Workers of the World, Compete!

Two interesting pieces of news recently that are worth sharing for their economic implications. The first is a story in The New York Times about the growth of noncompete clauses in the American labor sector. For those who don’t know, or can’t infer, what a non-compete clause is, you should understand it as an agreement to not work with a former employer’s competitor once you have left the employ of that employer (for a larger definition, see here).

For example, take someone who worked for a shoemaker who had invented a new type of sole that suddenly became very popular (e.g., Vibram’s), leading to larger market share and larger profit margins. As an employee, you may be privy to how those soles were made, thus making your labor more valuable to a competing firm since you could then divulge the secret to making those soles. In order to protect their trade secret (as well as to protect the market share and profits that resulted from it), your employer would ask you to sign a non-compete clause in which you promise to not seek or gain employment from a competing shoemaker for a stipulated amount of time. For workers on the factory floor for this shoe company – the “blue-collar” workers – noncompete clauses would be less necessary and less likely than noncompete clauses for their white collar counterparts. For such employees, work is more likely to be so highly specialized that it does not require knowledge of any valuable trade secret that a competing firm could take advantage of. Normally, such workers are encouraged to seek new employment with a new firm through higher wages and/or higher benefits – they sell their labor and the skills they possess to the highest bidder. Such competition incentivizes employers to offer higher pay and benefits, leading to a stronger economy. The ability for workers to leave an employer for higher wages and benefits is one factor in making our economy both dynamic and “healthy,” since higher wages/benefits result in more competition and more spending (which translates to someone else’s income, who then spends that money, etc.).

The growth of noncompete clauses changes this situation. As the story from the Times notes, non-compete clauses are no longer restricted to executives or other “white-collar” employees. Instead, they have grown more common amongst all levels of employment – even those highly specialized jobs that do not require any tradeable secret that could otherwise threaten a company’s market share and profit margins. One way to interpret this development is that companies have gone further than simply claiming intellectual property rights. Now, they are claiming ownership rights to all factors of production, including labor skills.

What does this mean for the average, blue-collar employee? One way to interpret this development is that the skills she possesses and employs for wages are no longer hers; they are the company’s. And, if she decides to try to employ them with a higher bidder, she cannot due to her non-compete clause. Because the threat of her leaving her current job, her only leverage, has been taken away by the non-compete clause, her bargaining position is decreased, and her employer’s bargaining position has improved. For example, assume that this employee had no intention of leaving her current job, and her contract is up for its annual review (in which she and her employer agree to an annual salary and compensation package, such as health, medical, and retirement benefits). If her employer is aware of the non-compete status of her contract, what incentive does the employer have in increasing her salary and compensation package? Since she is legally bound to not sell her skills to another bidder to the non-compete clause, she is faced with either maintaining her current job, leaving and becoming unemployed for the term that the non-compete clause stipulates, or retraining to learn a new set of employable skills that are not covered in her non-compete clause (assuming there is local work to be learned). Under these conditions, why would an employer negotiate faithfully?

Now, add to this discussion some recent news (at least, to me) of the comparative growth in real GDP globally that can be found here. What we can see is that rGDP growth in North America has fallen behind all of its peers, including those economies in East Asia, South Asia, and the Pacific where their growth has nearly six times higher! Could there be a causal relationship between non-compete clauses and rGDP growth?

One has to be very careful to not confuse correlation and causation. For that reason, I cannot say that the two are directly related. However, a quick google search of “noncompete clauses in East Asia” returned a report that suggests that these clauses in China are more restrictive, applicable to only the highest levels of Senior Management and above. If this is true, then there could be something to the relationship between GDP growth and labor dynamism (there are many other factors that surely contribute to this divergence, in ways more and less obvious. I am merely trying to draw a line from one set of facts to another, with potentially fruitful avenues for further inquiry)

During a time in which capital is concentrated into ever fewer hands, and an attendant inequality continues apace, it is as important as ever to ensure that our economy remains dynamic. The growth of non-compete clauses hinders such dynamism, hurting the vulnerable and helping the powerful. I hope we can see our way to a fairer future.

JH

 

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