What if a single clause in your job contract could quietly shape how much you are able to get paid -- after you leave that job? And what if that same contract clause ends up limiting the places you can move for a job? Today, the hidden power of the non-compete clause. New research from Matt Johnson, professor at the Sanford School of Public Policy at Duke University and co-authors gives insight into what the practice actually costs workers.
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Conversation Highlights
Responses have been edited for clarity.
On his interest in the non-compete clause
I read an article in the New York Times when I was in graduate school about how non-compete agreements, which historically were seen as relegated to very highly skilled, highly paid workers like executives and software engineers, were making their way into all sorts of jobs. The front-page story was about non-competes in hair salons.
So, the next time I got my hair cut, I asked my barber, said, "Do you have one of these non-competes?" And he said, "Yes." It turns out non-competes are actually pretty common in hair salons. We did a study that showed like a third of hair salons use non-competes!
It may seem surprising, but this is actually a sector where firms do invest a fair amount in their workers. They train workers in different ways of cutting hair and invest money to attract clients. And those two things, skills and clients, are things that workers can take with them when they leave.
Would employers really take their ex-employee to court?
Every year we see cases being taken to court. One that made a lot of headlines several years ago was a janitor who was making something like $12 an hour. He received a job offer at another firm to be a janitor for something like $15 an hour. He took the new job, and his former firm took him to court.
On findings related to state enforcement of non-competes
We find that when states make it easier to enforce non-compete agreements, the average workers' earnings go down by quite a significant amount.
On what would happen if states banned non-compete clauses
Our estimates imply that the average worker's earnings would increase by about 8%. Which is a very big number. If you pool that across the millions of workers in the U.S., that is a lot of money that we're talking about.
On why wages stall in states where non-competes are enforced
One reason that non-competes might reduce a given worker's earnings is that they take away that negotiating chip of being able to use job mobility to bargain for higher wages.
Think about plumbers or even hairstylists - if they're going to move jobs, it's likely going to be within their occupation. For those workers, the negative wage effects of non-competes are especially large because the cost of restricting mobility within their occupation or industry is very, very high.
on whether non-competes affect certain workers more than others
There's evidence that men are more willing to move long distances or commute long distances for their jobs. So, to the extent that non-competes are really limiting job mobility and job options within say, a geographic radius, that might be particularly binding on women's job prospects more than for men's. So, we find that making non-competes more easily enforceable particularly reduces the earnings of women over men.
What insight does the research hold for policymakers?
What I think is clear is that the current status quo is just not really serving anyone. The current status quo makes it, at least in most cases, relatively easy to enforce a non-compete, and that is very clearly hurting workers.
The idea of banning non-competes has been met with lots of resistance. The state of New York was considering banning non-competes for certain groups of workers (maybe those earning more than $100,000) and that received fierce pushback by certain sectors in New York.
I'm not completely convinced yet that non-competes should just be outright banned but I think it's very clear that there should be a higher burden of proof to enforce a non-compete agreement like showing that the non-compete really is truly protecting an asset that is essential to production. Maybe it's incumbent on a firm to really show that by having a worker sign a non-compete, they ensured that worker was compensated in some way.