Companies Say They Need Noncompete Clauses. Here’s How We Know That’s Not True.
Employers say they need noncompete clauses in order to protect their trade secrets and confidential information. But do they put their money where their mouth is? Research we conducted suggests that they don’t.
Noncompete clauses prohibit workers from being able to take a job with a company that competes with their current employer. In January the Federal Trade Commission proposed banning them based on evidence of the harm they do markets and to low- and high-wage workers; a Senate bill would similarly limit the use of noncompetes. Some trade groups and business associations are opposed to the FTC’s proposal, however, defending employers’ need for noncompetes as a means to protect trade secrets and other confidential information. We decided to put these claims to the test.
For a recent paper we wrote with Michael Lipsitz, we tested whether firms give small raises to workers to get them over a minimum earnings thresholds to enforce noncompetes. Our study leveraged a 2020 Washington state law that retroactively invalidated noncompetes for workers earning below a threshold of $100,000 per year (tied to inflation), covering approximately 80 percent of Washington workers. If employers valued the ability to enforce noncompetes for workers earning just below the threshold, then after the law came into effect employers should have given such workers small raises to reach or exceed the threshold. In the aggregate data we should have then seen more workers at or just above the earnings threshold, and fewer workers just below.
