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Unleashing job hoppers could give the U.S. economy a bounce. Legislators in some states may be naive to think that outlawing non-compete contracts, which can block even laid-off workers from joining rival firms, will reduce unemployment. But recent studies suggest that a ban could boost economic performance. That's reason enough to give the proposals a shot.
So-called "non-competes" are a blunt way to stop former employees from sharing customer lists, business plans and other company secrets with competitors. They're generally legal if their prohibitions last for only a year or two and cover a limited geographic area.
With states struggling to cut unemployment rates, though, the agreements have come under fire as obstacles to finding work. Politicians in Maryland, Massachusetts, Minnesota, Virginia and, most recently, New Jersey have considered limiting non-competes. Under a New Jersey bill, for instance, they wouldn't bind laid-off workers eligible for unemployment insurance.
It makes sense that such measures would boost employment – and save on public benefits – but there's no hard evidence for that. In fact, non-competes are more likely to stop workers from leaving their current jobs than to keep the unemployed from finding new ones, according to employment lawyers.
Eliminating the agreements completely, however, seems to have economic benefits. California is the one state that prohibits non-competes. And several studies have found that the freedom of high-tech workers to change jobs and share ideas with competitors is a big factor in Silicon Valley's success.
Meanwhile, states that strictly enforce such contracts tend to lose valuable employees to states with looser requirements, according to a 2011 study from Harvard and MIT business schools.
Companies have a legitimate interest in protecting their business secrets, and even California allows them to enforce employee promises not to reveal confidential information.
But while non-compete agreements used to cover only Wall Street bankers and other rarefied breeds, they now apply to a broad range of employees. Making it tougher for those workers to get new and perhaps better jobs is unfair as well as economically suspect. Enacting limits on non-competes would be the right thing for states to do, even if it's for the wrong reasons.