Consider This: Training, Wages, and the Enforceability of Covenants Not to Compete

Abstract

Using data from the Survey of Income and Program Participation, the author examines the effect of noncompete enforceability on employee training and wages. An increase from no enforcement of noncompetes to mean enforceability is associated with a 14% increase in training, which tends to be firm-sponsored and designed to upgrade or teach new skills. In contrast to theoretical expectations, the results show no evidence of a relationship between noncompete enforceability and self-sponsored training. Despite the increases in training, an increase from non-enforcement of noncompetes to mean enforceability is associated with a 4% decrease in hourly wages. Consistent with reduced bargaining power, noncompete enforceability is associated with a reduction in the return to tenure, and less-educated workers experience additional wage losses in the face of increased enforceability relative to more-educated workers. Suggestive evidence indicates that policies that tie the enforceability of noncompetes to the worker receiving additional consideration in exchange for signing a noncompete are associated with higher wages.