Time’s up for non-compete agreements

Non-compete agreements can hurt workers – limiting mobility, suppressing wages, and restricting job choice. So why are they still enforceable in many states?  They may not be for much longer.

The Federal Trade Commission (FTC) just approved a new rule in a 3-2 vote on Tuesday that would render non-compete agreements unenforceable “for the vast majority of workers.” And our recent working paper helped inform the FTC’s thinking in its final rule about how banning non-competes might boost innovation.  

Proponents of non-compete agreements often argue that harm to workers is outweighed by large positive effects on innovation – the idea being that companies will be more willing to invest in research and development if they know that their employees cannot leave and take ideas to a competitor.

Innovation can be worth sacrificing for. Innovation can “grow the pie” that we all rely on by accelerating economic growth. Unfortunately, this is not the case with non-competes.

Our research finds that the current impact of non-competes on innovation is negative. Using detailed data on patenting, firm entry, and the state-level enforceability of non-competes around the United States, we show that patenting actually declines significantly following increases in enforceability. 

We began work on this project prior to the FTC’s proposal to ban non-competes at the federal level in January 2023, but our findings quickly became relevant to the debate that followed that announcement. Although we do not claim that banning non-competes would maximize innovation, we offer evidence that making non-competes less enforceable than they currently are would likely benefit innovation. Ultimately, our paper, in tandem with concurrent work by another team of economists who reached a similar conclusion, was given “substantial weight” in the FTC’s final rule. 

Our work was also uniquely cited by the FTC rule as providing evidence of the “potentially central role for knowledge spillovers, which are hampered when worker mobility is diminished.” We provide direct evidence on this piece of the puzzle. By tracking inventors across firms over time, we estimate inventor-specific mobility effects and find, for example, that inventors switched jobs 22% less following an average-sized increase in non-compete enforceability. This parallels our finding that firms patent 13% less following such a change.

The new FTC rule bans most non-competes nationwide and will become effective 120 days after publication in the Federal Register – although at least one lawsuit has already been filed, in Texas, to challenge the ban. 

Our work on non-competes shows that innovation and worker protection may be complements rather than substitutes. Once in effect, the rule will hopefully generate new businesses, raise worker wages, and boost innovation, benefiting businesses and workers alike. 

Kate Reinmuth (2022 cohort) and Emma Rockall are PhD candidates in economics at Stanford University. Kate is a Knight-Hennessy scholar jointly pursuing a JD at Stanford Law School. She aspires to work on national economic policy related to applied micro-economic topics ranging from innovation to inequality of opportunity to anticompetitive corporate behavior. 

Knight-Hennessy scholars represent a vast array of cultures, perspectives, and experiences. While we as an organization are committed to elevating their voices, the views expressed are those of the scholars, and not necessarily those of KHS.