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The Case Against Non Competes

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The Case Against Non-Competes

February 24, 2020

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A recently introduced bill entitled the Workforce Mobility Act by a bipartisan coalition of Senators Todd Young (R-Ind) and Chris Murphy (D-Conn), and Representatives Scott Peters (CA-52), Mike Gallagher (WI-08), and Anna G. Eshoo (CA-18) offers the long overdue opportunity to limit the breadth and scope of non-compete agreements over American workers. Long has it been known that non-competes limit the dynamism of an economy by locking-in workers with specialized skills at firms who lose the pressure of competition to innovate. The Workforce Mobility Act would free skilled laborers to go to where their work is most highly valued, which would increase upward pressure on wages, and enable greater knowledge dispersion throughout the economy.

The prevalence of non-compete agreements in contemporary American life is worrying. Over a quarter of private-sector workers are currently contracted with some form of non-compete, often without fully understanding what it is that they are prevented from doing. When under this sort of pressure, workers are more anxious when looking to move to different jobs, and new firms are less likely to enter the market, feeling that they will not be able to secure the necessary talent. As a result, non-competes have resulted in labor market concentration and reduced wages. The harms, however, stretch beyond the near term. When governed by non-competes, workers are less resilient to labor market changes, and local economies relying on fewer firms are more sensitive to disruption. This means that as new technologies proliferate from 5G, which will lower the costs of telecommuting and outsourcing, to artificial intelligence, which will increase productivity of repetitive tasks, regions with higher levels of non-competes are more at risk for economic crisis.

The Workforce Mobility Act would drastically reduce these perverse incentives. By restricting the scope of non-competes to when information transfer would harm a company’s interests, such as during an exit or when senior executives are involved, it would free the majority of workers to find better work and leverage their skills. In addition, by stipulating that employers must be transparent with their non-competes, educating employees about what they can and cannot do for other firms, worker anxieties would be lessened.

This sort of bold action to limit predatory practices by employers with higher bargaining power would enable the entire United States to experience the kind of innovative knowledge sharing that occurs in Silicon Valley. It is not a coincidence that California, which has long banned non-compete agreements, is America’s most innovative state. Technology workers, knowing that their skills are valued and that they are free to move to employers that will give them better opportunities, are able to keep firms on their toes. New startups with ambitious visions are confident in their ability to attract top quality talent, even from larger firms, by offering greater control over their work or a better workplace environment. The anxiety is moved away from workers and onto the firm, which is forced to innovate and treat employees well to prevent them from leaving.

For the rest of the country to benefit from the flexibility that California has for workers to move around would help increase dynamism in a period when entrepreneurship has been in decline. Firm closings have outpaced firm openings for over a decade, increasing the dominance of large firms, and reducing the bargaining power of employees, even as unemployment rates are at historic lows. Tipping the scales in favor of workers is needed to kick start the wage growth that Americans have desired and deserved.

Initiatives such as these are welcome as they bring together both parties to deal with clearly identified issues that would make significant impact on the lives of countless workers. By restricting non-competes, not only would present workers benefit, but future workers will enter a more dynamic labor market, one that strongly desires to make the most of their skills. The Workforce Mobility Act serves as an investment in the future of American workers, something everyone should value.

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