Inconclusive Evidence From The FTC That Non-Competing Companies Reduce Earnings

The Federal Trade Commission put up a regulation on January 19 that would forbid businesses and employees from signing non-compete provisions. These clauses in contracts forbid former employees from joining rival companies in specific regions for a predetermined amount of time after leaving a company.

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The rule argues recent research demonstrates NCCs have "lowered salaries for workers from across labor force—including individuals not subject by non-compete provisions," despite though studies reveal only 18% of employees are working under an NCC.

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According to the regulation, NCCs diminish pay by restricting mobility and decreasing competition. NCCs, however, have a tumultuous effect on earnings since, on average, businesses that require NCCs must pay higher wages to recruit employees. NCCs also promote employee-beneficial training from employers by restricting mobility.

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Uncertain Research

Most mentioned studies cannot identify which workers work under an NCC but infer the impact on salary by comparing compensation in states (or time periods) with differing rates of "NCC enforceability." An exception is a research indicating CEOs earn 18.4% more, everything else equal, if their contract contains an NCC.

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The FTC extrapolates improperly from six published studies that link NCC enforceability and pay in order to claim that the regulation will enhance earnings. The study looks at two state-specific NCC restrictions that only apply to specific job groups, CEO compensation, or the effects of minor variations or adjustments to the NCC's capacity to be enforced.

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The cited research's empirical models are unable to distinguish between employees with related talents. While the regulation recognizes the limitations of studies of certain states and employment groups, including CEOs, I will concentrate on additional research limitations.

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The difficulty to accurately gauge employees' skills and pertinent prior job experience is a problem that all of the cited research has. Higher salaries in these studies may be due to greater abilities and experience, as more experienced professionals often earn more.

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For instance, according to the research referenced, after Hawaii's tech sector NCC ban in 2015, new workers' average pay improved by 4% in comparison to other benchmarks, such as tech jobs in those other states as well as other jobs in Hawaii.

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According to the FTC, data shows that salaries for new hires with comparable abilities increased by 4% following the NCC ban. The analysis, however, cannot compare the job qualifications of new employees prior to and following the NCC ban because it is only based on average earnings.

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The analysis is unable to differentiate between a rise in competitiveness and businesses' hiring of marginally more seasoned and qualified tech professionals after the NCC prohibition.

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Primary FTC Goals

The study that the FTC has given the most weight analyses within-state variations in NCC enforceability and includes all workers across all states. Just 36% of the salary variation is explained by worker factors like age and educational level.

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In the study, employees who have the same age and educational level appear to be identical, but they can vary by firm tenure, duration in present position, relevant previous employment, and college major.

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Increased profitability with a decline in NCC validity may be attributable to businesses hiring marginally more experienced personnel.

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The study reveals that higher incomes of 0.3% are connected with a one standard deviation reduction in NCC enforceability. Due to the minimal within-state variations in NCC enforceability during the study period, this effect size is tiny.

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The need for unreasonable huge extrapolations makes it improper to extrapolate the rule's effects from this study. In several states, the law requires a shift in NCC enforceability of more than Ten standard deviations.

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A transformation this significant has not been researched, for representative firms and employees. For example, it would not be acceptable to assume that ten times the dose of a proposed treatment would produce ten times the benefit if a pharmaceutical trial indicated a minor benefit from a small dose.

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If NCCs are forbidden, it is anticipated that employers will hire fewer workers with less experience, which will result in a minor increase in average wage. This is because businesses will spend less on employer-provided training if employees can join rival companies after receiving their training.

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NCCs promote employers to hire less-experienced employees, at lower initial compensation, and to provide training by partially limiting worker mobility. According to a quoted study, training incidence is 14% higher in areas where NCC enforceability is higher.

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A statewide prohibition on NCC will make it less profitable for certain businesses to recruit and educate less experienced employees, which will hurt employees who are unqualified for higher-paying jobs.