CompeteJanuary 13, 2023
Heraclitus, a 6th century B.C. Greek philosopher, famously said “the only constant in life is change.” He also disliked people and was depressed and irritable. He was right, on several fronts. Change is inevitable, as the cosmos has determined it’s essential. Growth and innovation are the product of change — new ideas, companies and people replacing old ones … churn.
Change brings risk to incumbents, who are incentivized to suppress it. Thus, a key role of government is to ensure efforts to suppress competition are blocked. Unfortunately, lawmakers have become addicted to expensive sleeping pills supplied by incumbents presenting a compelling offer: Here’s a shit-ton of money, and all you have to do is … nothing. Our regulators at the FTC and DOJ are stirring, but still not awake from a four-decade slumber.
As we’ve written before, yesterday’s iconoclasts pull the ladder up behind them the moment they become today’s icons. We’re in general agreement that “anti-competitive” behavior is bad, and have laws against it. Yet companies have been able to convince regulators to look the other way on an increasingly popular weapon of mass entrenchment. They’re passing out OxyContin during an AA meeting. The Oxy? Noncompete agreements.
Making good on a Biden campaign promise, the FTC has proposed a rule banning noncompetes across the board. FTC Chair Lina Khan wrote an excellent op-ed detailing why. The agency is presently seeking comments (you can do so here), so here’s mine: Word, sister.
Noncompete clauses are what firms use to sequester your human capital from competitors. When a new employee signs a noncompete with, say, Johnson & Johnson, they agree that when their employment ends, they won’t work at another pharmaceutical company for a designated period — usually one to two years. If you’re familiar with noncompetes, you likely associate them with technology jobs, where employers want to protect valuable intellectual property. And that’s the defense most often offered for the restrictions. BTW, the argument is bullshit … a confidentiality agreement does the trick.
The irony of noncompetes is they only serve to dampen growth. One of the few places where they’re banned is also home to the world’s most innovative tech economy: California. Job-hopping and seeding new acorns have been part of Silicon Valley since the beginning. In 1994 a Berkeley economist theorized that California’s ban on noncompetes was one of the main reasons Silicon Valley existed at all, and in 2005, economists at the Federal Reserve put forward statistical evidence supporting the theory. Apple, Disney, Google, Intel, Meta, Netflix, Oracle, and Tesla were able to succeed without limiting the options of their employees.
Yet outside California, corporate boardrooms love noncompetes. Historically they were attached only to high-skilled, high-paying jobs. Now they’re becoming ubiquitous across different industries at all levels. Fast-food workers are being forced to sign noncompetes, as are hairstylists and security guards. Roughly a third of minimum wage jobs in America now require such agreements. If forcing noncompetes on America’s lowest-paid workers sounds like indentured servitude, trust your instincts.
Employers claim noncompetes give them the assurance to pay for training and other investments in their employees. There is some evidence that noncompetes are associated with more worker training. But there’s a catch: They also decrease wages. The good news is we’ll train you to operate the fryer, the bad news is we won’t pay you a living wage to do it — and you can’t take a better job across the street.
The FTC estimates that noncompetes reduce employment opportunities for 30 million people and suppress wages by $300 billion per year. That’s far more than the total value of property stolen outright every year. Multiple studies also show that noncompetes reduce entrepreneurship and business formation. Which makes sense — it’s difficult to start a business when talent pools are not accessible or allocated to their best use. Downstream, the lack of competition leads to entrenchment, which eventually results in higher prices for consumers — as one study found has occurred in health care. Everybody loses. Except, of course, the incumbent’s shareholders.
Most of what gets written about business, my work included, focuses on the output. The dangers of social media, the potential of AI, or shifts in streaming. But inputs matter, too, and the most important input is our labor. It’s important because our work defines us, even more than the things we consume. Everything good in my life has come from work or relationships. The relationships, especially with my kids, have burned brighter as I can provide economic security, and it helps that Dad has a sense of self.
However … an increasing number of prime working-age people — men, in particular — are no longer seeking work at all. One in 9 American men aged 25 to 54 do not work today — 70 years ago that number was 1 in 50. These aren’t crypto bros who got out before the crash, or stay-at-home dads (fewer than a quarter of them have working wives). Some of the increase is accounted for by growth in the disability rolls, and by our shockingly high incarceration rate (ex-cons have a difficult time reentering the labor force), but the number of people dropping out of the workforce is much bigger than these trends explain. Often low-skilled, with job prospects that offer low compensation and lousy working conditions, they’ve simply given up.
This isn’t a uniquely American trend — in the U.K., 1 in 10 young men are economically inactive — but the decline in labor participation in the U.S. is the second largest among OECD countries. “Economically inactive” meaning not working and also not looking for work. This term should not exist in any developed society. It means our nation’s most basic and important resource lies fallow.
The FTC’s proposed ban on noncompetes includes a significant exception, one that I’ve experienced firsthand. Where the sale of a company is involved, the buyer can make a noncompete clause a condition of the sale. That’s fair: There’s often a great deal of money involved, and the employees of the acquired firm are forgoing career options in exchange for economic security. Though even a fairly negotiated noncompete is a straitjacket. When I sold my company L2 to Gartner, they required that I sign a noncompete. About three weeks later I realized I was not a cultural fit at Gartner. (The previous sentence is the mother of all understatements.) I left several million dollars on the table so I could leave before my earnout was over. But my noncompete remained in effect, and they threatened me (repeatedly) with legal action if I started anything in any near-related field. Multiplied millions of times, this creates a chilling effect in the economy; even if the legal action has no merit, raising capital for a startup under the shadow of a lawsuit is almost impossible. Sort of the mob meets blue blazers and pleated khakis.
Relationships and having a purpose (i.e., work) are the pillars of happiness. School, motivational bestsellers, and TikTok remind us we need to invest in them. But our nation also needs to invest. Last month, the U.S. invested in relationships, passing laws that (somewhat) protect your ability to love and marry who you want to. The country needs to invest in work, too, and let people decide who they want to be in a relationship with during most of their waking hours.
Life is so rich,
P.S. My Business Strategy Sprint is coming up at the end of the month. You can watch the first lesson for free here. And, hey, get 25% off membership while you’re there.