FTC Non-Compete Rule Change Could Boost Wages and Innovation

In April, the Federal Trade Commission (FTC) closed comments on a proposed rule change that would drastically limit employers’ uses and abuses of non-compete agreements in employee contracts. 

When the FTC announced the proposed rule change its press release suggested exploitation will go down and wages will go up if the change goes through: 

The Federal Trade Commission proposed a new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans. 

It is no surprise that labor and consumers have overwhelmingly favored the changes and business interests have opposed them. In a story on the divide NBC News noted that what it called “lobbying crossfire” by the dueling interest groups was “in addition to the more than 26,000 comments from the public the FTC gathered over the past several months.” 

This showdown in Washington was inspired by business’ expansion of the uses of non-competes over the last few years that many would argue has been an over- use or abuse. The original purpose of a non-compete was to protect legitimate business interests like the privacy of confidential business information and trade secrets. But some businesses have used non-competes as handcuffs to prevent even lower-level employees from leaving.  

A non-compete can unfairly lock someone into a job though there is no real threat to the business if they leave. The businesses have lawyers to enforce their claims but it is a small percentage of employees who have the finances to access lawyers for an expensive legal fight over the non-compete. 

Another concern is that many studies show the most innovative businesses created by executive types come from those who worked at other companies and saw a new, potentially better way to do things. In this way non-competes can stifle competition and innovation.  

In a New York Times op-ed, Lina Khan makes the argument that in addition to suppressing wages, non-competes suppress creativity in the marketplace: 

Start-ups are historically a key driver of job creation and innovation but several studies have found that noncompetes reduce entrepreneurship and start-up formation. How can a new business break into the market if all of the qualified workers are locked in? Or if the would-be founder is bound by a noncompete? 

I expect the FTC will carefully consider the concerns of businesses as it addresses the rule change. But it will balance that with the data showing the suppression of wages and the costs to innovation non-competes have created.  


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