A US ban on noncompete agreements would raise workers’ earnings up to 14%

Non-compete agreements was a hot topic this year. Wall Street like them; workers do not.

The contracts, also known as NCAs, restrict employees from working for a competitor in the event they leave their job. Employers use it as a way to protect their trade secrets and other inside information from falling into the hands of their competitors. Over one in five Americans are bound by them, most of them in paid management and executive roles. Have been non-competitors horribly described by the Federal Trade Commission (FTC) as “a widespread and often exploitative practice that suppresses wages, stifles innovation, and prevents entrepreneurs from starting new businesses.”

And it’s not just the workers who sign these contracts who feel the impact. a december study (pdf) conducted by the National Bureau of Economic Research found that states with stricter rules enforcing non-compete agreements were linked to a 1.7% reduction in earnings for all workers who lived there. The study also indicated that the average annual earnings for American workers would rise anywhere between 3% and 14% if a nationwide ban on NCAs were enacted.

Why are non-competitions bad for workers?

NCAs are only as strong as their enforcement, which varies from state to state. The main reason they are harmful to workers’ earnings is that there are usually fewer jobs in states with stricter laws, the study reported.

“Fewer job offers mean that workers have less ability to use improvements in outside options to negotiate for higher earnings and to climb the job ladder (that is, find better paying jobs),” the authors wrote in their analysis.

The impact is even stronger for women and people of color, who experience twice as much of a reduction in earnings compared to their white male counterparts.

“Strong enforceability [of NCAs] has a particularly negative effect on the earnings of women and racial minorities and therefore exacerbates existing inequalities in the labor market.”

Move to ban NCAs

Four US states – California, Minnesota, North Dakota and Oklahoma – have non-competitions prohibitedand New York State Legislature passed a bill banned its use earlier this year. The benchmark is waiting for the signature from Gov. Kathy Hochul, who has until the end of the year to pass or veto it.

The FTC is also considering a proposed rule termination of the use of NCAs.