Read today about a study that models the effects of non-compete clauses in employment agreements and how the resulting labor mobility helped Silicon Valley grow faster and ultimately surpass Route 128.
The conclusions come in a paper by April Franco and Matthew Mitchell. The husband-and-wife team wanted to understand why the highly-successful technology region known as Massachusetts’ Route 128 was gradually eclipsed by Silicon Valley during the 1970s and 1980s. The northeastern region had laws that helped enforce non-compete clauses, while California did not. Using a theoretical model, the researchers found that non-compete clauses initially helped the northeastern region because the protection they provided encouraged companies to invent new ideas in an arena that did not yet have many.
But once the tech industry was better established and there was more competition, the major productivity driver became labour mobility. At that stage, California gained an advantage because its lack of non-compete clauses made it easier for employees to create their own “spin-out” businesses based on knowledge developed at other firms â?? a key reason for Silicon Valley’s success.
As you can see from the Equilibrium Condition, it’s clear how the free flow ideas enabled by a more mobile workforce ultimately wins.