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Thursday, December 01, 2005

Job Hopping, Innovation, and Economic Security

When employees can easily move from job to job taking knowledge with them, it is believed to reduce innovation because firms cannot fully capture the returns on their investment. This article argues that is not always the case. Sometimes, job hopping spurs innovation.

Let me illustrate with, hopefully, a more intuitive model than the one used in the article. Suppose that innovation only happens if people with particular sets of skills are matched within the same firm. Start with the workers dispersed uniformly across firms. There will be some matches, but not as many as if workers are allowed to change jobs. Without job hopping, there will be no new innovation as no new matches will occur. But with job hopping, even random hopping with some stickiness after a match, more and more matches will be made as workers move around and there will be more innovation. Thus, the degree of optimal job hopping in an industry depends upon how innovations arise. If innovation arises from the internal research and development of a particular firm, then that knowledge will be protected and job hopping would be discouraged. But if it is a process of synergistic matches between workers, then job hopping will be more common. That is the basis for the tests discussed in this article:

In Silicon Valley, Job Hopping Contributes to Innovation, by Virginia Postrel: For four decades ... Silicon Valley has maintained an amazingly innovative business environment. ... What makes Silicon Valley special? Thanks to some new data, economists have finally been able to test statistically some popular explanations. In her influential 1994 book "Regional Advantage: Culture and Competition in Silicon Valley and Route 128" ..., AnnaLee Saxenian, an economic development scholar at the University of California, Berkeley, argued that Silicon Valley's innovative edge comes from two unusual characteristics. First, talented employees move easily and often to new employers, far more so than people elsewhere. "The joke is that you can change jobs and not change parking lots," one of her interview subjects said. Second, instead of vertically integrating, Silicon Valley computer makers rely on networks of suppliers. They also design open systems that can flexibly accommodate all sorts of new components. ... Many people, especially in Silicon Valley, found Professor Saxenian's argument convincing. But while her research was careful, it depended on interviews and had no large-scale statistical backing.  ... After all, the argument that Silicon Valley's job hopping fosters innovation contradicts economists' common assumptions. "It didn't feel right to me," James B. Rebitzer, an economist at Case Western Reserve University ... When employees jump from company to company, they take their knowledge with them. "The innovation from one firm will tend to bleed over into other firms," ... For a given company, "it's hard to capture the returns on your innovation," ... "From an economics perspective, that should hamper innovation."

He found a possible answer to the puzzle in the work of two management scholars, Carliss Y. Baldwin and Kim B. Clark. ... [T]hey argued that when there is a lot of technological uncertainty, the fastest way to find the best solution is to permit lots of independent experiments. That requires modular designs rather than tightly integrated systems. ... Employee mobility may encourage productive innovation, as people quickly move to whichever company comes up with the best new technology. But you would not expect to find people moving around all the time in every industry, only those where technical uncertainty justifies spending lots of resources on experiments ... In a forthcoming article in The Review of Economics and Statistics, he and two economists at the Federal Reserve Board, Bruce C. Fallick and Charles A. Fleischman, empirically test the claim that Silicon Valley employees move more often than computer industry employees in other places. ([Link to] "Job Hopping in Silicon Valley," ... To Professor Rebitzer's surprise (though not his co-authors'), it turns out that Silicon Valley employees really do move around more often than other people. ... Computer industry employees in other California technology clusters also seem to switch jobs more often than those in other states. This result supports an argument made by Ronald J. Gilson, a law professor at Stanford and Columbia. In a 1999 article, he suggested that a 19th-century California law helped create Silicon Valley's hypermobility by prohibiting the enforcement of noncompete agreements. In other states, businesses use these agreements to keep employees from easily hopping to other companies in the same industry. (That article is available [here].) Finally, the economists test whether computer industry employees are more likely to move than employees in other industries, as the modularity hypothesis would predict. ... Looking at cities within California, they write: "We find no evidence that outside the computer industry, job changes are more likely within Silicon Valley. ..."

I hesitate to bring this up after yesterday, but can this work on an international level too? Does this argue that by closing our borders to IT workers and workers in other knowledge based industries, we lower the chances of beneficial skill matches and reduce innovation?

In this model workers have very little job security, e.g. if their skills wane when they are old, then they will be cast aside in favor of more productive younger workers. There is also the risk of foreign competition, structural change, and so on. Is the the risk arising from this job insecurity fully capitalized into the worker's wages, or is there some market imperfection that prevents this? This question is more general than just IT workers as it pertains to increasing job insecurity across all occupations. It is relatively easy to imagine ways in which employment security risk might not be fully insured and how government intervention to create the correct incentives in the market or to provide the insurance itself would lead to a better outcome. By optimally insuring against such risk, perhaps we can offset some of the loss from the erosion of the long-term social contract between workers and firms, a contract where firms provided loyal employees with health and economic security and retained them until retirement.

    Posted by on Thursday, December 1, 2005 at 01:18 AM in Economics, Social Security, Unemployment | Permalink  TrackBack (1)  Comments (28)

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    » Fostering innovation through networking informatio from The Glittering Eye

    There’s been a little flurry of posting from econbloggers (see Brad DeLong post and Mark Thoma’s post) following Virginia Postrel’s New York Times article on how job-hopping by engineers in Silicon Valley has fostered creativity there. For me the key... [Read More]

    Tracked on Friday, December 02, 2005 at 11:01 AM


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