A Blog by Jonathan Low


Nov 7, 2018

Why Restricting Workforce Mobility Is Bad For the Economy

Enterprises which have to keep employees by force are likely to be sub-optimal performers.

Those that encourage mobility recognize that people who want to leave will probably do better elsewhere than they were at their previous employer. And that their efforts will be surpassed by those who want to join the organization.

The economy benefits from letting people and companies find the best fit. JL

Colby Smith reports in FT Alphaville:

Companies that require employees to sign non-competes make larger capital investments, (but)entrepreneurship declines as non-competes become easier to enforce. 15% fewer workers left companies to take more senior-level jobs once non-competes were harshly sanctioned. 6% fewer workers walked away to found start-ups, leading to a decline in the number of companies entering technology, professional services or education by 18%. Fewer new firms means (less) hiring and, a greater willingness to accept lower wages. 40% of Americans have been subject to (such) restriction
Few cases end in as great a victory as Sonia Mercado's.
Following a report by the ex-Alphavillain Kadhim Shubber, which detailed the story of Mercado, her $18 an hour cleaning job at a subsidiary of Cushman & Wakefield, and the subsequent lawsuit she faced after hopping to a rival firm, the $3.4bn real estate services giant dropped its case.
While Cushman & Wakefield now joins a handful of other companies (Jimmy John's and Amazon, for example) that backpedalled from their policies to restrict ex-employees' movements, similarly questionable non-competes have become more widespread, as has the research that says these clauses hurt the economy.
Of course, there are credible reasons why employers would want employees to sign these so-called non-compete agreements. Say, if that employee had inside knowledge of a company secret. Or, if that employee tried to nab customers to start a rival firm. In those instances, protecting this proprietary knowhow from jumping ship seems like a sound business practice.
Oftentimes, however, non-compete agreements are used with far less discretion. According to the Treasury, nearly 40 per cent of Americans have been subject to this kind of restriction at some point in their careers. For workers without a four-year college degree or those earning less than $40,000 a year (ie unlikely to have access to high-level trade secrets), roughly 15 per cent have them.
The economic impact can be quite sizeable. A study by Evan Starr, Justin Frake and Rajshree Agarwal finds that non-competes lead to lower wages and unhappier workers. Per Starr et al., a 10 per cent increase in the number of non-competes leads to 6 per cent lower wages in states that enforce the agreements versus those that do not. Just three states fall into the latter category. This is perhaps not so surprising considering most pay hikes happen when workers are switching jobs. As non-competes limit the freedom of workers to move, wages tend to suffer, even if workers bound by these clauses tend to get more training.
Another study by Starr, with JJ Prescott and Norman Bishara, finds that about a third of non-competes are signed only after an employee has accepted an offer, thereby gutting his or her ability to negotiate terms in the knowledge they'll be tied to the firm. In this scenario, employee satisfaction is roughly 12 per cent less than those not handcuffed by non-competes.
While companies that require employees to sign non-competes make larger capital investments than their more relaxed counterparts — perhaps because bosses know employees cannot freely walk out the door with the goods — entrepreneurship declines substantially as non-competes become easier to enforce.
Jessica Jeffers at Chicago's Booth School of Business finds that 15 per cent fewer workers left their companies to take more senior-level jobs once non-competes were more harshly sanctioned. More worryingly, 6 per cent fewer workers walked away to found start-ups, leading to a decline in the number of companies entering the technology, professional services or education space by approximately 18 per cent. Fewer new firms means fewer hiring needs and more broadly, a greater willingness among the labour pool to accept lower wages.
In August, Massachusetts (a notorious enforcer of non-compete agreements) signed into law a bill limiting the circumstances in which employers can prohibit their employees from leaving. Unless a worker steals company property, which could result in a non-compete of up to two years among other penalties, they are free to move on to other opportunities after a year or less. Massachusetts legislators also included rules about how much advanced notice employers must give employees before asking them to sign one of these agreements.
With these modifications, Massachusetts joins a handful of other states in loosening employers' grips on their staff recently. Vermont is considering an outright ban on the practice. Illinois has done so for low-wage earners. And in Oregon, home care workers are no longer subject to such clauses.
That's a relief for not only these employees, but the states' economies as well.


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