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Regulations on non-competition agreements are in need of development

Commissioned report by economics working group published on Akava Works webpages.
Professor in Economics Matti Liski (left), doctoral candidate Matias Pietola and Oskari Nokso-Koivisto wrote the report on non-competition agreements. Photo: Roope Kiviranta / Aalto University

The automatic use of non-competition agreements is problematic for the functioning of markets. This was the finding of a report commissioned by Akava Works and produced by an Aalto University economics working group.  The report consisted of a literature review by doctoral candidate Matias Pietola and an analysis based on the review and carried out by Mr Pietola, Professor Matti Liski and Oskari Nokso-Koivisto. The work is intended to provide the foundation for developing the regulation of non-competition agreements.

‘Our report indicates that non-competition agreements are made based on rather weak justifications, and that their use has increased. Legislators should wake up to this phenomenon, as current practices weaken labour market mobility, thus reducing competitiveness in both the labour markets and commodity markets. What is needed is either regulatory control or changes to current legislation’, says Professor Matti Liski.

Non-competition agreements are agreements made between the employee and employer which limit the employee’s right to carry out activities that compete with the employer, either for themselves or for others, after the termination of their employment. Numerous justifications are given for non-competition agreements, but the report indicates that they can inhibit labour market mobility when used wrongly. They may therefore be detrimental with regards to overall societal well-being.

When used correctly, a non-competition agreement enables businesses to invest in their employees, but when wrongly used they weaken competition in labour markets and commodity markets. For example, the entrance of new businesses into the market may be inhibited if competent workers are not available.

According to the Employment Contracts Act, a non-competition agreement can be signed only in case of an especially pressing need, and the advantages and disadvantages to society as a whole must be taken into consideration in addition to those of the employer and employee. Despite their potentially detrimental effects, non-competition agreements seem to be becoming more common, and they are also in some cases being made without the especially pressing need required by law.

The literature review and accompanying analysis have been published as a single report on the Akava Works webpages.

Inquiries:
Professor Matti Liski
Aalto University, Department of Economics
[email protected]
tel. +358 40 3538 173

Pietola M. Kilpailukieltosopimusten talousteoria ja empiirisiä tutkimustuloksia (The economic theory of non-competition agreements and empirical research results). 2018. In Finnish. www.akavaworks.fi

Liski M, Nokso-Koivisto O, Pietola M. Kilpailukieltosopimuksen periaatteellinen tarkastelu. Ajatuksia sääntelyn kehittämisen pohjaksi.  (In-depth review of non-competition agreements. Reflections for the development of regulation). 2018. In Finnish. www.akavaworks.fi

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