Intellectual Property Rights, Professional Business Services and Earnings Inequality

High skill labor demand is infrequent but firms cannot adjust perfectly due to several adjustment costs. Professional Business Services (PBS) sector help alleviate this problem by allowing high skill labor to move across firms, reducing idiosyncratic part of labor demand risk. This allows high skill talent to be utilized better 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 PBS to thrive in the following decades. Better utilization of high skill increased productivity in the economy. In addition, it decreased entrepreneurship by making working as a professional a viable alternative to opening a new firm as well as decreasing job-to-job transition rates since employees no longer needed to change employers in order to change workplaces. By increasing compensation for professional, it also contributed to the increased earnings inequality since 1980. Panel data analysis using time variation in U.S. states' adoption of the Uniform Trade Secrets Act shows a positive association between trade secret protection and 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.