1/26/2023

Welcome, everyone, to the latest debate. Earlier this month the Federal Trade Commission issued a proposal that would ban the use of non-compete agreements in employment contracts. Would killing non-competes usher in more innovation, or more theft? Jon Fortt is here to weigh in.

JON:

“Killing non-competes is a bad idea.

It would tilt the balance of power even further toward labor at a time when the hiring has been extraordinarily tight, the unemployment rate is 3.5%, and wage inflation is pressuring business. First, what is a non-compete agreement? Typically it's part of an employment contract where workers agree to a waiting period before they can leave one employer and go work for an industry rival in the same region. Those agreements can serve an important role. In a knowledge-driven economy, we can understand why companies have to carefully protect their intellectual property. And while it might seem like a good idea to rely on the Trade Secrets Act to just restrict workers from sharing information when they switch to a competitor, those violations are hard to prove and enforce. For some roles and in some industries, it just makes sense for there to be some friction that makes the job a bit stickier. Yes, people want to work from home and be flexible. Which means these days switching employers could be as easy as switching email addresses. You don't even have to clear your desk.”

Is it about protecting secrets, or is it more that some people don't want an even more competitive labor market?

JON:

“On the other hand, non-competes are a crutch. Unnecessary.

You know what proves it? California. Non-competes are unenforceable in California. If non-competes were so effective, you'd think Silicon Valley companies would be hemorrhaging secrets. And yet Apple manages to design the world's most profit-generating consumer devices there, and somehow employees don't get poached by rivals and leak the blueprints. At their worst, the agreements do two things: Prevent price discovery in salaries and stifle innovation. If my employer doesn't have to worry about me jumping ship, they can pay me less than I'm worth. And if I can't leave to start my own company in my area of expertise, that's a drag on a potential economic engine. Making things worse, non-competes aren't just for high-paid jobs anymore. Summer camp counselors and youth soccer coaches are being asked to sign them, too. According to a report from the Minneapolis Fed released a year and a half ago, 8% of the lowest-wage hourly workers are being asked to sign non-competes. That shouldn't happen in a properly functioning labor market.”

What do you think? Which side do you find more convincing, and why? Watch how it played out on Squawk Box below: