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The Labor Market Effects of Legal Restrictions on Worker Mobility

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  • Matthew S. Johnson
  • Kurt J. Lavetti
  • Michael Lipsitz

Abstract

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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  • Matthew S. Johnson & Kurt J. Lavetti & Michael Lipsitz, 2023. "The Labor Market Effects of Legal Restrictions on Worker Mobility," NBER Working Papers 31929, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31929
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    More about this item

    JEL classification:

    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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