Why have wages been so slow to rise at a time when demand for workers has pushed the U.S. unemployment rate to its lowest point in nearly half a century? One answer: contracts that tie millions of unspecialized workers to their jobs.
In far too many cases, these so-called noncompetes are an unwarranted restriction on freedom to transact and a drag on growth. If Congress won’t act to narrow their scope, states should take the lead.
The desire to keep workers from defecting to rival employers is as old as employment itself. As far back as the 15th century, English masters, such as dyers or blacksmiths, made apprentices promise not to set up shop nearby. Courts often refused to uphold such agreements, viewing them as coercive. As a House of Lords decision put it in 1893, “There is obviously more freedom of contract between buyer and seller than between master and servant or between an employer and a person seeking employment.”
More than a century later, the idea is back in vogue, as companies exploit the power that comes with increasing size and market concentration. In the U.S., new employees are commonly required to sign contracts that forbid them to work in the same industry for a given period. The practice makes sense for highly paid jobs involving big investments in training, and for staff with valuable proprietary knowledge. But it isn’t being limited to those kinds of employees.
A 2014 survey found that about 2 in 5 workers were or had at some point been bound in this way, including workers such as security guards and camp counselors. Some 12 percent of employees without a bachelor’s degree and earning less than $40,000 a year were tied down.
Why are noncompetes so popular? Simple – because they restrain wages. Granted, that’s sometimes justified, as when companies spend more on research and training if they’re confident that their intellectual property can’t just walk away. There’s evidence this applies to some high-level positions in knowledge-intensive firms. But it certainly doesn’t apply to millions of relatively low-paid, unskilled workers.
Even for highly skilled professions, the costs of limiting workers’ options often exceed any benefits. Noncompetes impede job growth, worker mobility and entrepreneurship.
California has long refused to recognize employee noncompete clauses. (It recently toughened its law to clarify that it won’t honor agreements signed in other states.) This policy may have something to do with the rise of Silicon Valley as a global technology hub. It attracts smart people looking to build careers and startups hoping to hire them, while the movement of talent from company to company promotes cross-pollination and innovation.
In principle, curbing noncompetes should appeal to both the political right and left – the right because it promotes competition, the left because it increases workers’ bargaining power. Yet Congress failed to pass a 2015 bill that would have protected low-wage workers from noncompetes.
Absent federal action, some states are stepping up. Earlier this year, Massachusetts adopted a law that bans noncompetes for low-paid, hourly workers and requires compensation for departed workers who remain bound by the clauses. Several other states – including Idaho, Illinois and Utah – have moved to limit the agreements. New Jersey, Pennsylvania and Vermont have legislation in the works.
More U.S. states need to recognize what the British House of Lords did long ago: A dynamic economy requires that people be free to go where their skills and talents are most valued.
Bloomberg View editorial.
