A government enacts a new law that bans the use of non-compete clauses in employment contracts, making it easier for workers to switch to higher-paying jobs at rival firms. Based on the wage-setting (WS) and price-setting (PS) model, what is the most likely consequence of this policy on the labor market equilibrium?
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Non-Compete Clauses as a Tool for Monopsony Power
A government enacts a new law that bans the use of non-compete clauses in employment contracts, making it easier for workers to switch to higher-paying jobs at rival firms. Based on the wage-setting (WS) and price-setting (PS) model, what is the most likely consequence of this policy on the labor market equilibrium?
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A significant decline in the market power of firms, such as through the breakup of a large employer in a 'company town', leads to a higher equilibrium real wage. This outcome occurs because the reduced ability of firms to suppress wages causes an upward shift in the wage-setting curve, while the price-setting curve, which is determined by the firm's markup over costs, remains unaffected.
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