Noncompete Agreements—Understanding Implications for Low-Wage Workers

Signing a noncompete agreement (NCA) means workers are not allowed to work for companies that compete with their current employer when they leave their job. Historically, NCAs were justified as a means to incentivize employers’ investments in trade secrets or training of highly paid, highly skilled workers. Recently, however, policymakers have become concerned by evidence that NCAs are widely used in low-wage jobs, where the benefits of NCAs seem questionable. Matthew S. Johnson and Michael Lipsitz examined the motivations for, and effects of, NCA use among low-wage workers.

Their study revealed that firms that would otherwise not use NCAs use them to extract surplus from workers in the presence of barriers to lowering wages (where a worker’s “surplus” is the benefit she gets from her job above and beyond her next best alternative). To test this hypothesis, they conducted a survey of hair salon owners, representing some of the first data on NCA use with employer information.

They find that when the minimum wage increases or when the market wage falls, firms are more likely to use NCAs. However, this only occurs among firms where the worker’s cost of signing an NCA likely exceeds the employer’s benefits (i.e., firms that would not otherwise use an NCA). Revisiting two prior studies, Johnson and Lipsitz also find that minimum wage increases only reduce employment in states where NCAs are not enforceable.

The findings have nuanced policy implications. On one hand, NCAs clearly cause harm to some workers, since some employers use NCAs to reduce their workers’ job surplus. On the other hand, some workers might benefit from NCAs—the authors do find evidence that, in some firms, NCAs are beneficial contracts for both workers and employers. Furthermore, some workers would only be able to obtain a job if NCAs are available. Thus, lawmakers should consider such tradeoffs when designing future policies to limit NCA use in low-wage jobs.

Read the study in the Journal of Human Resources: “Why Are Low-Wage Workers Signing Noncompete Agreements?,” by Matthew S. Johnson and Michael Lipsitz.

Matthew S. Johnson (@mslater_johnson) is an Assistant Professor of Public Policy and Economics at the Sanford School of Public Policy at Duke University. Michael Lipsitz (@MichaelLipsitz) is an Economist at the Federal Trade Commission.