Silicon Valley'S High‐Velocity Labor Market

The remarkable growth of Silicon Valley has often been linked to its high‐velocity labor market, as characterized by short‐term hiring and frequent employee departures to competitors or start‐ups. Such employee mobility is said to contribute to economic growth by facilitating rapid diffusion of information among firms. Law, nearly everywhere, is a potential obstacle to Silicon Valley‐style growth. In nearly all European countries, the problem is labor laws that discourage the creation of short‐term employment relations and saddle employers with significant obligations when jobs are eliminated. In America, the legal obstacle to the creation of high‐velocity labor markets is the law of covenants not to compete and trade secrets. California law, however, does not permit effective enforcement of either covenants not to compete or trade secret agreements. California companies that have sued departing employees have usually lost the suits, suffered damage to their reputations in their industry, and had difficulty recruiting employees. After showing how this result has been achieved by the California legal system, this article goes on to explain why a labor market in which employees have information that is valuable to employers, and in which long‐term contracting is not feasible, may be economically efficient (in spite of a potentially dampening effect on corporate R & D). A high‐velocity labor market functions more like an information market than like the traditional labor markets analyzed by economists; by spreading information more rapidly, it eliminates much wasteful duplication of effort and achieves more rapid “convergence” on solutions to technological problems—which in turn creates more growth opportunities and start‐ups. In making this argument, the author draws on Paul Romer's model of economic growth in which growth rests on “increasing returns” to information. Following Romer, the author suggests that the economic benefits of information diffusion achieved by labor mobility are likely to outweigh the risks that companies will underinvest in research because of their reduced ability to protect trade secrets.