When Talent Walks: Skilled Labor Mobility and Bank Behavior

The authors investigate how traditional banks react to a shock in high-skilled labor mobility that induces more labor turnover, raises the bargaining power of skilled labor, and translates into higher costs for the banks. Using the natural experiment of the U.S. state courts’ staggered rejections of the Inevitable Disclosure Doctrine (IDD), the authors document that the rejections of IDD increase labor mobility and wages of skilled workers, which translates to a higher operating cost and lower operating efficiency for traditional banks. This induces banks to increase the loan rates and selectively loan offering without impacting their riskiness. The impact of employee labor mobility on loan rates is more prominent among the banks whose clients have fewer outside options, banks with stronger bargaining power, and banks with a higher likelihood of employee turnover. Neither banks nor customers do seem to enjoy the benefit of such mobility, and the rent of high skilled labor is appropriated by the employees through higher salaries. This has important normative implications for the regulator.