The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship

Abstract

This paper examines how labor mobility restrictions like non-compete agreements affect firms’ investment decisions. Using matched employee-employer data from LinkedIn, I show that increases in the enforceability of non-compete agreements lead to widespread declines in employee departures, specifically in knowledge-intensive occupations. Established firms that rely more on these knowledge-intensive occupations increase their investment rate in physical capital. However, new firm entry in corresponding sectors declines. I provide evidence for different mechanisms to explain these patterns. Together, the findings show that labor frictions play an important role in investment decisions.

Keywords: Labor mobility, entrepreneurship, investment, non-competes, human capital

JEL Classification: J24, J41, J62, E22, L26, K31