Enforcing Noncompetes Creates Startup Jobs, Study Concludes

Most startups fail, but those that succeed contribute disproportionately to job creation. Startups created almost 4 million jobs in the U.S. over the past 40 years. In a paper written for the Federal Reserve Bank of Philadelphia, Gerald A. Carlino examines how the enforceability of employee noncompete agreements affects startups. The study exploited Michigan’s inadvertent reversal of its enforcement policy as a quasi-natural experiment, and found “little support for the widely held view that enforcement of noncompete agreements negatively affects the entry rate of new firms or the rate of jobs created by new firms.” Increased enforcement had no effect on the entry rate of startups, but had a positive effect on jobs created. According to the study, “in a standard Difference In Difference analysis, we find that a doubling in enforcement led to a 6 percent to 8 percent increase in the startup job creation rate in Michigan and to essentially no change in the startup entry rate. We also find evidence that enforcing noncompetes positively affected the number of high-tech establishments and the level of high-tech employment in Michigan.”