Non-Competes Seem as Stunting Wage Growth

A recent survey by economists shows that one in five American workers is bound by a non-compete clause.

Once reserved for highly-paid employees, especially in the high-tech and financial sectors, these clauses are increasingly being used to restrict the employment opportunities of blue collar workers as well.

A typical non-compete clause looks something like this:

During the Employee’s term of employment with XYZ, the Employee will not compete in any way with XYZ directly or indirectly, and will not consult with or have any interest in any business, firm, person, partnership, corporation or other entity whether as employee, officer, director, agent, security holder, creditor, consultant or otherwise.

Companies aren't just including the clauses in employment contracts — they're aggressively enforcing those clauses.

A lawyer quoted by the New York Times said that non-compete and trade-secret lawsuits had tripled since the year 2000.

Trade Secrets

Non-compete agreements are often designed to protect a company's trade secrets — knowledge about things like customer lists and the recipe for the "secret sauce" that could be of value to competitors.

However, notes the Times,

The problem is that it can be hard to distinguish true intellectual secrets from the accumulated skills that make workers more valuable. And since few companies want to lose good workers or give out huge raises, these agreements are making their way down the economic ladder to people like hairstylists and sandwich makers, far removed from what is thought of as the knowledge economy.

The Times reported that workers are often "astonished" to learn that they've signed away their rights to work for other companies.

Shoveling Dirt

One hourly laborer who shoveled dirt for $10 per hour was sued after leaving one environmental drilling company to go work for another. His contract prohibited him from working for a similar firm within 350 miles of his home for three years.

It's not always clear what companies are gaining by enforcing non-competes against low-level workers. Is it really worth the expense of litigation — which can easily be more than a ditch-digger's annual salary?

Perhaps so — if the occasional lawsuit keeps a larger number of employees "in line."

According to the Times,

Alan B. Krueger, a Princeton economics professor who was chairman of President Barack Obama’s Council of Economic Advisers, recently described noncompetes and other restrictive employment contracts — along with outright collusion — as part of a “rigged” labor market in which employers “act to prevent the forces of competition.”

Effect on Wages

According to Sandra Black, an economics professor at the University of Texas at Austin, non-competes discourage people from leaving their jobs.

Since employers know that employees will have a hard time finding other jobs if they leave, the employees have a harder time negotiating for better wages.

According to the Times,

Wages, employment and entrepreneurship are all diminished when workers have little leverage to bargain with their employer or leave a job for a better opportunity.

One worker quoted by the Times called non-competes "slavery in the modern-day form.”

Not all states will enforce non-competes, or not under all circumstances.

California, for example, is particularly hostile to non-competes in employment agreements.

Other states are moving to limit the scope of non-competes.

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