Noncompete Agreements Across High-Income Countries

A “noncompete” clause in an employment contract means that a worker agrees, as a condition of employment, not to leave the company and immediately work for a competing firm. The clause may specify whether the alternative competing firm is local, or just in the same industry, and it may specify that it only applies for a limited period of time. Noncompete clauses are controversial: in the United States, California, Minnesota, North Dakota, and Oklahoma ban them almost entirely, and other states limit them to specific occupations or income levels.

The economic argument for noncompete clauses is a concern that employers will taken information from one employer and then use it with another employer. After all, not all corporate information can be easily protected by trade secrets or patents. If employers know that employees may take information with them, the employers will want to limit key information to certain groups of employees, and will try not to train or teach other employees about such information. The economic argument against noncompete clauses is that they are a way for employers to make it harder for employees to shop around for better jobs.

The controversy over noncompetes is not limited to the United States. Dan Andrews and Andrea Garnero discuss “Five facts on non-compete and related clauses in OECD countries” (OECD Economics Department Working Papers, April 25, 2025). Here are their five facts:

First, the prevalence of such clauses is high, or at least higher than most would have thought, and may be rising. Second, post-employment restrictions have spread to many parts of the economy, well beyond the relatively narrow group of highly paid managers and professionals. Moreover, such clauses appear to be included in employment contracts even where they are legally unenforceable, simply to deter workers. Third, non-compete clauses are most often bundled with other clauses, typically a non-disclosure agreement. This helps to further suppress workers’ bargaining power without necessarily protecting trade secrets any more than a non-disclosure agreement alone. Fourth, even when unenforceable, non-compete clauses have economic consequences in terms of reduced job mobility, wages, knowledge spillovers and market dynamism. Finally, apart from the United States, other OECD countries have introduced limitations on the use of such clauses in the last decade, and a few others are currently discussing possible restrictions.

On that final point, the authors describe limitations on noncompetes that have already been enacted in Austria, Denmark, Finland, Netherlands, Norway, as well as various US states, as well as ongoing momentum for such limitations in Australia, Canada, the United Kingdom, and even across the EU. The economic case for noncompete agreements applies most clearly, if it applies at all, to the high-level executives or knowledge-intensive jobs, which tend to be high-paid. Thus, many of the limitations are to ban noncompetes for lower-paid jobs, or for the kinds of jobs that are not especially close to the knowledge frontier.

But advocates for noncompetes face an enormous counterexample: the state of California banned noncompetes back in 1872. It doesn’t seem to have much hindered the economic or technological leadership of California in the last 150 years. Indeed, some authors have argued that the free flow of workers across California firms has supported a culture of startups and knowledge workers in that state. Because employees who sign a noncompete agreement are also often required to sign a nondisclosure agreement, it’s not easy for a reseacher to separate what the effect would be if nondisclosures were allowed (and trade secret law was enforced), but noncompetes were banned. But there is at least a prima facie case that noncompetes function more often as a tool of employer intimidation, to discourage workers from leaving, than as an institution to encourage the flow of information and training within each firm.

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