Audio Recording by George Hahn
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.
As you are in the UK now, I am sure you have become familiar with “gardening leave”. For me, the solution of non competes, especially in the US, is to simply have longer notice periods that are fully paid. 3 months or 6 months should work depending on the position – One year is extreme and I have not heard of many that last that long.
The GREAT thing about “gardening leave” is that it also allows one to re-charge the batteries and allows for a much more productive start to the new role.
THANKS, as always, for your thoughtful article.
Prof Galloway, reading your post, I wondered how the trend in training investment in California has fared, with the ban on noncompetes. Has that been studied? Or is that where some of the data for the 14% increase with noncompetes comes from?
I have really liked several of your recent posts. As a Brit, I find reading your articles really useful in anticipating where employers in the UK might be going next. We have the gig economy and it may not be long before low skilled workers are precluded from transferring to another employer. As you say indentured servitude.
Wow, Scott…. great article, as usual. But I was just about to reflexively blast you for concentrating on men and not just working aged people – thinking “what about men who are stay at home Dads raising the kids?” but you addressed this in your article. Glad I read the article first before commenting (which, thankfully I typically do). Onward and upward my man. Take Care.
Interesting post. When I started reading it, my knee-jerk reaction was, “yes, but how many people do non-compete agreements affect outside of upper management generally and tech specifically?” Turns out it’s a much higher percentage than I thought.
That said, the implicit argument that there is a causal relationship between the increase of non-compete clauses and the decrease in male workforce participation isn’t supported. In fact, in the Brookings talk that is linked as a reference, Jason Furman argues that, “one big reason these men aren’t working or looking for work is because they’ve realized that employers aren’t interested in hiring workers with few skills or little education so they’ve given up.”
If Furman is right, the causal relationship would more likely be that men are not acquiring the skills necessary to be successful in our current economy and rather than reskilling or upskilling, they’re deciding to drop out entirely. That contradicts the argument that these men have marketable skillsets but are not able to apply them in a new job due to a non-compete agreement with a previous employer.
This, of course, does not mean that we shouldn’t work to eliminate non-compete clauses in employment contracts, particularly for lower wage earners. We should. But eliminating them will not help the men who have chosen not to acquire job skills, opting for more quality TV time.
It’s even worse than what Scott outlined. In my role at a private equity firm I review about a hundred confidentiality agreements a year, precedent to being given a “deal book” describing a business acquisition opportunity. All of them arrive with a paragraph innocuously titled Nonsolicitation. The legitimate purpose of this idea is for my firm to agree to not poach employees that we may be introduced to. But very many go much further and include a blanket “no-hire” provision whereby every firm who signs it is agreeing for at least a year or two to not hire ANY of their employees, even if they were fired and are looking for a new job. A typical deal process can involve upwards of a hundred PE shops, which collectively may own thousands of businesses. Many of them let junior people sign these CAs willy nilly because they’re desperate for the next deal, oblivious to the legal consequence. It is morally repugnant and we never, ever agree to these provisions. And you know what? The counterparty always backs down on it because – I like to hope – it’s embarrassing to be called out on it.
Scott, I think you might take a look at some of the other trends, too.
There are a lot of workplaces that are full of incivility and empty of COVID protection protocols.
They’ve also been talking about the companies that hire young people to burn them out. There’s also a “quiet hiring,” sort of like battlefield promotions; that’s not wrong now in a recession, but it will be when the people who get promoted find that they’re the ones to be burned out so that the usual suspects can move up when the company has more financial room to maneuver.
I’ve been the guy hired to be burned out and the guy who they wanted to get rid of once the crisis was over.
I don’t like that a lot of young men seem to have given up before they get started, but it doesn’t surprise me when I recall what I’ve experienced at work over the years.
I understand a lot of women and people of color were treated like that in earlier days. The solution, though, is to solve the workplace problems for everyone rather than to earmark a new group of people for the workplace mistreatment.
Telling men they’re lazy for not wanting to go into situations like that isn’t much of a solution, Scott.
You’ve missed the point completely
Thanks for the standard non-answer dismissal, Andrew. I must have hit a nerve.
I haven’t missed the point of the last six-seven years of public discussion.
If our society tells a lot of men that they should be discarded except when needed to fill the bottom-rung positions, that would be the most likely explanation for men dropping out, especially when the brunt of it falls on men in lesser income brackets who were hoping to do better than their fathers.
Thank you for your insightful opinion on yet another important topic; making our country more competitive and healthy.
Thank You! Thank You! Thank You! For going back to Spotify. Best New Year surprise so far. As you know I love your guidance I may not always agree with you, although mostly. But I so appreciate you putting your self out there with all sort of comments and great advice. Thank You once again have a wonderful year, decade and so on. Best wishes!!
Aren’t non-competes famously tough to enforce? Maybe it’s just in some states but I think it’s broadly true. For multi-millions or for real IP theft I’m sure the lawyers would come out but if I was advising a lower wage worker (or myself) I would just say sign the paper and then completely ignore the non-compete, because they shouldn’t exist for your job. Hopefully they can be mostly/entirely expunged from the market.
Looks like one in nine don’t have a problem with non compete.we use to call them bums.I’m 70 worked 2 jobs all my life to become the wealthiest man on earth.Wife and daughter are all the riches I need!! ps you lazy uninformed ,uninterested have the power to change this country for the greatest good again.Yes that means a better life for every American.not just corporate progress with there greasy handshakes and controls of the society.Sorry to say but we lost are way!
I’m all for an end to non-competes. But not by the FTC. That is administrative state over reach. This requires a legislative action. Of the FTC does it, ultimately this will be litigated up to the Supreme Court.
I am one of the non-working in America; however, not male and not of the age group (25-54). My am 80 y/o, well educated, healthy, energetic, and would love to be working — IF, I could locate an employer who was non-discriminating. Does the problem lie within our country’s mental and social attitudes? Are we failing to learn and progress and accept changes in behavior? Failure to adapt to changing environments?
Weakest of your essays to date. A real stretch to suggest this is a major factor in male unemployed. You are the best example of why a non-compete can work. You sold your company and reaped the benefits. Why should you then be allowed to open shop across the street? You moved on , in a non-related venture. Seems to have all worked out for you.
Why should he be able to open shop across the street? Why not? They bought the company, not him.
I love your thoughts. It’s not only the non-compete agreements that cover after you terminate your employment, but employment agreements that basically say the company owns your every waking thought and idea regardless of whether it relates to their business. Some of the stuff that companies are trying to stuff in these agreements are pure BS. They want to scare employees into giving away all rights they have, often in exchange for no compensation.
re: men dropping out of the workforce, I find it curious and interesting that the commentary and data you have referenced multiple times have been from people in the economics and business world. They clearly have incentives to have a greater pool of candidates to draw upon (and depress wages with a larger group selling their labour).
Seen through the lens of capitalism, not working is certainly bad for all involved. However I see little to no discussion from Scott around how these low- or no-skilled men have had the “promises” made to them that “if you work hard, anyone can make in America”, because that is clearly and demonstrably false. If there’s no chance to win or get ahead, why play the game?
Why debase themselves to do shit work for not enough pay to cover their necessities, that gives little hope that the future will be any different?
Scott says it directly “Every day America becomes more like itself” and that self is based on exploitation.
Maybe men aren’t working because big % of available jobs are service jobs which they equate with servant. Teaching, nursing, etc. are “girly” jobs. Wish we could make these important jobs more “manly” so some % of these guys would take them.
There should at least be some sort of provision to offer some sort of limited protection for small firms and start-ups. Just to at least to get them through the early incubation or start up phase. The often nerdy or distracted innovators will just get ripped off for their equity as their staff defects with the more personable head of the sales team. Big players like Meta will also now just pinch the staff of the small ones to avoid paying for founder equity. Washington rarely does something without some group lobbying and in this case it’s not the unions pushing for this so who is it? . Contrary to popular opinion NDA’s are useless and in any event if one follows the logic the FTC has proposed here then NDA’s should be banned too. In fact why not extend the freedom and competition logic to also ban patent protection and limited liability corporations while they’re at it? Who in their right mind is going to start or invest in a young start-up where your own staff on their own or with or a big competitor can simply start tomorrow competing against you or even shut you down? Read The Master Switch by Tim Wu and watch the movie Tucker to gain a better perspective of how hard the marketplace can be for young firms. The California argument is also non-sensical as they have a unique set of circumstances and advantages and an established start-up eco-system not available in most parts of the country. Read the story of the origin and history of Silicon Valley.
Very insightful… thank you. I would love to hear your thoughts on how this, among other factors, stymie tech innovation. For example… big corp is more interested in stock buy backs than investing in product R&D.
Well, I was “encouraged” to sign this, but at least they paid me to sign it…the payment is perhaps 1% of the value of the business I could not go after if I left the company…I wonder if those will be more enforceable
What are the odds… 2 different SG’s back to back. 🧐
Brilliant insight into a real Poison pill for the economy overall. Ive been a prisoner of one these. They nee to go and go NOW, it would be a great boost to there overall economy and well being of the work force.
Great post, and enjoy your writing and insights as always, Prof.
Small style suggestion: rather than “working wives”, it would be better to say “working spouses”, since some men have husbands.
Great insights as usual. The statistics are staggering. Appreciate you shining the spotlight. Uggh!!
I don’t disagree. I think it’s worth noting that your startup, Section4, includes non-compete language in their employee contracts (at least they did when I worked there). I don’t blame you for this and I’m not trying to be critical. Just simply pointing this out.