BETSEY STEVENSON
It’s easy to understand why the US Chamber of Commerce is so upset about the Federal Trade Commission (FTC) decision to ban non-compete agreements. The problem for businesses is not that they will lose trade secrets or valuable investments in workers to competitors. It’s that they just lost bargaining power to workers—and that’s exactly what the FTC intended.
Despite the common perception that non-compete clauses are relevant only for employees with access to critical trade secrets, the reality is that they are often imposed across various industries on a wide spectrum of workers, many of whom do not handle any sensitive information. It’s also the case that most hiring in the US involves people leaving one job for another, a critical factor shaping labour market dynamics. To see why non-compete deals matter, it’s important to understand the value of the right to quit one job and take another. The question is: Who should hold that right?
When parties can negotiate without cost and rights are clearly defined, noted the Nobel laureate Ronald Coase, they will reach agreements that result in efficient outcomes. The FTC’s ban shifts the bargaining power from employers to workers: Employers must make more competitive counteroffers to retain talent.
Previously, if you were governed by a non-compete agreement, you could pay your employer to let you out of it. Now, according to Coase’s theory, even though the number of workers switching jobs might not change, the ban will have a distributional effect: Workers with more bargaining power could get higher wages.
But wouldn’t workers simply have negotiated higher wages to compensate them for signing non-compete agreements in the first place? If this is true, then a ban on them would have little effect on wages. The evidence suggests that most workers don’t have such negotiations and many sign such clauses without realizing that they may not even be legally enforceable.
Workers often face significant challenges in negotiating terms, especially when they lack information about their options and the job market. The process of understanding and negotiating non-compete agreements can be daunting without legal assistance, leading to a negotiation that is cheaper for—and favours—employers.
Moreover, non-compete clauses exploit behavioural biases that lead workers to underestimate their future cost. Some workers are shown that cause only after they say they’re set to leave. In comments received by the FTC, many workers noted that they weren’t aware of such clauses until the last minute.
These arguments imply that banning non-compete clauses might be important not just for higher wages, but for greater labour competition as workers become more mobile and make more job transitions. Research suggests such agreements can restrict economic activity and personal career growth. And it’s not just labour market competition that suffers. By restricting labour supply, existing businesses can prevent new rivals from entering their markets and driving down prices.
Non-compete-clause supporters argue that they are necessary to protect business secrets and justify investments in employee training. But existing laws already protect confidential information. And businesses can adopt alternative strategies such as training-repayment deals, which are more directly tied to the specific investments made in employees. Coase’s work shows no difference in these outcomes if payments are made to retain workers, as businesses can offer to pay workers not to take jobs with competitors.
The FTC’s ban on non-compete agreements will help enhance labour market efficiency and economic growth. The US needs a competitive economy to stay strong in the global marketplace. And that requires workers who are able to take their skills where they are most valued—and new businesses that have access to the full talent of the US labor force.
In most other advanced economies, workers have rights to keep a job. The US, however, does not require employers to give reasons for terminating jobs, provide performance-improvement plans before such terminations, or offer a sufficient paid notice period before it is done.
The argument against those policies is that they would make it hard for the US to have a dynamic labour market. But the same logic applies to non-compete agreements: If it should be easy for employers to fire workers, then it should also be easy for employees to quit. And that requires US workers to have the right to take a better job. By allowing workers to move freely to roles where they are most valued, the FTC is fostering a competitive and fair labour market.