February 25, 2024

Image for article titled Noncompete agreements don’t just hurt the workers who sign them

Image: William Potter (Shutterstock)

Noncompete agreements have been a hot topic this year. Wall Street likes them; workers don’t.

The contracts, also known as NCAs, restrict employees from working for a competitor in the event that they leave their job. Employers use them as a way to protect their trade secrets and other inside information from falling into the hands of their rivals. About one in five Americans are bound by them, most of them in salaried managerial and executive roles. Noncompetes been described scathingly by the Federal Trade Commission (FTC) as “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”

And it’s not just the workers who sign these contracts that feel their impacts. A December study (pdf) conducted by the National Bureau of Economic Research found that states with stricter rules enforcing noncompete agreements were tied to a 1.7% reduction in earnings for all workers who lived there. The study also indicated that average annual earnings for US workers would rise anywhere between 3% and 14% if a nationwide ban on NCAs was enacted.

Why are noncompetes bad for workers?

NCAs are only as strong as their enforcement, which varies from state to state. The main reason they’re harmful to workers’ earnings is that there are typically fewer job openings in states with stricter laws, the study reported.

“Fewer job offers mean that workers have less ability to use improvements in outside options to negotiate for higher earnings and to climb the job ladder (that is, find better-paying jobs),” its authors wrote in their analysis.

The impacts are even stronger for women and people of color, who experience twice as much of a reduction in earnings compared to their white male counterparts.

“Strict enforceability [of NCAs] has an especially negative effect on the earnings of women and racial minorities and thus exacerbates existing disparities in the labor market.”

Moves to outlaw NCAs

Four US states—California, Minnesota, North Dakota, and Oklahoma—have banned noncompetes, and New York’s state legislature passed a bill earlier this year outlawing their use. The measure is awaiting the signature of Governor Kathy Hochul, who has until the end of the year to pass or veto it.

The FTC is also considering a proposed rule ending the use of NCAs.

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