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Recently, the media have paid much attention to the Diarra ruling, which followed on the 1995 Bosman ruling. These judicial rulings limit the ability of sports clubs to control the future employment of their employees and are grounded in Article 45 of the Treaty on the Functioning of the EU. Essentially, the Article states that the free movement of workers cannot be restricted unless on grounds of public policy, public security, or public health. While the rulings improve the labour market position of footballers, they reduce the incentive of clubs to train their players.<\/p>\n
For those not making a living by using their head, or feet, to propel a ball into a net, the Bosman and Diarra rulings have little impact. Yet, for many workers, non-compete agreements (NCAs) prevent them from joining a competitor or starting a similar business. In the US, the use of NCAs was banned by the Federal Trade Commission in early 2024 (Federal Trade Commission 2024). However, since then, a court case in Texas overturned this ruling, and many more similar cases are on the dockets in other states (Kaye 2024).<\/p>\n
In the EU, the approach to NCAs is diverse across countries. While most EU countries do allow NCAs, many have conditions that limit their scope and enforceability. In this column, we argue that NCAs interact with investment in intangible assets and market imperfections, and that this contractual feature is relevant to the debate on innovation, productivity growth, and market power.<\/p>\n
The theoretical arguments for, or against, NCAs are complex (Potter et al. 2024). NCAs provide incentives for firms to invest in innovation and worker-specific knowledge but hamper dynamic, competitive labour markets. They limit the potential efficiency gains that come from knowledge spillovers that occur when workers move across companies and share their expertise. To balance this trade-off, policymakers require empirical evidence on the various markets and mechanisms affected by the particulars of existing NCAs and regulatory changes. Such evidence is slowly becoming available.<\/p>\n
For labour markets in the UK, it is found that 26% of workers fall under NCAs, higher than in the US or Italy (Alves et al. 2024), and that NCAs also bind low-skilled workers. In the Dutch case, NCAs are found to impact approximately 18% of the labour force (Streefkerk et al. 2015). Most of these studies find that NCAs are not limited to high-skilled workers but are ubiquitous across different occupations, hierarchical levels, and industries. Young (2024) finds that a ban on non-competes for low-earning workers increased the quantity and quality of transitions in Austria. Johnson et al. (2023a) show the implications of changes in enforceability for US workers\u2019 earnings and job mobility. Balasubramanian et al. (2022) investigate the effects of NCA restrictions in Hawaii on the careers of technology workers. In existing jobs, NCAs also affect training, wages, and job satisfaction of US workers (Starr et al. 2021).<\/p>\n
Another set of papers examines the impact of NCAs on firms\u2019 investment decisions. Conti (2014) finds that stricter NCA enforceability induces US companies to choose \u2018riskier\u2019 R&D projects, while Johnson et al. (2023b) show that making NCAs easier to enforce substantially reduces the rate of patenting in US firms. Jeffers (2024) provides evidence that increased NCA enforceability leads US firms to increase their investment in physical capital but not in intangibles.<\/p>\n
In our view, the effect of NCAs is intertwined with a mechanism that drives the observed co-movement in product and labour market imperfections. In a recent study (Bartelsman et al. 2024), we propose a heterogeneous firm model where firms invest jointly with workers in intangible assets, and we demonstrate empirically that a change in NCA regulations affects workers in a way consistent with our model\u2019s mechanism.<\/p>\n