Policies designed to safeguard trade secrets and stimulate innovation may carry unintended consequences for workers later in their careers. A new study published in Labour Economics, led by researchers from Penn State, the Federal Reserve Bank of Cleveland and Colorado State University, finds that such measures can suppress wage growth over time and encourage firms to rely more heavily on automation rather than human labour.

“The policy is often framed as a way to protect innovation, but the data tell a different story,” said Bharadwaj Kannan, associate clinical professor of finance at Penn State’s Smeal College of Business. According to the study, younger workers may benefit initially through higher starting salaries, but this comes with a trade-off: slower wage progression in later years. At the same time, firms appear to be quietly shifting investment away from labour and towards capital-intensive production.

To better understand these dynamics, the researchers examined how companies that depend on trade secrets respond to policies that restrict labour mobility—meaning how easily employees can move between competing firms. Their analysis focused on the adoption of the inevitable disclosure doctrine (IDD). This legal principle allows employers to prevent workers from joining competitors if there is a risk that trade secrets could be disclosed, even without formal non-compete or non-disclosure agreements. Proponents argue that such policies strengthen research and development and support long-term firm growth.

The team analysed firm-level financial and accounting data drawn from the CRSP/Compustat Merged database, alongside industry-level measures of employment and capital investment from the U.S. Bureau of Economic Analysis. Their dataset covered the period from 1977 to 2011 across all 50 U.S. states. Over that time, 21 states adopted the IDD at some point, while six later reversed course, leaving 15 states—including Pennsylvania—recognising the doctrine by the end of the study period.

The findings challenge the policy’s intended benefits. Rather than boosting research and development or overall firm expansion, the adoption of IDD was associated with a shift in compensation patterns and production strategies. Workers at the beginning of their careers tended to receive higher initial pay, but their wage growth slowed significantly as they aged, effectively redistributing earnings across the life course.

At the same time, firms increased their reliance on capital. Investment in equipment and machinery rose by 3.5%, while the capital-to-labour ratio increased by 5.5%, signalling a measurable tilt towards automation. Taken together, the results suggest that policies aimed at protecting intellectual assets may reshape labour markets in subtle but important ways, with long-term implications for earnings trajectories and the balance between human and machine work.

More information: Bharadwaj Kannan et al, Replacing labour with capital: Evidence from aggregate mobility shocks, Labour Economics. DOI: 10.1016/j.labeco.2025.102832

Journal information: Labour Economics Provided by Penn State