Noncompete Agreements Take a Toll on the Economy

Despite sky-high housing prices, Silicon Valley remains the vital center of the U.S. tech industry. Once an industry takes root in a particular place, it’s very hard to pull it away. Which makes it all the more important to understand: Why did Silicon Valley become Silicon Valley in the first place?

One prominent theory is that California’s culture encouraged a free flow of workers and ideas between companies, combining and re-combining in ways that spurred continuous innovation, instead of being jealously hoarded in corporate offices.  

Ideas flow from company to company in a few ways. They can be communicated in a casual conversation, or by showing a product to a friend. They can be conveyed in formal settings like an industry conference or a research paper. But most ideas are contained in people’s heads, and so the main way for ideas to get from one company to another is for workers to switch employers.

This can’t happen if workers sign noncompete agreements, which mandate that a departing employee not go to work for a competing company — even if she or he is fired. California, fortunately, doesn’t allow this sort of agreement to be legally binding. Stanford professor AnnaLee Saxenian has said that if noncompetes had been enforced, Silicon Valley “would probably not be what it is today.”

States that want to cultivate the technology clusters of tomorrow would do well to follow California’s example. I have suggested that Wisconsin could ban noncompetes in order to help turn Madison into a tech hub. Pennsylvania could do the same to solidify Pittsburgh’s place as an emerging robotics cluster, and Ohio could help nurture nascent startup booms in Cincinnati and Columbus.
But the benefit of banning noncompetes probably goes far beyond the boost it gives to technology clusters. Workers in general have been seeing very small raises over the last few decades:

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