The Labor Market Effects of Legal Restrictions on Worker Mobility
56 Pages Posted: 18 Sep 2019 Last revised: 5 Oct 2019
Date Written: September 17, 2019
We analyze how the legal enforceability of contractual restrictions on job mobility affects labor markets. Using a newly-constructed state-year panel of Noncompete Agreement (NCA) enforceability spanning 1991 to 2014, we find that increasing the enforceability of NCAs leads to a decline in workers' earnings and job mobility. An increase from the 10th to 90th percentile of enforceability is associated with three to four percent lower annual earnings among employed workers, and a nine percent decrease in the monthly probability of changing jobs. Examining local labor markets split by state borders, we show that changes to NCA enforceability cause sizable externalities on workers not directly affected by those changes. We then revisit a classic theory of wage-setting based on implicit contracts: in contrast to prior evidence, workers facing strict enforceability are unable to leverage tight labor markets to increase their wage. Finally, we show that enforceable NCAs increase the racial and gender wage gaps -- the earnings effects among women and black workers are twice as large as the effect among white men.
Keywords: noncompete agreements, earnings, wage stagnation
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