On the Inefficiency of Non-Competes in Low-Wage Labor Markets

Tristan Potter, Bart Hobijn and André Kurmann

No 2022-2, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: We study the efficiency of non-compete agreements (NCAs) in an equilibrium model of labor turnover.The model is consistent with empirical studies showing that NCAs reduce turnover, average wages,and wage dispersion for low-wage workers. But the model also predicts that NCAs, by reducing turnover, raise recruitment and employment. We show that optimal NCA policy: (i) is characterized by a Hosios-like condition that balances the benefits of higher employment against the costs of inefficient congestion and poaching; (ii) depends critically on the minimum wage, such that enforcing NCAs can be efficient with a sufficiently high minimum wage; and (iii) alone cannot always achieve efficiency, also true of a minimum wage—yet with both instruments efficiency is always attainable.To guide policy makers, we derive a sufficient statistic in the form of an easily computed employment threshold above which NCAs are necessarily inefficiently restrictive, and show that employment levels in current low-wage U.S. labor markets are typically above this threshold. Finally, we calibrate the model to show that Oregon’s 2008 ban of NCAs for low-wage workers increased welfare, albeit modestly (by roughly 0.1%), and that if policy makers had also raised the minimum wage to its optimal level (a 30% increase), welfare would have increased more substantially—by over 1%.

Keywords: Non-compete agreements; low-wage labor markets; minimum wage (search for similar items in EconPapers)
JEL-codes: E24 J62 J63 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022-01-18
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: Add references at CitEc
Citations:

Downloads: (external link)
https://drive.google.com/file/d/1r-Vnv2U7JR-I9gI2Q ... c1W/view?usp=sharing Full text (application/pdf)

Related works:
Journal Article: On the inefficiency of non‐competes in low‐wage labour markets (2024)
Working Paper: On the Inefficiency of Non-Competes in Low-Wage Labor Markets (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2022_002

Access Statistics for this paper

More papers in School of Economics Working Paper Series from LeBow College of Business, Drexel University Contact information at EDIRC.
Bibliographic data for series maintained by Richard C. Barnett ().