Massachusetts should limit noncompete pacts to spur growth

Yesterday the Massachusetts House of Representatives voted to limit Massachusetts companies’ use of noncompete agreements, at last sending reform legislation to the Senate. The Senate should pass the bill, or make it stronger, and in doing so add to the growing backlash against these employment pacts, which, in many states, bar technology workers and sometimes even hairdressers or fast food workers from taking jobs with competitors of their current employer. Workers’ advocates are absolutely right to blast the agreements as unfair intrusions on workers’ rights, as I recently wrote in the Wall Street Journal. 

However, beyond their unfairness, there’s another reason to alter or do away with these covenants—one that should especially bother metropolitan economic development leaders, urban tech people, and entrepreneurs. Put simply: The contracts threaten metropolitan growth because they constrain the natural circulation of ideas in urban industry clusters.

To be sure, some economic studies support the value of noncompete agreements. They show that the deals allow firms to retain the benefits of worker training and encourage greater workforce investment.

However, the fact remains that knowledge “spillovers” are everything in modern tech scenes. In fact, cities drive economic progress in large part because of the free and vibrant movement of knowledge through their urban clusters and start-up ecosystems.

More than a century ago, the economist Alfred Marshall talked about the “mysteries of trade” circulating “in the air” of the great industrial districts. More recently, Henry Chesbrough wrote about the “radically more fluid” idea exchange that drives today’s “open innovation.” And even more recently, Prasana Tambe and Lorin Hitt demonstrated the crucial role of “job-hopping” as a mode of idea sharing.

More pointedly, scholars like AnnaLee Saxenian and Ronald Gilson have attributed Silicon Valley’s success—and Massachusetts’s failures—in the PC era in part to the state of California’s refusal to enforce noncompete contracts. Given that refusal, many scholars and tech people agree that the absence of noncompete limits permitted the rise of the Bay Area’s unusually free-wheeling culture of job-switching and idea-exchange. In the Boston area, however, noncompete agreements reinforced  a more closed corporate culture that suppressed idea exchange.

And so Massachusetts should put itself squarely on the side of progressive work rules, knowledge spillovers, and growth.  It should break with the 46 other states that allow noncompete agreements and side with the flow of knowledge and know-how within industries and regions. 

In short, heavy use of noncompete agreements is likely pernicious. Not only do the pacts intrude on the right of American workers to quit a job and work somewhere else, they may also depress the flow of ideas that drives the U.S. tech sector. States should curtail them if they want to energize their regional tech clusters.

Portions of this post appeared previously in the Wall Street Journal.