Labor Noncompete Agreements: Tool for Economic Efficiency or Means to Extract Value from Workers?

Abstract

A number of theoretical arguments have been offered in favor of noncompete provisions in labor agreements. While there has been considerable empirical research on the effects of those provisions, there has been little direct evaluation of the arguments themselves. In this article, I lay out and evaluate three commonly heard arguments, namely, (1) the voluntary nature of labor agreements justifies a strong inference that the terms of those agreements, including noncompete provisions, are beneficial for both workers and firms and that they are economically efficient, 2(A) noncompetes facilitate efficient knowledge transfer from firms to workers, and 2(B) noncompetes encourage efficient firm-sponsored investment in worker training. These arguments, though not entirely without merit, mostly do not survive close scrutiny, and in fact such scrutiny reveals strong arguments that point in the opposite direction. In addition, noncompetes may cause important additional harms that are not measured in conventional economic research.