The Effects of Noncompete Agreement Reforms on Business Formation: A Comparison of Hawaii and Oregon

Overview

In order to better understand the implications of noncompete agreements and their enforceability, we compare how targeted noncompete agreement reforms in Hawaii and Oregon affected business formation in each state. While Hawaii’s reform focused on noncompete agreements among technology workers, Oregon’s reform focused on low-wage hourly workers. Following previous work on entrepreneurship and noncompete agreements, we expect that the two reforms would have different impacts on business formation. Because technology workers are more likely to have the technical expertise and access to the financial assets necessary to start a business in their chosen field relative to low-wage hourly workers, we expect that the Hawaii reform will have a greater positive impact on business formation.

Summary of Results

• Legislation limiting the enforceability of noncompete agreements can change patterns of business formation.
• The Hawaiian reform, which exempted workers in technology focused industries, resulted in a 10.2 percent increase in the number of technology establishments and a diffusion of skilled technology workers across the labor market.
• The Oregon reform, which exempted low-wage workers, did not result in a statistically significant increase in the number of establishments or a significant shift in employment.

Why We Care

This research suggests that policymakers must ensure that noncompete agreement reforms include higher-earning knowledge workers if they aim to encourage entrepreneurship and foster economic dynamism with their efforts. This research finds that legislation limiting the enforceability of noncompete agreements among a subset of high-wage workers with in-demand skills resulted in the formation of new businesses and increased transfer of knowledge as workers changed jobs. It found no such impact to reforms covering only lower-earning workers. There are many reasons to curtail the use of noncompetes for low-wage workers, and this research helps build the case for curtailing the use among higher-wage workers, too.