EARIE Exclusive: Hidden Link Between Labor Markets and Mergers

00:00:00: How do restrictions on worker mobility affect mergers and acquisitions?

00:00:04: And what does this tell us about competition in labor and product markets.

00:00:09: In this episode we explore the economic effects of non-compete agreements, how their enforcement can influence firms.

00:00:16: decisions to acquire competitors retain employees compete for talent.

00:00:23: fifty-third annual conference of the European Association for Research in Industrial Economics, or EUI.

00:00:29: ZDW economist Bernhard Ganglmeier is joined today by Jinja Jin, professor at Boston University, Christian School of Business to discuss these questions.

00:00:40: Welcome

00:01:02: It's a great pleasure to have Ginger Jinn here with me today.

00:01:06: Ginger just joined Boston University as the Allen and Kelly Questrom Professor at The Questrum School of Business, at Boston University.

00:01:15: Ginger welcome.

00:01:16: thanks for being with me Today.

00:01:17: Thanks

00:01:17: For Having Me.

00:01:19: I want talk about your paper that you presented this year.

00:01:24: You study how regulation in labor markets the enforcement of non-compete clauses affects merge and acquisition activity in that industry.

00:01:35: Help us understand a little bit about how these two things are linked, and how we should think about that link?

00:01:41: And what effects should we expect from that

00:01:43: link?".

00:01:44: Oh definitely!

00:01:45: The Non-Competed Inforcibility has been studied a lot by researchers—and mostly focus on how it affect worker mobility.

00:01:53: Merge and Acquisition also studies by a lot.

00:01:58: acquisition increase firms' market power in both the product and labor markets as a buyer of labour.

00:02:07: In our paper, we try to put two types of labour friction into non-compete and merge an acquisition together because there is natural link.

00:02:20: For example, class would restrict workers' mobility.

00:02:26: Imagine you are a firm, You could try to hire that person away from your competitor or you tried to buy the whole firm.

00:02:33: The NCAA and non-compete agreement basically make it harder to hire this person so naturally intuitively should increase the probability that you want to buy the firm.

00:02:46: So we work out a theory, it turns out a little more complicated than what I just described because if the firm has been protected by non-compete reservation value to sell.

00:03:00: So if the owner is more reluctant to sell, then the buyer have to pay a little more right?

00:03:05: This becomes account availing force in terms of your willingness to buy.

00:03:09: so we figure out the condition under which the location of the target firm.

00:03:20: We also bring this to the empirical exercise by matching the firms merged in Pitchbook with the LinkedIn records of employees, so we can follow the employee's after a firm has been acquired and particularly try to distinguish so-called in market acquire versus outmarket acquire because non compete enforceability should only apply for the in market acquirer given that If they move to another firm who compete with the target firm, that is going to subject to non-compete.

00:03:54: But if you move out of that industry then your not subjected in non-competes.

00:03:58: so all the mechanism I mentioned should have more bite for so called in market acquirer than for the outer market acquire.

00:04:04: So thats why we try and set up this link And also test it into data.

00:04:11: You can imagine a data isn't as clean As the theory just specified right.

00:04:15: because For example, you take California.

00:04:18: California effectively has zero non-compete enforceability but it also have a lot of firms and M&As.

00:04:26: so its not clear that the link we're looking after really exists in data.

00:04:31: however We do find some evidence supporting this theory.

00:04:35: In some states for example The state's biggest change is non-competed enforceability.

00:04:43: the bite occurs in an extensive margin.

00:04:46: So when the noun compete has more enforceability, we see more merger activities versus no-merger activities.

00:04:53: so that's on the extensive margin.

00:04:55: and for those states already have a lot of mergers We see the effect on intensive margins.

00:05:00: That means okay The merger exists but whether acquire is in market or outmarket the state of target firm becomes more enforceable in non-compete.

00:05:14: So these are consistent with intuition I just described, we also followed employee after M&A to what extent they stay or leave.

00:05:27: Generally speaking, the theory predicts that they should be more likely to stay with in-market acquire because by definition then non compete supposed to protect The employer and we do see that on average.

00:05:40: In our data However condition on the person will move.

00:05:44: the person is actually tends to Move inside the market if the deal was done via your market acquired.

00:05:51: so to some extent that may kind of counter the effect of retention by this non-compete enforceability.

00:05:59: So overall, I think we find support from the data for the series and We hope that this sort of highlight a novel connection between non-competed enforceability on the labor market And MA activity on the product market.

00:06:15: That's fascinating It.

00:06:17: it is also indicative of growing interest in labour markets as it interacts with the competition and competition enforcement on a product market, then in industry side.

00:06:31: You talk about in-markets and out of markets acquisitions.

00:06:34: does it also matter?

00:06:36: Does the geographic composition off the merger also matter?

00:06:40: non compete clauses are enforced at the state level doesn't matter where that target or the acquire is.

00:06:45: in estates were non competing clauses aren't forced as opposed to not?

00:06:49: have you looked at?

00:06:50: Oh, definitely.

00:06:50: Geography matters here because the non-compete enforcement is done by state and local government in the US.

00:06:59: so we look at target states.

00:07:01: that's where the target firm is headquartered.

00:07:06: We didn't look much on Acquires State because Acquire often tends to be bigger.

00:07:12: they could be global company even if they had quarter in California, If they buy a firm in Washington state.

00:07:20: They may want to use the law that non-compete law in Washington State to bound the employment there.

00:07:27: so we look at it target state

00:07:30: because the focal employees live in Washington States So its washington states laws that apply here.

00:07:36: I understand It's clear.

00:07:39: There is one thing not on paper itself But can you speculate a little bit about how this link between labor markets and MA activity affects innovation?

00:07:48: You mentioned in the paper, equity hires are concerned.

00:07:53: Can you elaborate on

00:07:54: that?".

00:07:54: Oh yeah!

00:07:55: That's very good question.

00:07:56: unfortunately we don't... We have not linked our data to patents or other measures of elevation, so I do not have definite answer to you.

00:08:04: But i'm happy to speculate.

00:08:06: and the NCA, the non-compete agreement basically kind of bound the employee to the firm okay?

00:08:14: So um...to the extent that it helps the firm to invest more in that employee and create elevations inside the firm that could be a positive effect.

00:08:26: However, the lack of mobility to other firms could dampen their employees' incentive to invent and especially to maximize the value they can create from that invention.

00:08:38: so if you take our research seriously—that's stronger non-compete enforceability actually invite your market acquires to acquired firm?

00:08:49: That is kind mobilizing the employment, and I think to that extent it might be a good thing.

00:08:57: But we also find employees are more likely to stay with the in-market acquirer.

00:09:02: so again It depends on to what extent they market acquire or willing to invest in this.

00:09:08: Employee invests into specific resources.

00:09:11: This employee may need to invent new things.

00:09:15: So that's kind of ambiguous answer?

00:09:18: Also want to throw One more effect in this, if you're thinking entrepreneur may want to found a company and they may look at exit strategy.

00:09:27: To what extent the company they've found could be eventually get monetized through acquisition or through IPO?

00:09:36: So that's just another wrinkle.

00:09:38: That's in this whole thing right.

00:09:40: If The Entrepreneur is able to sell his company easier to sell the company or go public, this could promote their incentive to invent on something new.

00:09:53: So put all these together I guess that prediction and elevation will be quite ambiguous!

00:10:03: Let's hope that maybe at next year's eerie or in two years from now We'll see more papers even either coming out of your research team Or some other researchers.

00:10:10: the researchers who get expired by our presentation this week Come speaking of eerie.

00:10:16: Do you recall?

00:10:17: Your first eerie attendance, or are there most memorable attendants and why?

00:10:22: I think that was first invited to Erie as a keynote speaker in twenty-thirteen.

00:10:27: That's probably somewhere in Portugal, my first time too!

00:10:33: It is hard to believe it has already been over twelve years or thirteen after that and i'm quite impressed by the scope of this conference even at my very first time.

00:10:47: so afterwards i have attended Erie for multiple times.

00:10:53: Do you have a personal highlight for this year's Eerie, either on the program or sort of the backdrop and surrounding here in Mannheim?

00:11:00: That is good question.

00:11:01: I just arrived last night so very limited time to reflect upon that but was quite impressed by value itself at the University of Mannheim.

00:11:12: The palace, Baroque panacea are impressive!

00:11:16: And i kind lost my way into building.

00:11:21: do get lost in the building myself on occasion.

00:11:24: It is if I'm not mistaken, the second largest palace in Europe just after Versailles.

00:11:31: One last point you're also the managing editor at The International Journal of Industrial Organization which is Erie's official house journal.

00:11:40: As a managing editor i'm sure You see A strong increase In submissions Of papers Partly triggered by the use of artificial intelligence these days.

00:11:51: But as a managing editor or the journal in

00:11:54: U.S.,

00:11:55: you're also interested in AI, has it helps?

00:11:59: Or affects the community of research and industrial organization?

00:12:04: There's special issue coming out.

00:12:05: can talk about that?

00:12:07: Oh yes I'm glad to talk about the Journal.

00:12:10: The Journal is titled International Journal of Industrial Organizations The name suggested.

00:12:17: we'll welcome submission from all over the world.

00:12:20: And, and We want to kind of highlight artificial intelligence and industry organization are inherently linked.

00:12:33: And given that, Artificial Intelligence may change firm behavior, it may change individual creators' behaviors or policy makers mindset exactly what they watch out for.

00:12:44: we really wanted this special issue to drive people's attention To this phenomenon, I'm sure everybody is paying attention to artificial intelligence.

00:12:57: But if we want to kind of maybe highlight a special link between the Artificial Intelligence and Industrial Organization will welcome both theoretical and empirical submissions as well.

00:13:10: some pieces, thought-pieces about ongoing policy debate.

00:13:14: Which area you think that's policymakers should pay attention to through which angle in particular how it is related from behavior or consumer behaviour?

00:13:23: Yeah we welcome all of those.

00:13:25: Great!

00:13:26: Can you remind our listeners on the deadline when they submit their papers?

00:13:30: The deadline is December the first of twenty twenty six.

00:13:33: We still

00:13:34: have five months before four months ago.

00:13:36: yes and given AI's help, hopefully even new ideas could be criticized into full paper by that time.

00:13:45: Wonderful!

00:13:45: This has been a great pleasure Ginger.

00:13:47: thank you so much for chatting with me today.

00:13:50: enjoy the rest of the conference and if we do have some time go on a stroll The Weather is Beautiful and absorb what Monheim has to offer.

00:13:58: Definitely Thank You.

00:14:00: This was the ZDW podcast, Wirklich Wirtschaft with Jinja Jinn from Boston University Christchum School of Business.

00:14:07: Recorded on the occasion of the twenty-twenty six EWE annual conference in Mannheim.

00:14:12: You can find more information about a conference and research at ZDw On our website, zdw.de As well as In The Show Notes And Our Social Media Channels.

00:14:22: Thank you for listening.

00:14:23: See ya next time!