Amid growing sentiments that the US labor market has failed to produce economic gains for the majority of workers as domestic outsourcing increases, labor unions decline, wages stagnate, and superstar firms rise, noncompete agreements (NCAs) pose an additional threat to economic mobility. NCAs contractually restrict a worker’s ability to start a rival firm or work for an employer’s competitor after job separation. These agreements can weaken the economy by restricting an individual’s post-employment opportunities and slowing down innovation. They also limit workers’ upward economic mobility as they can restrict future wage growth and their ability to accept better working conditions through a competing employer. Moreover, they harm competition by blocking workers from pursuing better opportunities and prevent employers from hiring the best talent available. Some NCAs may even be drawn beyond legal limits and can hurt workers even more.
As noncompete agreements grow in popularity, their impact on workers and the economy largely depends on their enforceability. NCA enforceability is determined through judicial and legislative decisions at both the state and local levels, which in turn affect the intensity of NCA use. Higher noncompete agreement enforceability places tighter restrictions on worker freedoms by upholding the right of employers to prevent their competitors from hiring their employees. Conversely, lower noncompete agreement enforceability is more likely to restore labor market autonomy to workers by allowing other competitors to hire them.
In this study, researchers Matthew S. Johnson, Kurt Lavetti, and Michael Lipsitz define, quantify, and classify the extent of NCA enforceability decisions at the state level. The study assesses annual levels of NCA enforceability to estimate the impact of NCAs on individual earnings and job mobility. The authors build upon past work to create state-level longitudinal data from 1991 to 2014 and combine these data with several other datasets on workers’ economic outcomes.
Key findings
- Higher NCA enforceabilitylessens workers’ earnings and job mobility. Given that workers under NCAs cannot leverage tight labor markets to accept new job offers that would increase their wages, without competitive outside offers, they receive fewer pay increases during their job tenure than in areas where NCA enforceability is lower.
- Making NCAs unenforceable nationwide holds the potential to increase average earnings by between 3.3 and 13.9 percent for all workers economy-wide.
- The largest earnings effects of NCAs are observed among women and racial minorities, reducing earnings for both groups by twice as much as white male workers. Earnings and job mobility are most reduced for workers who are most likely to sign NCAs—those with a bachelor’s degree or higher.
- Lower NCA enforceabilitywould improve gender and racial wage gaps. The authors estimate that if the states with the highest 10 percent of NCA enforceability instead emulated the states with the lowest 10 percent, the earnings gap between white men and other demographic groups would close by 5.6 percent for white women, 4.6 percent for Black women, 9.1 percent for other nonwhite women (non-Black), 8.7 percent for Black men, and 3.6 percent for other nonwhite men (non-Black).
- State and local changes toNCA enforceability create spillover effectsto other local labor markets and affect workers in different legal jurisdictions. Specifically, changes to NCA enforceability in one state can impact the earnings and labor market churn of workers in adjoining states. This implies that NCA enforceability may impact both signers and nonsigners alike.
- Even in the absence of changes in the concentration of employers, higher NCA enforceability allows employers to wield greater market power over workers.
Policy and practice implications
WorkRise has identified the following implications for policy and practice.
Implications for policymakers:
- Limit NCA enforceability: Policymakers should review and revise laws to limit NCA enforceability. Judicial decisions on NCAs impact broader state and local labor laws, and high NCA enforcement is ultimately worse for workers and the economy.
- Ban NCAs: Outlawing NCAs altogether could positively impact all workers, not just those who sign them. The Federal Trade Commission is currently investigating an initial finding that NCAs constitute a method of competition that is unfair and proposed a new rule to ban them entirely. As referenced above, this ban holds the potential to increase average earnings by between 3.3 and 13.9 percent. Employer interests in maintaining trade secrets when workers switch jobs can be achieved through non-disclosure agreements while allowing for worker mobility.
Implications for employers:
- Discontinue NCA use: While NCAs often benefit employers, high NCA enforceability holds broader negative implications for the economy at large. In high-enforceability jurisdictions, NCAs exacerbate existing gender and racial earnings gaps, proving to be inequitable and placing greater burdens on certain demographic groups. In addition, recent findings indicate that employers do not find NCAs useful for workers who earn less than $100,000 a year.
Implications for researchers, economists, and legal scholars:
- Evaluate the broader impact of NCAs: The authors conclude that signing NCAs holds implications for both signers and nonsigners alike, with further spillover effects to nearby legal jurisdictions. Scholars evaluating NCAs should examine the impact of NCAs on nonsigners in local labor markets.
- Consider the harm of freedom of contract: Freedom of contract is “the ability of parties to bargain and create the terms of their agreement as they desire without outside interference from the government.” However, workers may be worse off with NCAs due to the economy-wide harms of prevalent NCA use. Researchers, economists, and legal scholars should take this finding into consideration in the longstanding debate on freedom of contract.
Not only can NCA enforceability lessen all workers’ earnings and job mobility, but it also has inequitable impacts on certain demographic groups. NCA enforceability affects the entire economy, often strongly benefiting employers and proving detrimental to a worker’s labor market autonomy.