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January 18, 2022

Employer market power in Silicon Valley

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From at least 2005 through 2009, some of the world’s most prominent technology companies have been linked to secret compacts not to compete for each other’s workers—“no poach” agreements, a violation of the Sherman Antitrust Act of 1890. According to the U.S. Department of Justice (DOJ) and in civil suits, Adobe, Apple, eBay, Google, Intel, Intuit, Lucasfilm, and Pixar all took part in the scheme, which prohibited “cold-calling” and bidding wars for talent. Violations were often resolved between managers. In response to Google’s recruitment of an Apple employee, for example, Apple CEO Steve Jobs complained by email to Google CEO Eric Schmidt. Schmidt obligingly responded, “the sourcer [recruiter] who contacted this Apple employee should not have and will be terminated within the hour. We are scrubbing the sourcer’s records to ensure she did not contact anyone else.” Jobs’ pithy response has become infamous: a simple smiley face emoji. The no-poach agreements ended in 2009 when a whistleblower alerted the DOJ, which investigated and filed a civil complaint against the companies involved. The case was settled with no admission of guilt from the tech companies, but also a prohibition by the DOJ on such conduct in the future. 

The economic view of no-poach agreements is clear. By limiting competition for workers, they reduce labor earnings and typically increase corporate profits. In addition, they lead to waste, as when workers spend time and energy seeking jobs at companies where no-poach agreements prohibit their hiring. 

In the case of the Silicon Valley agreements, I estimate the labor losses by comparing salaries at colluding companies to those at other technology companies like Amazon, Microsoft, and Cisco, before and after the 2009 DOJ investigation. Using data from Glassdoor, I find the agreements reduced the salaries of affected workers by approximately 5%. This estimate is surprisingly large because affected workers were well paid and highly educated, with 88% holding an undergraduate or graduate degree. Generally, the market for workers like this is competitive, because their skills are broadly applicable—think of software engineers—and they have the means to move to a new city. Despite these advantages, technology workers lost a total of roughly $2.7 billion from the no-poach agreements. In contrast, the companies involved settled employee class-action lawsuits in 2015 and 2018 for just $435 million. This disparity between the benefits and costs of collusion suggests current legal and regulatory structures may not sufficiently deter the exercise of employer market power.

Why does this case matter? The technology sector is large, accounting for $1.7 trillion in US value added as of 2019. But the broader significance of the no-poach agreements stems from current labor market conditions. In the US the average labor market is now “highly concentrated” under DOJ guidelines. That means many workers face a small set of employers bidding for their labor and anti-competitive agreements among employers are easier to sustain. The prevalence of such illegal agreements will remain difficult to evaluate, as employers have strong incentives to conceal them. “We rarely hear ... of the combinations of masters, though frequently of those of workmen,” wrote Adam Smith, “But whoever imagines ... that masters rarely combine [to lower wages], is as ignorant of the world as of the subject.”

© Matthew Gibson

Matthew Gibson is associate professor of economics at Williams College and an IZA Research Affiliate.

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