I tend to agree with the editors of the New York Times about this:
There is no single explanation for the stagnation of workers’ income in recent decades, but a key reason is that negotiating power shifted from workers to employers. The rise of noncompete agreements is both a symptom, demonstrating the power of employers to dictate terms, and a cause, undermining the ability of workers to obtain a larger piece of the pie.
Defenders of the practice say it encourages companies to make investments, for example in employee training, since the company is more likely to reap the benefits. They also insist that workers are compensated for the loss of bargaining power with higher wages or greater job security. Indeed, some experts have asserted that the elimination of noncompete agreements would cause wages to fall, because workers would no longer be paid for signing.
The Oregon study shows that this theoretical model of labor markets bears little relationship to the lived reality. After the law took effect, job hopping increased by as much as 18 percent — and wages for workers no longer bound by noncompetes rose by as much as 21 percent.
Put plainly, the old rule allowed employers to suppress their workers’ pay.
I would certainly like to see evidence that the availability of non-compete agreements to employers resulted in their spending more on training than would otherwise have been the case. I have not noticed it. Quite to the contrary I have seen an increasing reluctance of employers to invest in training. I have also heard employers express regret for having provided training to their employees only to have those employees leave them for higher paying jobs.
I’m skeptical, however, that non-competes are the main reason for slow growth in employee wages. I think employers are simply pursuing the incentives they have. More important reasons are globalization and its flipside, mass immigration.
Strategies other than bans on non-compete agreements, returning the H1-B visa to its original purpose, and controlling illegal immigration might be to provide incentives for employers to provide training for their employees and limiting the eligibility for bidding on federal contracts to companies who employ significant numbers of foreign workers, either as W-2 employees or temps.
I have to confess I have no idea what they are talking about. Most non-competes drive off of concerns about protection of intellectual property or, in the case of selling business owners, that you buy their business and they just set up shop across the street.
In my experience the latter is enforceable, the former barely so, and a run of the mil NC not at all.
The primary purpose for noncompete clauses in employment contracts is to protect trade secrets and confidential information such as customer lists.
I’m sure there are economists that argue the noncompete clause is given in exchange for consideration, but I think the clauses are clearly intended to help the employer, and any benefit to the employee will be indirect.
The primary purpose for noncompete clauses in employment contracts is notionally to protect trade secrets and confidential information such as customer lists. Insisting that minimum wage employees sign noncompetes sounds fishy in that regard.
I think what they’re saying is that non-competes have been stretched beyond recognition to prevent employees from leaving for higher wages. IMO H1-Bs are a more significant factor in that but their example of Oregon is interesting in that respect. Either
– banning non-competes caused wages to rise or
– wages rose after non-competes were banned but not because they were banned
IMO that requires closer analysis..
“The primary purpose for noncompete clauses in employment contracts is notionally to protect trade secrets and confidential information such as customer lists. Insisting that minimum wage employees sign noncompetes sounds fishy in that regard.”
Correct. In my profession we see people signing restrictive covenants for multiple years and for distances that require them to move far away, when there really are no trade secrets or confidential pt lists. AS we are consultants patients dont follow us if we go somewhere (with very rare exceptions). Employers are just making sure it is difficult for employees to leave. I think it is kind of immoral.
Steve
@steve, from my perspective the difficulty is that the judge-made rules at least in my state are framed from a typical common-law perspective, meaning that the ruling will depend on the precise circumstances. My impression is physicians are involved in a lot of appellate court decisions in my state, but there is no ruling that their covenants are always invalid or always valid.
So, a physician (or similarly situated employees) face a problem that the restrictive covenant may be void, but in order for it to be voided, they would need to go to court and frequently these covenants have attorney-fee shifting provisions in favor of the employer. This is a form of regulatory uncertainty.
@Dave, I found the Oregon study and it looks like they examined wage increases after a 2008 Oregon law. They recognize that the 2008 recession might influence the results but feel confident with their model. The law essentially outlawed non-compete agreements for employees earning less than the median income for a family of four (somewhere around $70k), but they focus on the impacts on hourly workers.
According to some other study I’d probably have to read to understand what they are doing, the national rate of use of non-compete agreements is 18%. They identified jobs according to the Standard Occupational Classification System that had higher rates of use and its these “high use” occupations that showed the greatest wage increases since 2008. Positive wage effects were highest in:
management in business science and arts;
installation, maintenance and repair;
construction
I have to wonder about this; If management commonly uses these clauses, does it necessarily mean that the segment receiving hourly wages does as well? Didn’t Portland have a post recession construction boom?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3452240
OK, I followed the trial to the working paper that is the source of the SOCS data, and read the synopsis, which was a bit interesting:
“Noncompetes are more likely to be found in high-skill, high-paying jobs, but they are also common in low-skill, low-paying jobs as well
as in states that do not enforce them. Approximately 10% of employees negotiate over their noncompetes and roughly one-third of noncompetes are signed (with no additional consideration) after applicants have already accepted their job offers. Differences in the timing of the noncompete are associated with different outcomes: those presented with a noncompete before accepting the associated job offer earn 9.7% higher wages, receive 11% more training, and are
6.6% more satisfied with their position than those who are not bound by noncompetes. In contrast, those asked to sign after accepting their job offer are 12.5% less satisfied in their job and experience no wage and training benefits.”
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2625714
Comments: If non-competes can be found in states where they are unenforceable (i.e., illegal) that sort of throws a lot of analysis premised on the effect of different legal regimes into disrepute. Also, the courts may not find additional training on its own to be a legitimate business interest that will uphold a non-compete, but the employee might! Judges do think that a non-compete required after being hired is supported by additional consideration (at-will employees can always be fired for any reason), which doesn’t mean that it doesn’t piss-off the employees.
PD- That is what we see in PA and in NJ. I have spent a lot fo time talking this over with our lawyer and hospital lawyers. What is interesting is that the cases split pretty evenly in New Jersey but in PA they are only uphold the restrictive about 20% of the time I have been told.
We are also seeing a newish phenomenon in my specialty where the VC companies come in and buy up practices, then tell the existing employees they can either leave or sign a contract guaranteeing they will stay for at least 5 years, with penalties for leaving early. The VC groups also tend to push for longer restrictives, at least 2 years and often 3 or 4. No more getting people to stay because you pay a fair wage and make it a good place to work.
Steve