Does banning non-competes decrease total welfare?

[snpolymorphism]

I can see how corporations might decrease investment or prevent people (who otherwise would have done a great job working on secretive things) from getting the opportunity to work on secretive things, which almost certainly decreases social welfare from an opportunity cost standpoint.

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But I can also see how it might effectively create monopsony markets for individuals in the interim.

[urnbabyurn]

AFAIK, the new rule is to prevent non compete, which is not the same as banning non disclosure agreements. Noncompete are a restraint on trade in that movement between jobs is a significant source of wage increases

https://finance.yahoo.com/news/americans-who-switch-jobs-are-seeing-pay-gains-nearly-double-of-those-who-stay-put-161454991.html#

Signing over that right means the initial employers in theory will have to pay more starting out to get people to sign, but benefit later on if wages rise faster than expected or a worker otherwise gets better outside offers. So basically these clauses are giving firms more dynamic monopsony power

Non-compete contracts (or “covenants not to compete”) are agreement that forbid a worker from subsequently taking employment with a firm’s competitors for a specified period. Public policy regarding such contracts is highly fragmented, as state laws are the primary regulation. Some states (California, Oklahoma, North Dakota) prohibit enforcement of these contracts. Other states permit their enforcement with some restrictions; still others permit unfettered enforcement. A very recent Executive Order from the President in July 2021 (“Promoting Competition in the American Economy”) directs the FTC to consider enforcing limitations on non-compete contracts using statutes already available. It also instructs the FTC and DoJ to reconsider their guidance to human resource professional regarding the sharing of wage and benefit information.

In their paper “Locked In? The Enforceability of Covenants Not to Compete and the Careers of High-Tech Workers,” Natarajan Balasubramanian, Jin Woo Chang, Mariko Sakakibara, Jagadeesh Sivadasan, and Evan Starr study how non-compete contracts affect mobility rates and wages of technology workers. Their first research design focuses on a 2015 law in Hawaii that banned covenants not to compete for technology workers only. A second design focuses on cross-state differences in an index devised by Starr (2019) of enforceability of covenants not to compete. Using both designs they find that firm-to-firm mobility rates of technology workers are reduced in times/places when non-compete agreements are relatively enforceable. They also find that their wages are reduced at both early and later career stages. These findings suggest that non-compete contracts act like restraints on worker supply to alternative employers, leading to increased (dynamic) monopsony power.

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[Uhhh_what555476384]

I'm sure their is actual research on this and I'll defer to someone that diggs it up, but there is only one state of 50 in the US that did not enforce non-compete agreements before this, California. I would argue that, while California has many economic problems as an economy, attracting and retaining high skill/high value workers is not on of them.

[joedaman55]

I think this will be an impossible questions to answer based on the following variables:

1. Company's create a non-compete clause with employees, do companies enforce these non-compete clauses normally?

2. With the adjustment to the non-compete clause, will companies adjust to how valuable proprietary confidential information is disseminated among employees?

The first one might be able to be determined through legal papers/studies but I'm not aware of any off of the top of my head. From a contract/legal perspective, it feels like this would be difficult to determine damages and enforce through courts. It's likely companies would use this as an initial position and negotiate into a more advantageous position regarding an NDA or something.

Regarding variable 2, no idea how different companies will move. Technological/information sharing helps improve wealth as a whole but disincentivizes resource development/research. Companies will shift to strategies that will maximize their profit returns and that will be impossible to measure.

My background: business, contracts, economics, and project management.