Andrew Leigh: Non-compete clauses are costing workers $7 billion a year

One in five Australian workers are subject to a non-compete clause in their employment agreement, impeding them from moving to a better job.

Workers who want to switch to a nearby firm can find themselves barred from moving unless they take months off work.

Faced with the prospect of enforced unemployment, many never make the switch. Given how important job mobility is to innovation and wages, this means non-competes may be hurting both productivity and earnings.

Non-compete clauses aren’t an empty threat. When the Competition Taskforce in the Australian Treasury began investigating the impact of non-compete clauses, they uncovered some shocking stories.

In one case, a migrant worker with limited English was asked to sign an employment agreement with a 12-month clause. When he asked, the worker wasn’t provided a copy of the agreement in his preferred language, and the employer threatened to sue him if he switched jobs.

In another case, a legal action was filed against a teenager on the minimum wage for breaching his non-compete agreement. Threats and legal proceedings have been brought against cleaners, nurses and hairdressers for breaching non-compete clauses.

In an especially egregious case, a worker experiencing workplace bullying felt like they could not resign from the workplace, due to their concerns that the broad non-compete was enforceable and would prevent moving to a similar job nearby.

The latest research from the e61 think tank, authored by Jack Buckley, Ewan Rankin and Dan Andrews, paints a stark picture of the impact of non-compete clauses on Australia’s labour market, particularly in curbing wage growth and stifling job mobility.

The study, using newly linked microdata, shows that workers at firms heavily using non-competes earn 4 per cent less on average. The decline in wages becomes worse over time, with lower-skilled workers suffering the most pronounced wage stagnation.

Meanwhile, high-skilled workers experience longer spells of unemployment when switching jobs. In an economy experiencing skills shortages, does it really make sense to ask scarce human talent to languish for months on the bench?

Firms typically justify non-competes as a way to safeguard trade secrets and client relationships, but the data suggest that such restrictions might instead be serving to entrench existing power imbalances.

Employees face diminished leverage in negotiating for better pay, especially as non-competes prevent them from capitalising on new opportunities. More troublingly, the study finds no clear compensatory mechanisms for workers signing non-competes — they do not receive higher starting salaries to offset the reduced wage growth that follows.

What is particularly concerning is the breadth of non-competes’ application. These clauses are now affecting workers far outside traditional high-tech or sensitive industries, including many low-wage sectors, from yoga instructors to security guards.

After a decade of sluggish wage growth under the former Coalition government, the widespread use of non-competes may be more of a hindrance to economic dynamism than a protector of corporate innovation.

What does a 4 per cent hit to wages mean in dollar terms? Across full-time and part-time workers, median earnings are $67,000 a year.

Four per cent of that is $2700, a sizeable hit on employees with a non-compete clause in their employment contract.

Taking account of the fact that one in five workers are subject to a non-compete clause, this implies that non-compete clauses are driving down average wages across the board by more than $500 a year. Across the workforce, that’s a $7 billion hit to worker pay.

As it turns out, these new Australian findings are in the ballpark of figures produced by the US Federal Trade Commission. In calling for a nationwide ban, the Federal Trade Commission estimates that non-competes in the United States are depressing average annual US wages by US$524.

The agency also estimates that a nationwide ban would boost innovation and increase new business formation. On their figures, scrapping non-compete clauses would lead to the creation of an additional 8500 US businesses annually.

The impact of non-competes on innovation makes sense when you consider the challenges for an entrepreneur starting a company in a full-employment economy.

To get off the ground, new companies must hire most of their new employees away from other firms. That’s good for the workers (because they earn more) and good for the economy (because new firms are often more productive). Non-compete clauses can act as sand in the economy’s gears.

If firms really want to protect trade secrets, the e61 researchers argue, they should do so directly.

The researchers contend that non-disclosure agreements — which protect secrets, but don’t stop workers from switching jobs — are an effective way for firms safeguarding their confidential information. Unlike non-compete clauses, the research shows that non-disclosure agreements do not reduce mobility or wages.

The case against non-compete clauses can be made in terms of equality: when workers are starting a job, they often feel they don’t have any bargaining power against a standard-form agreement.

The case against non-competes can also be made in terms of freedom: employees should have the right to move jobs when they wish. It’s not often that the case for reform can be made from both sides of the ideological fence.

Over time, non-compete clauses have spread across the economy. Today, non-compete clauses don’t just apply to the architect poring over plans, they also apply to the barista pouring your coffee.

It’s time we took a hard look at whether non-compete clauses are serving the national interest.

Andrew Leigh is the Assistant Minister for Competition.