The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship

Abstract

This paper examines how labor frictions affect investment rate and new firm entry. Using matched employee-employer data from LinkedIn, I first show that increases in the enforceability of non-compete agreements lead to widespread declines in employee departures across seniority levels, driven by workers in knowledge-intensive occupations. Investment rates at existing firms increase, especially for firms that employ more skilled workers. This comes at the expense of new firm entry, which declines substantially in knowledge-intensive sectors. The results suggest that labor frictions play an important role in investment decisions, and that NCs may factor into slowing business dynamism.

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

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