⛓ Some brief thoughts on banning noncompete agreements

5 Quick Questions for ... Cato Institute scholar Marian Tupy on Paul Ehrlich’s doomsaying

In This Issue

The Essay: Some brief thoughts on banning noncompete agreements

5QQ: 5 Quick Questions for ... Cato Institute scholar Marian Tupy on Paul Ehrlich’s doomsaying

Micro Reads

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Quote of the Issue

“There is nothing stable in the world; uproar’s your only music.)” - Joseph Schumpeter

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The Essay

⛓ Some brief thoughts on banning noncompete agreements

Item: The Federal Trade Commission proposed a rule Thursday to prohibit employers from imposing noncompete clauses on workers — a widespread practice that economists say suppresses pay, prevents new companies from forming and raises consumer prices. The ban would make it illegal for companies to enter into noncompete contracts with employees or continue to maintain such contracts if they already exist, and it would require that companies with active noncompete clauses inform workers that they are void. Such agreements typically prevent workers from getting jobs at a competitor of a current or former employer for a defined period. The FTC estimates that banning noncompete contracts would open new job opportunities for 30 million Americans and raise wages by $300 billion a year. If enacted, the rule could send shock waves across a wide range of industries. - The Washington Post, 01/05/2023.

Pro-progress, Up Wing policy doesn’t always have to be about giant leaps forward: massive new R&D spending, eliminating the National Environmental Protection Act, instituting a progressive consumption tax. Lots of seemingly small steps are important, too. And sometimes they can have big impacts down the road.

One of the best examples is the non-compete agreement, which typically bans employees from switching to a competitor or starting a competing firm for some pre-determined time. It’s not hard to make a strong case that these contracts play a significant role in undermining economic growth, productivity, startups, and worker wages. From the NYT:

Studies show that noncompetes, which appear to directly affect roughly 20 percent to 45 percent of U.S. workers in the private sector, hold down pay because job switching is one of the more reliable ways of securing a raise. Many economists believe they help explain why pay for middle-income workers has stagnated in recent decades. Other studies show that noncompetes protect established companies from start-ups, reducing competition within industries. The arrangements may also harm productivity by making it hard for companies to hire workers who best fit their needs.

Surely the most famous supposed impact of noncompete helps explain why cities and regions around the world try to be become the next Silicon Valley near San Francisco and not the next Route 128 around Boston. By happenstance, California law makes it impossible to enforce noncompetes, in the Golden State which wasn’t the case in Massachusetts decades ago. Back in the 1960s, it wasn’t obvious that one region or the other might become the country’s and world’s dominant technology hub. But the worker mobility in Silicon Valley gave it an important long-term edge encouraging knowledge spillovers as employers move between firms and started their own.

It’s a combinatorial advantage that serves as a key plot point in the classic 1994 book Regional Advantage by AnnaLee Saxenian, a professor in the School of Information at the University of California, Berkeley. As Saxenian said in a 2014 interview:

The Boston area was organized around these big, vertically integrated minicomputer companies — DEC, Data General. They were classic postwar American companies, with vertical hierarchies and career ladders. Planning and research happened at the top of the organization and then funneled down. Whereas in Silicon Valley you had, really by chance not design, a series of flat companies, with project-based teams that moved around. People moved between companies much more fluidly. At a time that technology and know-how were sort of trapped within the vertically integrated companies of Route 128, they were being continually recombined in Silicon Valley. That gave them a real edge in innovation.

Of course, there’s a downside here: There’s a cost to employers from those knowledge spillovers if they create a new competitor or help an existing one. More worker mobility might also discourage companies from investing in workers. And maybe all workers shouldn’t be treated the same. As my AEI colleague Michael Strain explains in The New York Times today:

Michael R. Strain, an economist at the American Enterprise Institute, said that while there were good reasons to scale back noncompetes for lower-wage workers, the rationale was less clear for better-paid workers with specialized knowledge or skills. “If your job is to make minor tweaks to the formula for Coca-Cola and you’re one of 25 people on earth who knows the formula,” Dr. Strain said, speaking hypothetically, “it makes total sense that Coca-Cola might say, ‘We don’t want you to go work for Pepsi.’” He said that it might be possible to satisfy an employer’s concerns with a less blunt tool, like a nondisclosure agreement, but that the evidence for this was lacking.

That said, this might be an opportune time for bold reform, although I might prefer something a tad less bold. Consider: At some point this year, the US economy might start experiencing some job market disruption and higher unemployment, which we’re already seeing in the tech sector. As the Financial Times recently noted, “First, the sharp downturn in public market tech valuations has resulted in a sizeable outflow of employees from big tech companies and an inflow of digitally savvy workers into mainstream businesses. More than 150,000 workers have been fired by tech companies around the world in 2022, according to layoffs.fyi, a website tracking the trend.” While American techies in California don’t have to worry about noncompetes, reform would be welcome by those elsewhere. It would seem to be perfect timing for noncompete reform.

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5QQ

💡 5 Quick Questions for … Cato Institute scholar Marian Tupy on Paul Ehrlich’s doomsaying

Yesterday I offered my thoughts on Paul Ehrlich’s recent 60 Minutes appearance. Today, I offer you Marian Tupy’s. As the editor of HumanProgress and coauthor of Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet — check out our podcast conversation about the book here — he’s one of the best people to offer an alternative to Ehrlich’s doom and gloom.

Tupy offered some initial thoughts on Monday in HP, but I wanted to know more. Here are 5 9 Quick Questions:

1/ I thought Paul Ehrlich’s overpopulation concerns were discredited, yet he recently made a 60 Minutes appearance. How mainstream are his ideas today?

In fact, Ehrlich is pushing two sets of overpopulation concerns. First, he claims that we are running out of resources that we use to create economic value, such as metals, minerals, fuels, etc. Second, he claims that we are running out of nature. As far as I can tell, that includes concerns over biodiversity, ecological sinks, clean air, as well as abundance of cropland, grazing land, fishing grounds, forests, etc. Basically, he believes that we are raping and poisoning the planet. The first set of concerns is no longer widely held among mainstream economists (if it ever was) but remains popular among non-economists, especially biologists, and among the larger public. The second is taken more seriously by all kinds of scholars as well as the public.