The Labor Market Effects of Legal Restrictions on Worker Mobility
We analyze how the legal enforceability of noncompete agreements (NCAs) affects labor markets. Using newly-constructed panel data, we find that higher NCA enforceability diminishes workers’ earnings and job mobility, with larger effects among workers most likely to sign NCAs. These effects are far-reaching: changes in enforceability impose externalities on workers across state borders, suggesting that enforceability broadly affects labor market dynamism. We provide evidence that NCA enforceability primarily affects wages through its effect on workers' outside options; moreover, workers facing high enforceability are unable to leverage tight labor markets to increase earnings. We motivate these findings by embedding NCA enforceability in a search model with bargaining. Finally, higher NCA enforceability exacerbates gender and racial earnings gaps.
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