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The U.S. economy has experienced a historic turnaround since the depths of the Great Recession.
The unemployment rate has fallen by half since its peak in 2009, and over the last six years,
American businesses have created more than 14 million new jobs, the longest streak on record.
Despite this remarkable progress, the U.S. economy faces a number of longer-run challenges,
some of which go back several decades. In at least part of the economy, evidence suggests that
competition for consumers and workers is declining, and the number of new firms each year is
experiencing a downward trend. In addition to this trend, there has been a decrease in ‘business
dynamism’—the so-called churn of firms and who is working for whom in the labor market—
since the 1970s.
One factor driving these issues may be institutional changes in labor markets, such as greater
restrictions on a worker’s ability to move between jobs. To address these and other issues that limit
competition in the marketplace, the President has directed executive departments and agencies to
propose new ways of promoting competition and providing consumers and workers with
information they need to make informed choices, in an effort to improve competitive markets and
empower consumers’ and workers’ voices across the country.
Building on these efforts, this document provides a starting place for further investigation of the
problematic usage of one institutional factor that has the potential to hold back wages—non-
compete agreements. These agreements currently impact nearly a fifth of U.S. workers, including a
large number of low-wage workers. This brief delineates issues regarding misuse of non-compete
agreements and describes a sampling of state laws and legislation to address the potentially high
costs of unnecessary non-competes to workers and the economy. It draws on a recently released
report from the U.S. Treasury Office of Economic Policy--
Non-Compete Contracts: Economic Effects
and Policy Implications—which provides an overview of the nascent research on non-competes’
prevalence, enforcement, and effects.
Introduction
Non-compete agreements, or “non-competes,” are contracts that ban workers at a certain company
from going to work for a competing employer within a certain period of time after leaving a job. The
main rationale for these agreements is to encourage innovation by preventing workers with ‘trade
secrets’ from transferring technical and intellectual property of companies to rival firms, even when
there are trade secret laws to protect companies. These agreements may also encourage greater
employer investments in worker training because they may reduce fear that workers will take skills
gained to a competitor.
Workers’ value comes in part from the skills and experiences gained on the job. Non-competes can
reduce workers’ ability to use job switching or the threat of job switching to negotiate for better
conditions and higher wages, reflecting their value to employers. Furthermore, non-competes could
result in unemployment if workers must leave a job and are unable to find a new job that meets the
requirements of their non-compete contract.
In addition to reducing job mobility and worker bargaining power, non-competes can negatively
impact other companies by constricting the labor pool from which to hire. Non-competes may also
prevent workers from launching new companies. Some critics also argue that non-competes can
actually stifle innovation by reducing the diffusion of skills and ideas between companies within a
region, which can in turn impact economic growth. Non-compete agreements may also have a
detrimental effect on consumer well-being by restricting consumer choice.