FTC Proposed Rule on Non-Competes - Summary, Analysis, Related Topics

Summary

Issue

The FTC announced that it is considering a nationwide ban on non-compete clauses in labor contracts

• NY Times Article
• WSJ article
• Nice summary of the issue and the process

Background on Non-Competes

Non-Competes are clauses that employees sign as part of their job that promise that the employee will not "compete" with their employer if the employee is fired or quits.

The FTC's Case

• FTC News Release
• Summary Page for Proposed Rule
  • Fact Sheet
  • Full Background Document including economic and legal justification (Please note this is a modified version where I added bookmarks to make it easier to navigate. Original here)
• FTC Chair's Official Statement
• FTC Commissioners' Official Statement

• Dissenting FTC Commissioner's Statement

Review of Economic Research

Earnings - Effects on Overall Labor Force

1. The Labor Market Effects of Legal Restrictions on Worker Mobility
   • Time - 1991 - 2014
   • Sample - all workers
   • Identification - Changes in statewide enforcement, year to year.
   • The effect on wages of going from full enforcement of non-competes to zero enforcement - wages will increase by 11.7%.
   • Stronger effect for college educated (14.3%) than non-college educated (< 3.5%)
2. Consider This: Training, Wages, and the Enforceability of Non-Compete Clauses
   • Enforcement of Non-competes leads to 4% decrease in hourly wages
   • Enforcement of Non-competes leads to a 14% increase in employer-sponsored training
3. Low-Wage Workers and Enforceability of Non-Compete Agreements
   • Sample - Oregon hourly workers
   • Enforcement of Non-competes leads to a 2-3% decrease in hourly wages.
4. Locked In? The Enforceability of Covenants Not to Compete and the Careers of High-Tech Workers
   • Sample - Hawaii high-tech workers
   • Enforcement of Non-competes leads to a 4% decrease in wages for new employees.
5. Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment
   • "Tougher noncompetition enforcement promotes executive stability"
   • Enforcement of Non-competes reduces compensation
   • Stricter enforcement increases human capital development expenditures per employee
   • Stricter enforcement reduces personal investment in development more than it increases employer expenditures
6. CEO Noncompete Agreements, Job Risk, and Compensation
   • Sample - CEOs
   • Enforcement of non-competes leads to an increase in total compensations for CEOs who sign non-competes. (4% in median state)
   • Comment: Interpretations are complicated due to interactions, but it seems to show that CEOs are, on average, better compensated when there is no enforcement of non-competes, but that CEOs who sign non-competes can increase their compensation when states enforce them. My takeaway is that certain CEOs do benefit from the existence of non-competes, but the average does not.
7. The Impacts of Restricting Mobility of Skilled Service Workers: Evidence from Physicians
   • Sample - Physicians
   • "NCAs increase the rate of return to job tenure, with larger effects in states with more enforceable NCA laws."
   • Comment: The FTC discounts these results because it "does not consider how changes in...enforceablity affect physicians' earnings", which seems counter to the abstract. Also, the FTC goes on to say that healthcare prices increase due to non-compete clauses, which would at least imply that physician salaries are increasing. They further say that since there is no relationship between physician labor and prices, physician earnings can't be the cause. To me, this seems like a leap of logic. The study itself did not review physician earnings.

Estimate of Effect on Earnings

To determine the overall effect on earnings ($250B-$300B), the FTC relied on the 3.3% figure from the Johnson, Lavetti, and Lipsitz paper (#1 above, unclear exactly how this was calculated, but is an estimation of the effect of applying their results to the nation) for the lower bound. Multiplying 3.3% by 2020 total private earnings ($7,577T, they got $250.05B).

For the upper bound, they use the Starr paper (#2 above). They calculate the effect state-by-state, of a 1% increase in earnings for every transition from 2009 enforceability to zero enforceability, and total them. One problem with this approach is that enforceability laws have changed considerably since 2009.

They do not attempt to quantify the effects on training investments or increases in consumer prices that may result from higher labor costs.

Other Informative Pieces

• Higher minimum wages induce employers to insist on non-compete clauses
• University of Chicago Law Review review of non-competes
• International Center for Law & Economics - Comments on Non-Competes
• Minneapolis Fed - Non-competes restrict workers' access to job opportunities
• IZA World of Labor - Balanced summary of the issues
• Eugene Scalia Discussion of the Issues