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

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.

How Labor Market Institutions Matter for Worker Compensation

Labor markets deviate substantially from the competitive ideal, and policies and institutions affect workers’ outcomes. Over the last 45 years, the dramatic increase in compensation of high earners and weak or stagnant growth for low and middle earners have shone a spotlight on the ways in which labor market institutions sometimes work to the detriment of lower-paid workers. In this article, we survey several institutions—minimum wages, private sector unions, noncompete agreements, and occupational licensing—considering how they have evolved in ways that affect workers’ outcomes, given that the labor market is characterized by uneven distribution of market gains. We describe the modern labor market as one that substantially features alternative work arrangements and labor market concentration, and we consider the implications of this for public policy. Those policies, along with the surveyed institutions, are the focus of our final section that discusses key options for improving worker outcomes.

Low-Wage Workers and the Enforceability of Noncompete Agreements

We exploit the 2008 Oregon ban on noncompete agreements (NCAs) for hourly-paid workers to provide the first evidence on the impact of NCAs on low-wage workers. We find that banning NCAs for hourly workers increased hourly wages by 2%–3% on average. Since only a subset of workers sign NCAs, scaling this estimate by the prevalence of NCA use in the hourly-paid population suggests that the effect on employees actually bound by NCAs may be as great as 14%–21%, though the true effect is likely lower due to labor market spillovers onto those not bound by NCAs. Whereas the positive wage effects are found across the age, education, and wage distributions, they are stronger for female workers and in occupations where NCAs are more common. The Oregon low-wage NCA ban also improved average occupational status in Oregon, raised job-to-job mobility, and increased the proportion of salaried workers without affecting hours worked. This paper was accepted by Lamar Pierce, organizations.

Physician Practice Organization and Negotiated Prices: Evidence from State Law Changes

We study the relationship between physician organizational structures and prices negotiated with private insurers. Using variation caused by state-level judicial law changes, we show that a 10 percent increase in the enforceability of noncompete agreements (NCAs) causes 4.3 percent higher physician prices, and declines in practice sizes and concentration. Using two databases containing every physician establishment and firm between 1996 and 2007, linked to negotiated prices, we show that larger practices have lower prices for services with high fixed costs, consistent with economies of scale. In contrast, increases in firm concentration conditional on establishment concentration leads to higher prices. (JEL D24, G22, I11, J44, K22, L13)