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

Bart Hobijn, André Kurmann and Tristan Potter

No 2022-01, Working Paper Series from Federal Reserve Bank of San Francisco

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 wages (search for similar items in EconPapers)
JEL-codes: E24 J62 J63 (search for similar items in EconPapers)
Pages: 52
Date: 2022-01-18
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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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)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:93658

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DOI: 10.24148/wp2022-01

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