Labor market reform as an external enabler of high-growth entrepreneurship: A multi-level institutional contingency perspective

Abstract

We investigate the impact of friction-reducing labor market reforms on regional high-growth entrepreneurship (HGE) through the effects of reduced legal enforceability of noncompete agreements (NCAs). We draw on new institutional economic theory and the external enablement framework, with insights from the theory of market-preserving federalism, to explore how these reforms enable (disable) HGE within the context of other, concurrent institutional changes at different governance levels. We assemble a novel multi-level longitudinal dataset and employ staggered difference-in-differences estimation to assess causal effects. Our findings suggest that while reducing the enforceability of NCAs can foster regional HGE, the effectiveness of such reforms is heavily influenced by concurrent federal and local institutional changes. In sectors facing significant federal regulatory expansion, the benefits brought by the reduction of NCA enforceability are negated. However, local pro-market institutional changes can counteract the disabling effects of federal regulatory expansion. This highlights the need to consider how the evolving institutional environment influences potential enablers of HGE, cautioning against claims that these labor market reforms (or other exogenous environmental changes) universally yield positive entrepreneurship outcomes.