EIG American Dynamism Series | The Case for Non-compete Reform
On April 29th, the Economic Innovation Group (EIG) hosted a webinar to discuss the Workforce Mobility Act, recently reintroduced bipartisan legislation from U.S. Senators Chris Murphy (D-CT) and Todd Young (R-IN), that would limit the use of non-compete agreements that curtail worker mobility, stem wage growth, and stifle entrepreneurship and innovation.
Today, around 20 percent of American workers are covered by a non-compete agreement. Non-compete agreements have negative effects on all workers but are especially damaging for historically marginalized workers. When enforced, non-competes lower wages for female and nonwhite workers by twice as much as for white male workers.
The webinar featured a conversation with Senators Murphy and Young, moderated by John Lettieri, President and CEO of EIG, on the the Workforce Mobility Act, as well as a live panel discussion between Rachel Arnow-Richman (University of Florida Levin College of Law), Najah Farley (National Employment Law Project), and Eli Lehrer (R Street Institute), moderated by Jordan Weissmann from Slate, on the need to limit the use of non-competes.
Why Non-Compete Reform Deserves Our Attention
- Senator Murphy highlighted the importance of eliminating non-competes for addressing a whole host of economic priorities—from raising wages to fostering a more dynamic and entrepreneurial economy. “It’s about innovation, it’s about worker mobility, it’s about putting real pressure for pay increases,” he said.
- Senator Young discussed how eliminating non-competes aligns with American values. The senator pointed out that there’s a “real mismatch between the skills that are required in our economy on one hand and the skills people have on the other.” Encouraging workers “to leave one labor setting and go into another where they are adding more [economic] value or pursuing their own passions, that seems very much consistent with the American ethic and the American dream,” he added.
- Eli Lehrer explained that non-competes are a “clear market failure.” Further explaining that at the individual level, non-competes can have serious consequences. These contracts tamp down wages and do “immense harm to lower-wage, lower-skilled workers,” he said.
- And Jordan Weissmann illustrated how extensive non-compete agreements are today by saying, “Non-compete agreements are basically everywhere…They are a fact of life for millions and millions and millions of workers.”
Uplifting Lower-Wage and Historically Marginalized Workers
- Senator Murphy pointed out that research suggests non-competes have a much heavier economic impact on women, who have also been disproportionately impacted by the pandemic, than men. “As we try to make sure that women…have an onramp back to economic success, [non-compete reform] is part of that package,” he said.
- John Lettieri also emphasized that the same demographic groups disproportionately impacted by the pandemic are disproportionately harmed by non-competes. “Stricter non-compete enforceability lowers earnings for non-white workers by twice as much as for white male employees,” he added.
Supporting Workers and Employers Alike
- Senator Young explained the importance of labor market flexibility. “Ideas are developed and innovation occurs when you take one idea or concept or finding and pair it with another. It’s through that process of synthesis that innovation occurs. And sometimes these ideas reside in different individuals so when you have more churn in your labor market it leads to more innovation within these enterprises that, of course, employers and managers care very much about.”
- Senator Murphy added that it’s difficult for companies in industries with a high penetration of non-compete agreements to break from the trend. “This is an area of the law where there is a benefit to a common decision being made,” he explained.
- “I saw how non-competes operated, which was to throw a monkey wrench in decisions long down the road from when they were signed, in effect when a company was interested in hiring a new worker who was bound by a restraint,” said Rachel Arnow-Richman. These contracts contribute to the “inability of that worker to take the next step in his or her career and for the new employer to be able…to offer attractive terms.”
Spurring American Innovation
- Non-compete agreements “first and foremost restrain innovation,” emphasized Senator Murphy. “If you are tied to your place of employment, and you cannot leave to go bring an idea you have into fruition, it harms all of us,” he added.
- Eli Lehrer emphasized that at the societal level, non-competes keep innovators from turning new ideas into real products. “There’s a reason Silicon Valley is in Silicon Valley and not Boston,” he said. “California doesn’t [enforce] non-competes.”
The Workforce Mobility Act is the Right Solution
- All three panelists agreed that there should be a near-total—if not complete—ban on the use of non-competes, which the Workforce Mobility Act would achieve.
- Najah Farley stated that she’d like to see an eligibility threshold set at a high enough level that workers subject to non-compete agreements could afford to negotiate with their employer and hire legal counsel if needed.
- Rachel Arnow-Richman added that the bill pairs a non-compete ban with three critical elements: education, investigation, and enforcement. “We can’t just ban. We also have to have an infrastructure to address violations,” she explained.