Mobility Constraint Externalities: How Noncompetes Shackle the Unconstrained
49 Pages Posted: 29 Aug 2017 Last revised: 22 Feb 2018
Date Written: February 17, 2018
Covenants not to compete are often included in employment agreements between firms and employees, justified by each party's voluntary "freedom to contract." However, noncompetes may also generate externalities for individuals who have not signed such agreements. We theorize that enforceable noncompetes increase frictions in the labor market by increasing uncertainty and recruitment costs, and by curtailing entrepreneurship. We find that in state-industries with a higher incidence and enforceability of noncompetes, the unconstrained receive relatively fewer job offers, have reduced mobility, lower wages, and are less satisfied with their jobs. The results offer policymakers a reason to restrict noncompetes beyond axiomatic appeals to a worker's "freedom of contract" and highlight labor market frictions that may impact firm-level human capital strategies.
Keywords: Employee Mobility, Noncompetes, Job Satisfaction, Wages, Noncompetes
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