To refresh: non-competes are clauses in employment contracts that stipulate an employee cannot work for a competitor or another franchisee within a company for a certain period of time after leaving their job.
Alex Tabarrok argues that non-competes increase affected workers’ wages, rather than reducing them (as the FTC claims), because there is a lower supply of available workers willing to tolerate such an imposition on their future prospects. Yet he is still sympathetic to the experiment of banning non-competes because of the possible spillover benefits to the broader economy. Tabarrok believes removing non-competes will lead to more worker mobility between jobs, increasing cross-pollination of ideas between companies, thus potentially enhancing innovation. He thinks this effect is an external benefit any individual firm won’t sufficiently consider in setting their own employment contracts.
Other law and economics scholars, such as Geoffrey Manne, oppose the ban. Non-competes are voluntary agreements between employers and employees, and so should generally be mutually beneficial. And there are clearly many scenarios under which non-competes can provide firms with the confidence to train new workers, share competition-sensitive information with staff, and take a chance on hiring “risky” personnel with a tendency to jump ship. At the very least, if we are to “experiment” with banning such clauses, says Manne, it should be at the state level, rather than a federal mandate. There are evidently a lot of complex trade-offs, some of which might only become clear after this Chesterton Fence has been torn down.
The most common position among market-sympathetic economists, however, is to say the ban is overly broad and should be tailored to removing job constraints on lower paid workers. President Joe Biden has claimed that “one in five workers without a college education is subject to non‐compete agreements. They’re construction workers, hotel workers, disproportionately women and women of color.” The debate generally is predicated on the assumption that non-competes for low-wage workers, say, in the fast-food industry, are evidence of unjust corporate power. Why on earth should be a burger flipper be constrained in what future jobs they can take?
This argument, I suggest, still dismisses real trade-offs.
Consider the interaction between non-compete agreements and state or local minimum wage laws. Suppose a government raises its minimum wage, which makes it more costly for a business to pay a new worker. For the first few weeks of a job, the worker is presumably not up to speed. The firm may pay a lower basic wage rate overall to reflect that a new employee incurs costs of training and the risk that, after this training is complete, they might just decide to leave. Yet in the presence of a higher minimum wage, the initial loss crystallized will be higher and it will take more effort to make the worker profitable, making the risk of the employee jumping ship once they get trained up much more worrisome.
