Economist Examines Impact of Noncompete Agreements

Academic Research by: Liyan Shi

Liyan Shi, an assistant professor of economics at the Tepper School, argued in a 2023 study published in Econometrica that noncompete agreements harm the economy. She suggested that a near ban of these agreements may be the best policy.

In April, the Federal Trade Commission (FTC) issued a final rule to promote competition by banning noncompetes nationwide to protect workers' freedom to change jobs, increase innovation, and foster new business formation.

In this Q&A, Shi provided insights into noncompete agreements and their influence on the workforce and economy.

What are noncompete contracts and how common are they among U.S. workers?

Shi: Noncompete contracts are agreements where an employee promises not to work for a competitor after leaving the company. They are difficult to measure because they are private contracts. A nationwide survey by the University of Maryland found that about 30 million U.S. workers, or 18% of the workforce, are bound by noncompetes, and 38% have signed such contracts during their careers.

What does your research reveal about the prevalence and duration of noncompete clauses among executives?

Shi: Among executives and key employees at publicly listed firms, nearly two-thirds are bound by noncompete clauses, lasting about two years on average.

What are the main concerns about noncompete agreements?

Shi: The main concern is their anticompetitive effects: restricted labor mobility prevents workers from moving to more productive jobs and inhibits new firms' entry. Noncompete contracts have been identified as contributing to declining labor market fluidity, stagnant wage growth, and decreasing business dynamism in the U.S. While they protect employers' investments, particularly in employees, this has led to varied legal approaches across the country.

What policy recommendations do you have regarding noncompete agreements?

Shi: My research indicates that while noncompetes benefit firm investment, particularly in intangible assets like R&D, these benefits are outweighed by the costs of reduced labor reallocation and fewer new jobs. On balance, I recommend a near ban on noncompetes.

How do noncompetes affect workers and employers?

Shi: Noncompete clauses lower wages because workers cannot take new, potentially more lucrative jobs and are less likely to get raises. However, high-skill workers may demand higher starting wages to compensate for future restrictions. Despite this, noncompetes should not remain unregulated because they affect third parties—potential employers who could offer more productive jobs but cannot recruit workers bound by these agreements.