Banning non-competitors is good for innovation

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A non-compete ban, such as the one proposed in the US by the Federal Trade Commission, is not only good for workers. It’s good for companies and for innovation in the long run. By allowing workers to share the benefits of their innovations, a non-compete ban would motivate them to work harder, make it easier for them to start new businesses, and make the overall economy more dynamic and competitive.

The FTC’s announcement that it plans to adopt a nationwide non-compete rule should be understood as more than just a move to protect workers, although it is. It’s also a big step forward for competition and innovation and will make companies stronger in the long run.

Non-competitors have a detrimental effect on talent mobility, entrepreneurship and equality. They prevent employees from changing employers or starting a business of their own competitor. Such restrictions depress wages, reduce entrepreneurship and hinder efforts to correct inequality.

Over the last decade, a wide range of research – empirical, experimental and theoretical studies – offers compelling evidence on the key role that human capital policy, including non-compete contracts, plays in industries and regions. These studies overwhelmingly demonstrate that the harms of non-competition extend not only to employees but also to companies and regional innovation. Non-competitors reduce market dynamism and interfere with the free labor market. They make it more difficult for new companies to start up and cause industries to become more monopolized by incumbent firms. And they reduce employee motivation and knowledge sharing, the key building blocks of innovation.

Locking employees in with the uncompetitive not only reduces their external prospects, but also decreases their ownership of their human capital and labor, reducing their incentives to perform and develop their skills in the first place. When talent is stalled, the job market becomes a “market for lemons” – a market where it is difficult to ascertain candidates’ quality, ability and past experience. In such a market, companies end up with employees trapped in work they are not passionate about. When companies don’t let employees leave for greener pastures, the result is “silent layoffs.” That means unhappy employees and dissatisfied employers.

A natural experiment on non-competitors

California and Massachusetts present a paradigmatic natural experiment on the effects of non-competitors. Massachusetts has long mandated non-competitors and only recently, in 2018, passed a law restricting their use, based on growing economic research into their harms. California has always deemed non-competition void.

Both states were well positioned in the early 1970s to become the global high-tech hub that Silicon Valley is today. However, Massachusetts high-tech companies’ use of non-competitors has made it more difficult for talented employees to launch their own ventures. By contrast, the computer industry accelerated in California, and inventor networks in the Bay Area grew denser, even as they stagnated around an older generation of companies in Massachusetts.

Furthermore, California as a whole benefited from its comparative political advantage. He experienced a cerebral gain, as the world’s best talent was drawn to the freedom California offered. Existing companies also benefited, because a free labor market meant that companies that were doing well could hire new employees. And the state has benefited from the tax base that a robust market economy could bring.

An example like this isn’t perfect—many factors have contributed to Silicon Valley’s rise—but combined with the depth of research already discussed reinforces the fact that non-competitors stifle innovation. Additionally, impressive innovation in California in the absence of non-competitors holds true not only for the tech industry in Silicon Valley, but also as it pertains to other industries such as the biotech and pharmaceutical industries, and the entertainment and content industries in the South. of California.

Intellectual property is about balance

A sound innovation policy requires balance. For example, intellectual property (IP) law balances the desire to offer innovators some insulation from competition against the risk that blocking too much intellectual property will stifle the very creativity the law is meant to protect. Non-competitors have no such balance. They are a blunt instrument that by and large prevents a person from taking a job in their chosen profession, sometimes for years.

There are better tools to strike a balance between workers’ ability to change jobs and start businesses and employers’ desire not to see their R&D leave. In California, where non-competitors have always been unenforceable, firms have other means at their disposal to protect their inventive step in streamlined ways. Most notably is the strong protection afforded to trade secrets. Every state protects trade secrets, and Congress passed the Defend Trade Secrets Act (DTSA) in 2016 to provide additional strong federal-level secrecy protections. Trade secret strikes the right balance by focusing on narrower limits on the use of specific information rather than blanket prohibitions on competition.

The uncompetitive help no one except dying companies, those who can’t compete to hire the best talent and can’t survive in the innovation marketplace. Everyone else – growing companies, new companies, employees and the economy – benefit from a free and dynamic labor market in which employees can move freely and companies compete for their talent. Unfortunately, defenders of those dying companies are bound to attack the FTC’s proposal, in the pages of the Wall Street Journal and elsewhere. The FTC is right not to let the dinosaurs of yesteryear hold back our economy.

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