroeconomic Implications".