Banning non-competes, as proposed by the US Federal Trade Commission, is not only good for workers. This is good for companies and innovation in the long run. By allowing workers to share in the benefits of their innovations, noncompetitors encourage them to work harder, make it easier for them to start new companies, and create overall the economy more dynamic and competitive.
The FTC’s announcement that it plans to adopt a rule banning non-competes nationwide should be understood as more than a measure to protect workers, even though it is that. It’s also a big step forward for competition and innovation, and it will make businesses stronger in the long run.
Non-competes have a harmful effect on talent mobility, entrepreneurship, and equality. They prevent employees from switching employers or starting their own competing businesses. Such restrictions reduce wages, reduce entrepreneurship, and hinder efforts to correct injustices.
In the last decade, a wealth of research — empirically, experimentand theoretically studies — offer compelling evidence about the key role played by human capital policy, including noncompete contracts, across industries and regions. These studies show that the harm of non-competes is not only to employees but also to companies and regional change. Not competing reduce market dynamism and interfere with a free market for labor. They make it harder for new companies to start up and cause industries to become more monopolized by incumbent companies. andthey reduce employee motivation and knowledge sharing, the basic building blocks of innovation.
Locking in employees to non-competes not only reduces their external prospects but also reduces their ownership of their own human capital and labor, reducing their incentives to perform and develop their skills. in the first place. When talent is locked out, the job market becomes “a market for lemons” — that is, a market where it is difficult to determine the quality, skills and past experience of candidates. In such a market, businesses have employees stuck in a job they don’t want. When companies don’t allow employees to leave for greener pastures, the result is “quiet attrition.” That means unhappy employees and dissatisfied employers.
A natural experiment in noncompetes
California and Massachusetts present a paradigmatic natural experiment on the effects of noncompetes. Massachusetts has long enforced non-competes – and only recently in 2018 passed a law limiting their use, based on increasing economic research on their harms. California is often considered uncompetitive.
Both states were well positioned in the early 1970s to become the global high tech hub that Silicon Valley is today. However The use of high tech companies in Massachusetts by non-competes makes it difficult for talented employees to start their own businesses. In contrast, the computer industry grew stronger in California, and inventor networks in the Bay Area became denser, although they stopped in Massachusetts around an older generation of companies.
What’s more, California as a whole benefits from a comparative policy advantage. Experience it brain gainas the world’s best talent is drawn to the freedom California offers. Existing firms also benefit, as a free labor market means that well-performing firms can hire new employees. And the state benefits from the tax base that a strong market economy brings.
An example like this is not perfect – many factors contributed to the rise of Silicon Valley – but combined with the depth of research already mentioned it reinforces the fact that noncompetes prevent innovation. In addition, California’s impressive innovation in the absence of non-competes is true not only for the tech industry in Silicon Valley, but also for other industries such as the biotech and pharma industries and the entertainment and content industries. Southern California.
Intellectual property is about balance
A healthy innovation policy requires balance. For example, intellectual property (IP) law balances the desire to give innovators some insulation from competition against the risk that locking up too much IP will stifle creativity that is protected by law. Noncompetes do not have a similar balance. It is a blunt tool wholesale that prevents a person from getting a job in their chosen profession, sometimes for years.
There are better tools for achieving a balance between the ability of workers to move jobs and start companies and employers want to not see their R&D go out the door. In California, where non-competes are often unenforceable, businesses have other ways to protect their invention activity in good ways. Most relevant are the strong protections afforded to trade secrets. Every state protects trade secrets and in 2016, Congress passed the Defend Trade Secrets Act (DTSA) to provide stronger federal secret protections. Trade secrecy strikes the right balance by focusing on narrower limits on the use of certain information rather than blanket restrictions on competition.
Non-competes are helpless except for dying companies – those that cannot compete to hire the best talent and cannot survive in the innovation market. Everyone — growing companies, new companies, employees, and the economy — benefits from a free, dynamic labor market where employees can move freely and companies compete for their talent. Unfortunately, advocates for the dying companies are vociferously attacking the FTC’s proposal, in the pages of Wall Street Journal and elsewhere. The FTC is right not to let the dinosaurs of the past get in the way of our economy.