The Labor Market Effects of Legal Restrictions on Worker Mobility

Abstract

We analyze how the legal enforceability of Noncompete Agreements (NCAs) affects labor markets. Using newly-constructed panel data, we find that higher NCA enforceability diminishes workers’ earnings and job mobility, with larger effects among workers most likely to sign NCAs. These effects are far-reaching: examining local labor markets that cross state borders reveals that enforceability affects workers’ earnings in different legal jurisdictions. Revisiting a classic model of wage-setting, we find that—in contrast to prior evidence—workers facing high enforceability are unable to leverage tight labor markets to increase their wage. Finally, higher NCA enforceability exacerbates gender and racial wage gaps.

Keywords: noncompete agreements, earnings, wage stagnation