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Antitrust Enforcers to Ban Indentured Servitude

by Matt Stoller,

Over the last ten years, policymakers have become aware of a pervasive practice in labor markets known as a ‘non-compete’ agreement, an employment contract provision that bars people from leaving their jobs to go work for a competitor. Non-competes have been around for centuries, though they’ve almost always been rare. In the 1600s, they were used for things like a baker selling his shop, and as part of the sale the buyer had the baker commit to not opening a new bakery next door for some period of time. In the 20th century, non-competes applied to high-level executives, the proverbial CEO with access to Coca Cola’s secret recipe.

...for many people, being bound by a non-compete can be a truly horrible experience, a soft form of indentured servitude if you are tethered to a place and a specific skillset. While the ostensible purpose of such contracts is that an employee and employer are bargaining in a relatively equal position over the terms of work, it’s usually the case that employees don’t know what they are signing or aren’t in a position to refuse. In some states where non-competes are legally unenforceable, employers still threaten employees who don’t know any better. And while technically you should be able to go to court if an employer overreaches, most people don’t have the tens of thousands of dollars necessary to do that. So it becomes a silent threat to litigate you into bankruptcy. (It’s especially absurd when the employee can be fired at will but can’t leave to work for a competitor.)

...while it’s true non-competes hinder wage growth, they do much more than that. For instance, they prevent would-be entrepreneurs from starting companies. As historian Margaret O’Mara noted, California’s ban on non-competes, which has existed since the 19th century, was a key reason for Silicon Valley’s success. In the 1970s, Massachusetts had Harvard and northern California had Stanford, and Massachusetts was wealthier, better connected and more technologically advanced. But it was Northern California that prevailed in digital technology. In Massachusetts, the startup culture never became as ripe, and the porous information ecosystem of engineers changing companies that led to lots of companies in Silicon Valley never developed. Without California’s ban on non-competes, top semiconductor engineers could never have left their original employment to form legendary companies such as Fairchild Semiconductor or Intel.

...the FTC put forward a proposed rule under which these contracts would become illegal. According to FTC economists, such a change could potentially raise the aggregate wage of Americans by $300 billion a year, which works out to a little less than $2,000 per worker in the U.S. Under the rule, all non-competes would be unenforceable.