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The FTC rule would eliminate a common part of employee contracts for millions in the U.S., one that limits innovation, mobility and wages, experts say.
The Federal Trade Commission announced a new rule to ban non-compete agreements, an element of employee contracts that prevent workers from leaving to work for competitors, with a new rule that would radically change the U.S. labor market.
Despite the rule facing challenges from business groups –– the U.S. Chamber of Commerce sued the FTC over its authority to ban non-competes –– experts say the impact of the FTC’s decision would be seismic for workers, companies and the economy.
“For me, this is something that is a long time coming and should have happened sooner,” says Samina Karim, professor of entrepreneurship and innovation at Northeastern University.
“It doesn’t seem that non-competes are necessarily good for firms’ own profitability, it seems that it’s not necessarily good for innovation, it’s certainly not good for employee choice,” Karim adds. “Denying choice usually always leads to bad outcomes.”
The FTC projects that eliminating non-competes will lead to the formation of more than 8,500 new businesses per year, a $524 wage increase per year for the average worker and a $194 billion decrease in health care costs over the next decade. The FTC also says the ban will result in an average increase of 17,000 to 29,000 more patents each year for the next decade.
Non-competes are a common practice in many industries in the U.S. According to the FTC, about 18% of U.S. workers, 30 million people, work under non-competes. These contract clauses usually prohibit employees from working for a competitor within a specific geographic area or a specific time period after they’ve left their current employer.
“In this case, if you ban these non-compete clauses, economic theory predicts wages should go up for workers and we should see more turnover,” says Mindy Marks, an associate professor of economics at Northeastern who specializes in labor economics. “Instead of being locked into their current employer, we should see greater mobility.”
That’s exactly what happened in Hawaii when, in 2015, the state banned non-competes in the tech sector. New-hire wages increased by 4% and mobility by 11%, researchers found. The same study found that, on average, in states with non-competes, tech workers had 8% fewer jobs and 4.6% lower cumulative wages over the course of their careers.
“I have no reason to think that Hawaii is not representative,” Marks says.
According to Marks, the danger of non-competes is they have the potential to create a monopsony, a market environment where there is one buyer with a tremendous amount of power. Similar to a monopoly, this can result in lower wages and worse working conditions, Marks says.
“In that environment, non-competes help give firms market power, and there are certainly instances where non-compete contracts get drawn in such a way that there is literally one employer you can work for,” Marks says. “I’ve heard stories of hair salons who set up hair salons that say you can’t work for any other [competitor] within a 30-mile radius. That basically forecloses any other potential employer that you may have.”
The arguments for non-competes usually come down to the need for businesses to protect trade secrets or ensure long-term investment in employees is not lost to a competitor.
But Karim notes there are already plenty of ways for businesses to protect their ideas, from patent laws to non-disclosure agreements. More than 95% of workers with non-competes have also signed an NDA, prohibiting them from sharing information about their employer’s trade secrets even after leaving, according to the FTC.
Karim argues the ban will create more opportunities for innovation, noting that this has already been happening in states like California that don’t support non-competes.
“We see that there’s a lot of innovation there when you give workers choice,” Karim says. “In sectors like biotech, [the ban] will certainly raise the question of when we codify things to have more patent protection, which we think of, in general, as intellectual property rights protection. That might be a little more prevalent, but, again, biotech has been in California for a long time.”
While the wage increases stemming from a non-competes ban will understandably grab headlines, Marks says the benefits of increased mobility for workers should not be underestimated.
“We saw in the COVID recession and recovery that there were wage gains, but the wage gains were really concentrated in people who switched firms, who could take advantage of the dynamism of the labor market and move to locations and industries that are growing and hiring,” Marks says. “Most economists think that worker mobility is a good thing for the economy; it helps it run more smoothly.”
“To me, this feels like a win,” Marks adds.