Trade Secrets and Income Inequality

Abstract

In this study, we investigate the effects of trade secrets protection, particularly through the lens of the Uniform Trade Secret Act (UTSA), on both state-level and firm-level income inequalities. We propose that trade secrets legislation hampers the mobility of skilled workers, leading firms to offer lower wages to retain these essential talents. Since it is assumed that low-skilled workers are unaware of a firm's trade secrets, the protection of such secrets might decrease wages for skilled employees while leaving those of low-skilled employees unaffected. Consequently, income inequality among employees is anticipated to decrease with the implementation of trade secrets laws. To test this hypothesis, we analyze state-level income inequality data and also examine firm-level salary disparities between top executives' compensation and the average employee salary. Our empirical findings indicate that states adopting the UTSA experience a 7.6% reduction in the income share of the top 1%, relative to the mean. This research sheds light on how trade secrets protections could impact societal welfare beyond the mere economic growth of an economy.

Keywords: Trade secret, UTSA, Income inequality, Wage