Lina Khan, Chair of the Federal Trade Commission; (Photo by Bill O'Leary/The Washington Post) … [+]
The Federal Trade Commission has banned non-compete clauses in employment contracts. The rule is not a law and is being challenged in federal court. The economic impact is modest, but it slows innovation in the economy as companies seek alternative ways to protect trade secrets.
The initial controversy was over wage rates. The FTC argues that the ban will increase wages because non-competes suppress them. Opposing views have been expressed, including by Tyler Cowen. The simple idea is that an employer and job seeker enter into a transaction. If an employer wants a certain period of time that is not in the employee's interest, the employer will have to waive something else. If an employer demands terms that put a job applicant at a disadvantage, but does not offer higher wages or other benefits, the job applicant will leave and find employment elsewhere. Therefore, those who agree to a non-compete will likely receive a higher salary.
This model will seem naive to many who argue that the employer has all the bargaining power. This idea grew during the period from 1970 to 2010, when the labor force expanded significantly. The idea of a competitive market for labor sounds more reasonable today, when many companies struggle to hire and retain the workers they want. Like Cowen, I expect wages to decline only slightly for traditionally uncontested jobs. People who avoided job opportunities due to lack of competitiveness will now be willing to work for these companies. As the number of job seekers increases, wage offers become less generous.
There is a more interesting discussion on innovation. Although a non-compete ban provides a two-way argument, I expect the ultimate effect of the ban to be negative.
Consider a company that has spent time and money developing a new idea that is worth not patenting. It could be a new ingredient in your secret sauce, a way to find customers who love your product, or a production that uses less energy to enable lower prices and higher profit margins. It could also be technology. Non-compete agreements allow companies to protect their intellectual property by preventing employees from leaving to work for a competitor for at least one to two years.
Without non-competes, companies would want to limit the number of employees who know the secret. Depending on the nature of the secret, it may slow down the secret's implementation or reduce its applicability. A company may decide that secrets should be limited to employees at its headquarters. Employees in local offices are not told the secret, even if it helps increase productivity. Alternatively, the range of products that take advantage of the secret may be limited to a small number of centrally produced products and less locally produced products.
Let's go back in time and think about the initial decision to develop a secret. It may have required a significant investment of time and money. Without non-conflicts, secrets have less value. If anti-competitive conduct is prohibited, some R&D projects will not be carried out, slowing innovation throughout the economy.
Conversely, as innovation spreads across the country and the world, economies benefit. People who change jobs bring ideas with them, helping their new employers and, in turn, the economy as a whole. (Alex Tabarrok has a good explanation.) This idea corresponds to patents and copyrights. A static view says that if patents and copyrights ended now, we would be better off than we are today. But if innovation slows down because ideas are easily copied, our future doesn't look very good. Long-term economic growth would be better if innovators knew they could reap many of the benefits of their work.
In light of the FTC's decision, business leaders with critical intellectual property must rethink their operations with a focus on protecting ideas. It's one way he restricts access to secrets. Compensation associated with remaining with the company, such as stock options or bonuses that vest over time, can also be helpful. Decisions about investing in the development of new ideas should be made with the understanding that corporate secrets will not remain secret for as long as they once did.
From the point of view of social benefits, it is worth recalling the conclusions of Nobel laureate William Nordhaus, who studied innovation. “I estimate that innovators can capture about 2.2 percent of total social surplus from innovation.”
