IDEAS home Printed from https://ideas.repec.org/p/ris/drxlwp/2022_002.html
   My bibliography  Save this paper

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

Author

Listed:
  • Potter, Tristan

    (Drexel University)

  • Hobijn, Bart

    (Arizona State University & Federal Reserve Bank of San Francisco)

  • Kurmann, Andre

    (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%.

Suggested Citation

  • Potter, Tristan & Hobijn, Bart & Kurmann, Andre, 2022. "On the Inefficiency of Non-Competes in Low-Wage Labor Markets," School of Economics Working Paper Series 2022-2, LeBow College of Business, Drexel University.
  • Handle: RePEc:ris:drxlwp:2022_002
    as

    Download full text from publisher

    File URL: https://drive.google.com/file/d/1r-Vnv2U7JR-I9gI2QCLaVx-HKXkp9c1W/view?usp=sharing
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Arindrajit Dube & T. William Lester & Michael Reich, 2016. "Minimum Wage Shocks, Employment Flows, and Labor Market Frictions," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 663-704.
    2. Bontemps, Christian & Robin, Jean-Marc & van den Berg, Gerard J, 2000. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Nonparametric Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 305-358, May.
    3. Manning, Alan, 2011. "Imperfect Competition in the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 11, pages 973-1041, Elsevier.
    4. Brenzel, Hanna & Gartner, Hermann & Schnabel, Claus, 2014. "Wage bargaining or wage posting? Evidence from the employers' side," Labour Economics, Elsevier, vol. 29(C), pages 41-48.
    5. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    6. Jesper Bagger & Fran?ois Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2014. "Tenure, Experience, Human Capital, and Wages: A Tractable Equilibrium Search Model of Wage Dynamics," American Economic Review, American Economic Association, vol. 104(6), pages 1551-1596, June.
    7. Cynthia L. Doniger, 2022. "These Caps Spilleth Over: Equilibrium Effects of Unemployment Insurance," Finance and Economics Discussion Series 2022-074, Board of Governors of the Federal Reserve System (U.S.).
    8. Yannis Bakos & Florencia Marotta-Wurgler & David R. Trossen, 2014. "Does Anyone Read the Fine Print? Consumer Attention to Standard-Form Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 43(1), pages 1-35.
    9. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g8grh35j2 is not listed on IDEAS
    10. R. Jason Faberman & Andreas I. Mueller & Ayşegül Şahin & Giorgio Topa, 2022. "Job Search Behavior Among the Employed and Non‐Employed," Econometrica, Econometric Society, vol. 90(4), pages 1743-1779, July.
    11. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
    12. Melvyn G. Coles & Dale T. Mortensen, 2016. "Equilibrium Labor Turnover, Firm Growth, and Unemployment," Econometrica, Econometric Society, vol. 84, pages 347-363, January.
    13. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 281-315.
    14. Jesper Bagger & Francois Fontaine & Jean-Marc Robin, 2014. "Tenure, experience, human capital and wages: a tractable equilibrium search model of wage dynamics," CeMMAP working papers 12/14, Institute for Fiscal Studies.
    15. Bruce Fallick & Charles A. Fleischman, 2001. "The importance of employer-to-employer flows in the U.S. labor market," Finance and Economics Discussion Series 2001-18, Board of Governors of the Federal Reserve System (U.S.).
    16. Alan B. Krueger & Orley Ashenfelter, 2022. "Theory and Evidence on Employer Collusion in the Franchise Sector," Journal of Human Resources, University of Wisconsin Press, vol. 57(S), pages 324-348.
    17. Robert E. Hall & Alan B. Krueger, 2012. "Evidence on the Incidence of Wage Posting, Wage Bargaining, and On-the-Job Search," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 56-67, October.
    18. Kurt Lavetti & Carol Simon & William D. White, 2020. "The Impacts of Restricting Mobility of Skilled Service Workers: Evidence from Physicians," Journal of Human Resources, University of Wisconsin Press, vol. 55(3), pages 1025-1067.
    19. Robert E. Hall & Sam Schulhofer-Wohl, 2018. "Measuring Job-Finding Rates and Matching Efficiency with Heterogeneous Job-Seekers," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(1), pages 1-32, January.
    20. Gabriel Chodorow-Reich & Loukas Karabarbounis, 2016. "The Cyclicality of the Opportunity Cost of Employment," Journal of Political Economy, University of Chicago Press, vol. 124(6), pages 1563-1618.
    21. Dale T. Mortensen & Tara Vishwanath, 1991. "Information Sources and Equilibrium Wage Outcomes," Discussion Papers 948, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    22. Alan Manning, 2006. "A Generalised Model of Monopsony," Economic Journal, Royal Economic Society, vol. 116(508), pages 84-100, January.
    23. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-273, May.
    24. Mark J. Garmaise, 2011. "Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(2), pages 376-425.
    25. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," American Economic Review, American Economic Association, vol. 101(7), pages 2873-2898, December.
    26. Liyan Shi, 2023. "Optimal Regulation of Noncompete Contracts," Econometrica, Econometric Society, vol. 91(2), pages 425-463, March.
    27. repec:hal:spmain:info:hdl:2441/7rep5mp5ij95l94ec64n5tdclp is not listed on IDEAS
    28. Evan P. Starr & J.J. Prescott & Norman D. Bishara, 2021. "Noncompete Agreements in the US Labor Force," Journal of Law and Economics, University of Chicago Press, vol. 64(1), pages 53-84.
    29. Evan Starr, 2019. "Consider This: Training, Wages, and the Enforceability of Covenants Not to Compete," ILR Review, Cornell University, ILR School, vol. 72(4), pages 783-817, August.
    30. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    31. repec:hal:spmain:info:hdl:2441/dc0ckec3fcb29ms985085gkbp is not listed on IDEAS
    32. Marcelo Veracierto, 2011. "Worker flows and matching efficiency," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 35(Q IV), pages 147-169.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On the Inefficiency of Non-Competes in Low-Wage Labor Markets
      by Christian Zimmermann in NEP-DGE blog on 2022-03-15 15:08:47

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Simon Jäger & Benjamin Schoefer & Samuel Young & Josef Zweimüller, 2020. "Wages and the Value of Nonemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 1905-1963.
    2. Cynthia Doniger, 2023. "Wage Dispersion with Heterogeneous Wage Contracts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 138-160, December.
    3. Niklas Engbom & Christian Moser, 2022. "Earnings Inequality and the Minimum Wage: Evidence from Brazil," American Economic Review, American Economic Association, vol. 112(12), pages 3803-3847, December.
    4. Alan Manning, 2021. "Monopsony in Labor Markets: A Review," ILR Review, Cornell University, ILR School, vol. 74(1), pages 3-26, January.
    5. Marcelo Arbex & Dennis O'Dea & David Wiczer, 2019. "Network Search: Climbing The Job Ladder Faster," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(2), pages 693-720, May.
    6. Di Addario, Sabrina & Kline, Patrick & Saggio, Raffaele & Sølvsten, Mikkel, 2023. "It ain’t where you’re from, it’s where you’re at: Hiring origins, firm heterogeneity, and wages," Journal of Econometrics, Elsevier, vol. 233(2), pages 340-374.
    7. Damdinsuren, Erdenebulgan & Zaharieva, Anna, 2023. "Expectation formation and learning in the labour market with on-the-job search and Nash bargaining," Labour Economics, Elsevier, vol. 81(C).
    8. Gottfries, Axel & Teulings, Coen, 2023. "Returns to on-the-job search and wage dispersion," Labour Economics, Elsevier, vol. 80(C).
    9. Christopher Taber & Rune Vejlin, 2020. "Estimation of a Roy/Search/Compensating Differential Model of the Labor Market," Econometrica, Econometric Society, vol. 88(3), pages 1031-1069, May.
    10. David Card & Ana Rute Cardoso & Joerg Heining & Patrick Kline, 2018. "Firms and Labor Market Inequality: Evidence and Some Theory," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 13-70.
    11. Philip Jung & Moritz Kuhn, 2019. "Earnings Losses and Labor Mobility Over the Life Cycle," Journal of the European Economic Association, European Economic Association, vol. 17(3), pages 678-724.
    12. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    13. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," American Economic Review, American Economic Association, vol. 101(7), pages 2873-2898, December.
    14. Rasmus Lentz & Nicolas Roys, 2024. "Training and Search On the Job," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 53, pages 123-146, July.
    15. Marta Lachowska & Alexandre Mas & Raffaele Saggio & Stephen A. Woodbury, 2022. "Wage Posting or Wage Bargaining? A Test Using Dual Jobholders," Journal of Labor Economics, University of Chicago Press, vol. 40(S1), pages 469-493.
    16. Giuseppe Moscarini & Fabien Postel-Vinay, 2016. "Wage Posting and Business Cycles: a Quantitative Exploration," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 135-160, January.
    17. Ioana Marinescu & Ronald Wolthoff, 2020. "Opening the Black Box of the Matching Function: The Power of Words," Journal of Labor Economics, University of Chicago Press, vol. 38(2), pages 535-568.
    18. Fella, Giulio & Audoly, Richard & De Pace, Federica, 2022. "Job Ladder, Human Capital, and the Cost of Job Loss," CEPR Discussion Papers 17746, C.E.P.R. Discussion Papers.
    19. Evan Starr & Justin Frake & Rajshree Agarwal, 2019. "Mobility Constraint Externalities," Organization Science, INFORMS, vol. 30(5), pages 961-980, September.
    20. Rune Vejlin & Gregory F. Veramendi, 2023. "Sufficient statistics for frictional wage dispersion and growth," Quantitative Economics, Econometric Society, vol. 14(3), pages 935-979, July.

    More about this item

    Keywords

    Non-compete agreements; low-wage labor markets; minimum wage;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:drxlwp:2022_002. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Richard C. Barnett (email available below). General contact details of provider: https://edirc.repec.org/data/cbdreus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.