Noncompetes in the Us Labor Force
Abstract: As a result of limited empirical evidence and controversial anecdotes, speculation over the ubiquity and importance of covenants not to compete in the U.S. labor market is rampant. In this paper, we present a simple equilibrium framework to account for the existence and incidence of noncompetition agreements. We then populate this framework using data from a new survey. The data show that noncompetes are a perhaps surprisingly common feature of the labor market. As a lower bound, we estimate that one in four employees have ever signed a noncompete, and 12.3% are currently working under one. Of those with college education or above, one in five are currently subject to a noncompete agreement. The occupations in which noncompetes appear most frequently are engineering (30%) and computer and mathematical occupations (28%), though they are prevalent in typically lower-skilled occupations as well: installation and repair (11%), production occupations (11%), and personal services (12%). We conclude that the observed heterogeneity in the incidence of noncompetes provides evidence that firms use noncompetes to prevent employees holding key resources from joining competitors. We then examine explicitly whether or not noncompetes are associated with the expected effects of the theory. We find that noncompetes are associated with increases in tenure, increases in the reservation wage for competitors, and increased training. We also show that noncompetes are associated with little negotiating, no wage premium at signing but greater wage growth. We discuss how these results affect our understanding of competitive advantage, the labor market, and the debate over noncompete enforcement.
