Non-compete clauses harm economy

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The non-competition clause limits worker ability to pursue opportunities. Photo Courtesy of Creative Commons

Kassidy Crown

 

The U.S. economy thrives on free market enterprise, where prices of goods are ultimately determined by the consumer. Cost and demand alter what is sold and for how much.

However, that system cannot effectively run if the innovation of products, and the people behind the products, are restricted in their capacity to develop and produce.

For example, some companies will require employees to sign a non-compete clause which restricts a newly fired individual or someone who wants to switch to a more beneficial company from seeking a job that is within the same field they just left for a specified amount of time.

Non-compete clauses not only add additional challenges to workers who have been recently laid off, but they also negatively impact the overall economy by restricting free market enterprise.

These types of agreements force the departing employee to learn an entirely new set of skills in order to be hired mid-career at a new company. And, due to constant innovation in the workforce, they would likely have to relearn everything they had previously learned at their job if they rejoined the same field.

Non-compete clauses serve as a company’s insurance that the time and money they spent in training someone is not used against them. The argument stipulates that if a company spends significant time training you as an asset, they don’t want you to take your skills to another company and benefit a direct competitor.

For example, a family member of mine was recently laid off from 3M Oral Care and was offered a severance package. Now, they must wait at least two years before being able to re-enter the oral care field as a sales representative.

Theoretically, one could move to a different state or part of the country and get a position at a direct competitor, as is the case of my family member. But 3M, while being worried about the skills my family member had been taught during their career entering a competing company’s hands, they are also worried about the clients who they served following them.

However, that is not a viable option for many people who have been just laid off.

Washington is one of many states who enforce their non-compete clauses; these clauses are considered contract law and are legally binding. But not all states enforce these contracts; California, though they have non-compete clauses, does not enforce them and they are not legally binding.

Stanford professor AnnaLee Saxenian has stated that California’s Silicon Valley, the largest tech-center in the United States, “would likely not be what it is today” if it were not for the state’s decision to not enforce non-compete clauses.

This would likely be the case due to the flow of ideas. Company ideas flow to new places with the people who have the ideas. By not enforcing non-compete clauses, California is allowing a more efficient spread of ideas.

Economists Evan Starr, Justin Frake and Rajshee Agarwal conducted a study in 2017 that found workers who worked in states that had strict non-compete clauses suffered from “lower wages, less job mobility, and lower levels of job satisfaction.”

With lower wages, less job mobility, and lower levels of job satisfaction employees are less enticed to work harder and help companies grow. And, as already mentioned, less job mobility inhibits the spread of ideas for co-operative company growth.

Non-compete clauses are effectively harming free market trade by preventing constant innovation of products and economic growth. They prevent workers from moving to a company where more job satisfaction could be found, shackling them to one company.

States should move to follow California’s lead and foster economic growth by making non-compete clauses non-enforceable, or at the very least limiting where and how long they can be enforced.

If states follow California’s lead, we can begin to foster free market growth with new ideas and higher employee satisfaction. That way, companies and workers will be held to a higher standard and improve economic growth.