In an era where tech giants are routinely vilified for crushing competition, a new economic model flips the script: these same monopolies might be the very reason research workers are seeing their wages rise. Nominal News reports on a counterintuitive finding from Fernández-Villaverde, Yu, and Zanetti (2025), suggesting that the dominant players in the economy are engaging in "defensive hiring" that inadvertently boosts worker pay even as it stifles overall innovation. This is not a story about benevolent corporations; it is a story about a market failure where the protection of profit margins creates a wage premium for a tiny elite, leaving the broader economy worse off.
The Paradox of Defensive Hiring
The piece centers on a specific economic mechanism known as a monopsony, where a single buyer (the employer) dominates the market. Usually, this power allows firms to suppress wages. However, the authors argue that in high-stakes sectors like technology and pharmaceuticals, the fear of being "creatively destroyed" by a new startup changes the calculus. Nominal News explains that "large firms may have an incentive to hire more research and development (R&D) workers to make it harder for other companies to innovate." By hiring up the available talent, incumbents create a barrier to entry that is financial rather than technological.
This strategy forces the dominant firm to pay more, not less. The article notes that because these giants account for the bulk of hiring, they effectively set the industry-wide wage. "By setting the wage higher, new entrant firms will find it expensive to enter the market," the piece argues. This creates a strange equilibrium where the very companies accused of killing competition are paying their employees a premium to ensure no one else can compete with them. The evidence cited is compelling: in industries where incumbents spend heavily on R&D, the creation of new firms drops, yet the survival rate of those incumbents rises.
"The incumbent firm is aware of this trade-off and thus takes it into the account when setting the wage."
This dynamic is particularly potent because of the "inelastic" supply of research workers. The text clarifies that "the total number of people that are available to do research does not increase (decrease) much if the wage given to these workers increases (decreases)." In plain terms, you cannot simply train a million new AI researchers overnight. This scarcity allows the incumbent to "hoard" talent. The model suggests that when switching costs between sectors rise—making it harder for a researcher to pivot from, say, biotech to software—the wage premium for those researchers jumps by 50%. The incumbent hires more, the wage goes up, but the overall rate of innovation in the economy actually falls.
The Human Cost of Hoarded Talent
The most striking implication of this research is the divergence between the health of the specific worker and the health of the economy. Nominal News highlights a painful trade-off: "What might be good for the economy (higher innovation) might not be good for the specific worker (research workers may see lower wages)." In the model, when the government subsidizes new firms to spur innovation, the wage premium for researchers stays flat. Conversely, when the incumbent is subsidized, innovation plummets, but the research wage premium skyrockets by 50%.
This reveals a stark reality for the roughly 5% of the US workforce engaged in research. They are benefiting from a system that is structurally inefficient. The piece notes that "the incumbent firm increases the wage it offers and hires more research workers" specifically to prevent competitors from emerging. The result is a "defensive hiring" mechanism that is stronger than the traditional monopsony power to suppress wages. However, this comes at the cost of "creative destruction," the engine of long-term economic growth. The model shows innovation dropping from 1.3% to 1.27% simply because switching costs rose, a seemingly small number that represents a massive drag on future productivity.
Critics might note that this model assumes a level of coordination and market power that may not exist in every sector, or that the "hoarding" effect is overstated in a globalized labor market where talent can move across borders. Yet, the data on declining new firm formation and rising R&D spending in the US supports the core premise that incumbents are successfully blocking entry.
"Solving this trade-off issue (what's good for the economy might not be good for research workers) may require government intervention via transfers to research workers."
The editors of Nominal News point out that while the research workers are winning, the broader population is losing. With only a tiny fraction of the population working in R&D, the policy implication is that the gains from this "defensive hiring" are concentrated while the costs—slower innovation and fewer new products—are diffuse. The article suggests that without intervention, the market will naturally gravitate toward this inefficient state where wages are high for the few, but progress is slow for the many.
Bottom Line
The strongest part of this argument is its ability to explain why wages for elite tech workers continue to rise even as the sector's overall growth slows; it reframes high salaries not as a sign of a booming market, but as a symptom of a blocked one. The biggest vulnerability lies in the assumption that these firms act with such perfect foresight to manipulate the labor market, though the empirical data on R&D spending and firm survival lends it weight. Readers should watch for how policymakers might respond to this specific trade-off: if the goal is to reignite innovation, the current high-wage equilibrium for research workers may need to be disrupted, potentially at the expense of those workers' immediate financial security.