How a new ban on noncompetitive labor contracts could mean more money for Utahns

What do California, North Dakota, Minnesota and Oklahoma have in common?

Those four states that banned non-compete agreements between employers and employees.

That list makes you appreciate that this is not an issue stuck in partisan politics. The idea that a person should be able to work wherever they choose is one that appeals to both free market conservatives and worker protection liberals.

Other states have been limiting enforcement of no contests in recent years. In 2016, Utah’s HB251 mandated that noncompetes must be one year or less; anything beyond that would be considered legally void.

Now, the Federal Trade Commission has gone further and applied a new rule to all 50 states that will go into effect in early September. Essentially, it prohibits all future noncompetes. It also retroactively negates all non-competes that have already been signed, with the exception of senior executives making more than $151,000 a year. (Non-executives with large checks will also see their current non-competes removed).

Finally, companies have to actively tell their employees (by text, mail, email, or on paper by hand) that their disqualifications no longer apply.

This is a big change! Companies are divided on that: some say noncompetes allow them to invest more in training their employees, knowing they can keep them locked in for a period. Other companies want to level the playing field and compete for labor talent through wages, benefits, culture, perks, and more.

Workers, however, are fairly uniformly in favor of the move. Of the 26,000 comments the FTC received during its public comment period (from both companies and workers), more than 25,000 of them were in favor of banning noncompetes.

In issuing the rule, the FTC published a 570-page document. Many outlets have called this a 570-page rule, but the rule portion is really only nine pages. However, this is preceded by 561 pages of a surprisingly readable and scientific explanation of why they choose to ban noncompetes, which I encourage you to read if you have endless time and are eager to understand why the FTC does things.

For everyone else, that’s why this column exists.

A “malign force” does not compete

A surprising number of people are employed with a non-compete clause of one kind or another. The FTC estimated it at about one in five workers.

I didn’t know that 45% of doctors had a non-compete clause, along with a similar number of vets. Nor would I suspect that 30% of hairdressers do.

A surprising number of low-income workers have no competition: 13% of workers making less than $40,000. Meanwhile, 53% of those who have no competition are hourly workers. Large companies frequently use noncompetes; a survey indicated that 32% of employers with more than 50 employees use them for all their employees. Low-wage companies do, too: 29% of companies where the average wage is less than $13 an hour use non-competes for all of their workers.

Signing a non-compete has a decent chance of becoming, as the FTC writes, a major “pernicious force” in one’s life, forcing one to “make choices…harmful to their finances, their careers, and their families “. Comments to the FTC have all kinds of stories like this one:

• A bartender making $10 an hour said his employment contract signed on his first day had a non-compete clause he didn’t know about. When she was sexually harassed at work, she left for another bar and was promptly sued for $30,000.

• A cardiologist reported that his small healthcare practice was acquired by a larger company. The firm asked doctors to sign non-compete clauses, but ended up pushing them out the door in favor of other doctors. The cardiologist’s patients had to decide between trusting a new set of doctors or driving more than an hour to continue their current care. Another doctor said he had a similar occurrence and found that his patients simply chose to skip care because they couldn’t afford to drive that far.

• A geologist said she was able to find a part-time job in her field out of college, but was fired. Due to her lack of competence, she was unable to accept another job in her field at her location and instead took a job as a waitress.

Oh, and many commenters from various industries wrote about how they were forced to move their families, or move away from their family, so they could continue to provide income without violating their non-compete agreements.

On the one hand, yes, they are agreements signed by these workers. But many reported that their companies used unethical practices to induce workers to sign them: hiding them in plain language, presenting them after an employee had already left their previous job, or even entering them while they were working at their current one. Many had no real choice.

On this point alone, the FTC reasoned that it would be reasonable to prohibit noncompetes.

Economic benefits of banning non-competes

But the FTC also calculated that there would likely be significant benefits to the economy as a whole if noncompetes were banned. Among them:

Salary increases

The FTC relied on some pretty significant academic work that showed that people’s wages went up when they couldn’t be made cash or didn’t exist. Theoretically, this makes sense: if people have more leverage to quit their jobs, they can demand raises or simply find jobs with higher wages.

The largest study referenced, for example, looked at national wage data from 1991 to 2014, comparing states with various noncompete laws, and estimated that wages would increase between 3% and 14% if if non-competences were prohibited.

When Oregon banned non-skills for hourly workers, wages rose 2-3% overall and 4.6% in industries that frequently use non-skills. Interestingly, wages increased by 3.5% for women and 1.5% for men. Hawaii’s ban on non-competes for tech workers boosted those wages by 4%. There is also significant evidence that banning non-competes raises wages even for non-competes by making the labor market more competitive.

In the end, the FTC conservatively estimated that banning noncompetes would increase wages by 0.86%. Specifically, for Utah, the FTC said that banning noncompetes would increase worker wages by $715,807,809, an average of $542 per worker. (This includes workers with and without competence).

More business creation

Since noncompetes typically prevent workers from starting new businesses to compete with current ones, they have a significant distributional effect on the economy. Essentially, noncompetes limit the number of small and new spin-off companies in favor of larger, more established companies.

There is a significant argument that this hurts the economy as a whole. Many historians of technology argue that California’s antitrust law is the main reason Silicon Valley is the epicenter of the tech boom, a claim I thought was a bit absurd at first, until I learned that. 70% of NASDAQ-listed Silicon Valley stocks have roots as a spin-off from a 1960s semiconductor company.

One point of evidence for this came from Utah. When Utah limited noncompetes in the mid-2010s, one study found that entrepreneurship and self-employment increased by 5.6%. Similar changes came to Hawaii and Massachusetts, when they limited noncompetes.

Overall, the FTC estimates that banning noncompetes will increase new business creation by 2.7-3.2%.

Also, more patents tend to be filed in states with non-compete restrictions, as workers have more ability to profit from their novel ideas. The FTC estimates that this ban will increase the number of patents filed by 11-18%.

Lower prices?

Those two previous economic outcomes will have different forces on inflation. On the one hand, rising wages means that companies will raise their prices. On the other hand, greater competition and technological innovation in the market from new competitors in the market should lead to lower prices.

Which one will win? It probably depends on the industry and how competitive (or uncompetitive) it is currently. The FTC has identified healthcare as a mature industry with potential for innovation and new players, particularly at the more intimate, doctor-patient level. Studies in states with noncompete limitations indicate that prices decrease significantly for health care in those areas. Overall, the FTC has estimated that prices for medical and clinical services will decrease by $74 billion to $194 billion over 10 years, no small downward adjustment.

Other industries were not as well studied, so the FTC made no claims about lower prices there. But they hoped that the non-compete ban would result in higher worker productivity overall, thanks to a better worker-business match, which would lead to better prices in the future.

Changes in institutional investment

Although this article has been very optimistic about the ban so far, it is worth noting the main criticisms. In particular, noncompete advocates argue that contracts allow for greater investment of money in businesses and more educational investment within businesses for employee training. The reason is that investment is more likely to be recouped in a world where employees cannot leave after receiving it.

It was an interesting element of the 2016 Utah debates on the topic. When worker after worker went before House and Senate committees on the issue to say how the noncompetes affected them, employers argued that they would reduce their spending on training their employees as a result of any change. This may well be true, but training can also function as a differentiator in a competitive job market.

To its credit, the FTC factored these costs into its decision, but simply decided that the pros outweighed the cons. I thought economic commentator Noah Smith summed it up well:

“It’s really more about the kind of economy that we think will be better overall. An economy with strong non-competes will be a bit more like Japan: workers will be better educated, but they’ll change jobs less and get lower wages, big companies dominating will do more R&D, but the new disruptive companies will be left out of the market due to lack of personnel. “It’s about the choice between a dynamic and competitive economy. Personally, looking at the results in America as in Japan, I’m inclined to go with the former.”

We’ll see what happens here in general: The US Chamber of Commerce has already filed a lawsuit against the FTC over the action, and it’s possible that a court will stay the ban. But I think that would be short-sighted. When you consider the negative impacts non-competes have had on workers’ lives, add the likely positive impacts on the economy as a whole, banning non-competes seems like a definite win.

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