Researchers refute earlier claims
In the heady days after one accepts a new job, a noncompete agreement may seem an innocuous bit of paperwork. These contracts, in which employers bar employees from working in competition after leaving the company, are routinely demanded of nearly one in five jobs in the U.S., according to a report published by the U.S. Treasury in 2016. Less than 10 percent of new hires try to negotiate their terms, according to the report.
But workers who sign enforceable noncompetes pay dearly for their deference, according to preliminary results from new research. Employees bound by strong agreements get lower starting pay than their less restrained peers, and their earnings remain lower throughout their careers, according to a working paper by a team of academic researchers.
The study looks at career trajectories of workers in technology, an industry where most professionals sign noncompetes. Using quarterly Census Bureau data from 30 states, the researchers compare tech worker wages in states with strong noncompete enforcement to those in states that heavily restrict enforcement. The data allowed researchers to follow individual careers, and to compare only workers in the same industries, gender, age and earnings, at firms of similar size.
Simply starting a tech career in a state that strongly enforces noncompetes reduces earnings up to eight years later, whether or not a person is changing jobs, the study found. Workers constrained by strong noncompetes are less likely to change jobs — a traditional route to higher pay — but more likely to take their skills to other states when they do, according to the results.
The findings are outlined in "Locked in? The enforceability of covenants not to compete and the careers of high-tech workers," by Natarajan Balasubramanian of Syracuse University, Jin Woo Chang of University of Michigan, Mariko Sakakibara of UCLA Anderson, Jagadeesh Sivadasan of University of Michigan and Evan Starr of University of Maryland. Balasubramanian, Sakakibara and Starr each have previously published research on the effects of noncompetes on workers and economies, and their research is heavily cited by the Treasury study.
Their research adds much-needed quantitative analysis to the debate over noncompetes, a source of growing concern for state and federal authorities. The number of noncompetes has risen dramatically in the last decade, and their terms now cover low income earners as well as engineers. Reports by the White House and Treasury in 2016 cited ways the agreements can damage careers and the economy at large.
Laws governing enforcement of noncompete agreements are in flux in Oregon, New Mexico, Alabama, Florida, Illinois and numerous other states, as legislators and courts grapple with how much control companies deserve over careers of former employees. Traditionally, lawmakers supported noncompetes for their presumed ability to draw high paying jobs and top talent to their states. Treasury's report notes insufficient research in the field to conclude how noncompetes affect economies, and particularly few studies with quantifiable results.
The preliminary findings in "Locked in?" along with related research by its authors, offer surprising details about the kinds of workers covered under noncompetes and the career paths those workers take. Their results so far suggest that noncompetes depress wage growth, entrepreneurship and the movement of workers. Each is a factor economists consider crucial to a healthy economy.
Career Control for the Greater Good
A typical noncompete agreement prevents an employee, for a certain amount of time, from doing similar work outside the company within a defined geographic area. A sales rep for an insurance company might, for example, be barred from taking an insurance job, or starting an insurance company, within the same state or territory for a year after quitting.
Rationale for such unusual power over individual livelihoods stems from decades-old assumptions about innovation and the things that promote it. Ostensibly, employers invent more readily if they know workers can't show rivals their trade secrets, including technologies, price lists, sales trends and customer data. Innovative companies will lay stakes in states that protect their secrets, proponents argue, and their success will bring those states more high-paying jobs. Workers, proponents say, get career boosting training in projects that employers would not pursue without legal protection.
But nearly 30 million U.S. workers are covered by noncompete agreements now, and it's unlikely that all of them have access to trade secrets, according to research by Starr and University of Michigan's Norman Bishara and J.J. Prescott. Once reserved for engineers working with top secret technology, recent agreements also restrict career moves for workers making club sandwiches from corporate recipes and $10-an-hour laborers on construction sites. Some 15 percent of workers without four-year degrees are under noncompetes, and 14 percent of those earn less than $40,000 annually, according to the study.
The power that states give corporations to pursue noncompetes varies dramatically. California, North Dakota and Oklahoma all but bar enforcement. On the other extreme, several states bind workers to noncompete agreements even if they lose their jobs in layoffs. Many states legislate some restrictions, such as limits on the distance and time they can cover, or adjudicate enforcement for fairness on case-by-case bases.