A Brief Review of the Theory, Evidence, and Recent Reform Efforts
By Evan Starr, Assistant Professor, University of Maryland Robert H. Smith School of Business
Policymakers from across the political spectrum have zeroed in on non-competes and no-poach agreements as contributors to the steady decline of the United States’ storied economic dynamism. Economists have documented that these rapidly-spreading provisions deter entrepreneurship, prevent workers from earning what a competitive market would dictate, and slow the natural labor market churn that keeps wages rising, productivity advancing, and the economy healthy. In this brief, Evan Starr, Professor at the University of Maryland Smith School of Business, reviews the latest empirical evidence from this burgeoning field of scholarship and presents the menu of reform options under consideration.
Key findings from the literature include:
Non-competes are increasingly pervasive: One in five employees, or approximately 32 million Americans, are currently bound by a non-compete. In total, 38 percent of workers have signed at least one non-compete agreement in the past.
Probability of Signing a Non-Compete Agreement (Based on Occupation)
No-poach agreements have proliferated too: No-poach agreements cover nearly 60 percent of major franchises in the United States today, up from 36 percent in 1996.
Non-competes reduce entrepreneurship: Greater enforceability of non-competes reduces new firm entry by 18 percent. The firms that do start tend to have fewer employees at launch and are more likely to die in their first 3 years. Ones that survive still tend to remain smaller for their first 5 years. The threat of enforcement appears to particularly dampen entrepreneurship among women.
Non-competes enforcement hurts worker wages: Workers in states that enforce non-competes earn less than equivalent workers in states that do not enforce them.
Non-competes deter workers from finding better opportunities: Workers bound by a non-compete stay in their jobs 11 percent longer with no offsetting increase in pay or satisfaction.
Non-competes likely slow the pace of innovation: Non-competes obstruct the flow of knowledge by restricting the churn of workers among firms. They make venture capital less effective in spurring new patents and job growth.
Negotiations are rarely balanced or transparent: Less than 10 percent of workers negotiate over the terms of the non-compete. When asked to sign a non-compete, 93 percent of workers simply read and sign. 30-40 percent of workers who are asked to sign non-competes are first asked after they have already accepted the job.
Non-competes are inefficient: 11 percent of those who sign one are forced to find work in a different industry after they leave their job.
Non-Compete Enforcement by State
Source: Beck Reed Riden 50 State Noncompete Chart