Let’s say I come to you asking for a raise. “Sorry Francis, we’re tapped out for the year.” I could leave — if only I didn’t sign that noncompete.
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Noncompete agreements restrict a worker from starting or working for a competing company for a period of time. The Federal Trade Commission is considering banning them.
Here’s why this is absolutely the right policy…
Worker Leverage
If I can’t work at a competitor, that means I cannot work in the field in which I have experience. And if I move to another field I know nothing about, my wages will be much lower.
So rather than leave my employer, I’m going to stick it out, even if the pay isn’t great.
Innovation
California is the most innovative state in America, by far.
California also happens to be one of the few states in the country that doesn’t enforce noncompete agreements. Workers are free to leave a company and start a competitor.
Is California so innovative because it scoffs at noncompetes? I don’t know.
But it certainly doesn’t seem to be holding them back.
Benefits of Noncompetes are Dubious
The economist Tyler Cowen argues that banning noncompetes will lower wages. From his latest Bloomberg column:
Say you run a hedge fund. Many members of your trading team will have partial access to your firm’s trading secrets, and if they leave they can take those secrets with them. In the absence of noncompete agreements, firms would be more likely to “silo” information — becoming less efficient and less able to pay higher wages.
Cowen’s argument is purely theoretical. He offers no evidence that states or employers without noncompetes have lower wages than those with them.
Cowen also argues that without noncompetes, employers will have less incentive to train. After all, their employees could jump ship at any time.
But again, he offers no evidence that companies without noncompetes invest less in training.
My Experience with Noncompetes
I’ll admit it, I have an ax to grind here. In my first job out of college many years ago, I had to sign a noncompete.
I didn’t want to sign it. But I was fresh out of school with barely a dime and no work experience — what else could I do?
When I found out other people in the industry were making two or three times what we were, naturally I wanted out. But the noncompete stopped me from working in the field for a whole year.
Unable to work in the field I knew, I applied for jobs outside it. But with no experience, there were no takers.
So I lived off my savings for a year until the noncompete expired. And sure enough, I dramatically increased my pay just days after it ended.
Let’s Ban This Nonsense
Noncompetes offer workers a terrible choice. Would you prefer indentured servitude, or unemployment?
In the absence of powerful evidence of their benefits, noncompetes should be banned. I urge you to write your representatives and ask them to end this abusive practice.
Freedom matters.
What’s your view on noncompetes? Leave a comment at the bottom and let me know!
There will be no blog on Monday for the holiday. See you Tuesday.
Have a great weekend everyone!
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Photo: FTC Chairwoman Lina Khan. “Lina Khan” by New America is licensed under CC BY 2.0.
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