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Three Questions

The End of Noncompete Agreements May Be Near

Earlier this month, the Federal Trade Commission unveiled a proposal that would block companies from limiting their employees’ ability to work for a rival through noncompete agreements, a move President Biden applauded. We asked Yale SOM’s Fiona Scott Morton, an expert on antitrust policy and director of the Thurman Arnold Project at Yale, about the ban’s potential impact on wages, innovation, and the economy as a whole.

Do noncompete agreements stifle competition? How does that affect the economy?

Yes, they do. They end or reduce competition between employers for workers. They affect the economy by causing lower wages and fewer job opportunities, both for the workers covered by such clauses and those who are not. Profits of firms, by contrast, are higher because they are paying lower wages.

Could banning noncompete agreements reduce innovation, as the U.S. Chamber of Commerce argues?

This is unlikely. We have evidence from California, a state that has long had a total ban on noncompetes, and a state that is known for its innovation. Workers who are not prevented from striking out on their own can pursue innovation without restriction.

How widespread are noncompete agreements? Would a ban affect the wages of ordinary people?

They are very widespread—or at least were until the attorney general in the state of Washington started pursuing many fast food and other chains with lawsuits challenging the contracts. Those chains all dropped their use of noncompetes. I believe the estimate is something like one worker in five.

A ban would affect the wages of ordinary workers, as they are the workers most likely to have an unjustified and non-negotiated noncompete clause in their employment contract. And those bans affect other workers in the sector by depressing wages overall.

Department: Three Questions