Noncompete Agreements

Steven C. Salop recommends that the next presidential administration continue to focus competition policy on protecting against adverse labor market outcomes. He suggests several policies the administration might pursue to achieve these benefits.

Jonathan Masur and Eric Posner argue that the Federal Trade Commissions’ recent ban on noncompete clauses is lawful under the plain language of the Federal Trade Commission Act, longstanding court precedent, and well-established administrative law principles.

Nearly one in five American workers are affected by noncompete agreements, which prevent workers from working for or creating a rival firm. In new research, Axel Gottfries and Gregor Jarosch estimate that the Federal Trade Commission’s proposed noncompete ban could raise wages by 4%.

Noncompete agreements, which impose contractual limits on an employee’s ability to work after leaving a job, are regulated or banned in all states. But employers can potentially get around legal limitations on noncompetes by asking workers to sign confidentiality agreements that have similar functional effects. In a new article, Camilla A. Hrdy and Christopher B. Seaman provide empirical evidence that a significant number of employment agreements contain broad confidentiality provisions that place noncompete-like restrictions on workers.

American antitrust regulators have recently taken aim at noncompete clauses. They argue that noncompetes suppress labor bargaining power and thus wages. The Italian labor market differs from its American counterpart in its rigid protections for labor, but the use of noncompetes in Italy occur at about the same rate as in the United States and shows a correlation with lower wages for workers whose noncompete clauses are unjustified because their jobs require little training and do not grant access to trade secrets. The evidence from Italy suggests that better regulation of noncompetes and informing workers of their rights is justified on the whole.

Drawing on the theory of Albert O. Hirschman’s  Exit, Voice, and Loyalty, Brian Callaci argues non-compete clauses stifle the important channels of communication between employees and businesses necessary for improving firm competitiveness. The evidence also shows that, despite claims from businesses, non-competes harm rather than reward employees for their loyalty. 

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