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Noncompete clauses can bring wages down by 20%, Treasury Department report finds

Treasury Building
Posted at 1:57 PM, Mar 14, 2022
and last updated 2022-03-14 15:01:01-04

A common employment practice in the U.S. is facing new scrutiny.

A new report from the Treasury Department shows anti-competitive practices like noncompete agreements have brought down wages by 20% and, in some cases, even more.

The report further strengthens the argument for the Federal Trade Commission to put some policy in place that would ban some noncompete clauses — something President Joe Biden requested last summer.

There's bipartisan support at the federal and state level to ban noncompete contracts, especially for lower-wage workers. Experts argue and research shows that noncompete clauses hurt all workers and the economy as a whole.

"If you have a great idea to start a new company, a noncompete not only prevents you from starting that company, it might also make it harder to hire once if you do start that company," said Evan Starr, an associate professor at the University of Michigan.

About 1 in 5 workers has a noncompete clause. For higher-paying jobs, they can be a bargaining chip for more money. But for lower-wage workers, noncompetes are particularly burdensome.

"It is about making sure that you have kind of a captive workforce," said Heidi Shierholz at the Economic Policy Institute. "Your workforce can't go anywhere else, and then you actually have to pay them less to keep them because they don't have outside options."

Starr says the policies leave lower-wage workers in a precarious situation.

"And for a lot of workers, especially low wage workers who don't have access to the legal system, those threats are sufficient to chill either the worker from taking a risk or from the firm that might hire that worker from stopping that process and hiring somebody else," Starr said.

Some states have or are considering bans on noncompete agreements. The impact of those bans will come down to who they include.

For now, experts suggest seeking legal advice if presented with a noncompete clause. Some may not be enforceable, depending on the state.

Workers should also consider the company culture before signing such an agreement.

"If you found your dream job, for example, and you don't think you're ever going to move again, then maybe the noncompete is not a big deal," Starr said. "But if you're a young worker who's got aspirations of moving up, and you think that this job is not going to last forever, then maybe you ask to be out of the noncompete agreement. And if the firm drops you, doesn't want to hire you for that reason, then that actually may be a good thing for you in the long run, even if it hurts in the near term."