Evan Starr | The Noncompete Effect, From CEOs to Sandwich Makers

Matt Bahl:
Welcome to emerge everywhere. And if you’ve listened to this podcast before, you’ll know I’m not Jennifer. Tasha. My name is Matt Ball. I’m vice president, head of workplace financial health at the Financial Health Network, and I work closely with Jen as we advance opportunities to improve the financial health of America’s workforce. I’m going to be guest hosting a few podcasts over the summer and into the end of the year, focusing on issues and challenges facing America’s workforce.

What are the ways in which we can work together to improve the financial health outcomes for working people all across the country? So join me as we dive into conversations exploring the world at work.

What if the most impactful policy addressing worker financial health has nothing to do with retirement savings or other industrial policy? What if it’s the Federal Trade Commission’s recent decision to ban non-compete agreements today? To guide us through this conversation. We’re joined by Professor Evan Starr. Evan is an assistant professor of management and organization at the Robert H. Smith School of Business at the University of Maryland.

He received a PhD in economics from the University of Michigan and a bachelor’s degree from Denison University. Professor Starr scholarship has been cited extensively, including by the FTC, as it was promulgating its rule banning non-compete agreements. Join us today as we explore the contours of the impact this rule may have on the economy and worker financial health. Since we spoke with of a federal court in Texas issued an injunction against the FTC’s non-compete ban.

Well, what does that mean? It means that the federal court is going to issue a more formal ruling towards the end of August, deciding whether or not the Federal Trade Commissions non-compete ban will take effect. This is likely to spur additional challenges. There may also be state or federal legislation in response. We really don’t know. What we do know is our discussion with Evan focuses on the financial, health and economic impacts of non-compete on workers, entrepreneurs, and our broader economy.

And regardless of how the courts settle this question, the debate will continue about whether or not non-compete are an aspect that improve or hinder worker financial health. Professor Evan Starr, welcome to Emerge Everywhere. We’re excited to have you and your expertise. And this is a bit of a new topic for our audience. And I think one of the ways that we want to dive into this is what are non-compete. And who’s subject to them?

Evan Starr:
So thank you for having me. It’s a real pleasure to be here. Non-compete agreements are typically just a few sentences and an employment contract. And what they say is that if a worker was to leave their employer that they can’t go join or start a competitor, typically for a limited period of time and in a limited geographic area.

So, for example, if you signed a non-compete and Jimmy John’s a famous example back from 2014 and you were making sandwiches and that could be stipulated that you couldn’t leave and work for effectively, any food establishment within three miles of any Jimmy John’s for a period of two years after you left your job.

Matt Bahl:
Yeah, I think the Jimmy John’s example is always it’s a famous one, but it’s not the only one. And I think it challenges certain assumptions about who’s subject to non-compete. And so can you give us a sense about what’s the range of workers that are subject to non-compete or have historically been subject to non-compete?

Evan Starr:
That’s a great question. So, we learned about the use of non-compete agreements. Really only in the last decade or so through various surveys of workers and of firms asking about the use of these agreements. And so broadly, the estimates suggest somewhere between 15% and 30% of workers are bound by non-compete agreements. The kind of modal estimate is around 20% or so and so you’ve got roughly 1 in 5 workers who are bound by non-compete agreements. if you survey firms, actually, you tend to get a little bit higher numbers. About 30% of companies say they use non-compete for every worker. And about 50% of firms said they use non-compete for at least some workers, which could just be the top executives at the company.

And so, you know, when you look at, like, what types of workers are bound by non-compete agreements, you’ll find them all over the, the worker spectrum. they’re used for, for executives, perhaps most frequently, they appear in about 60 to 80% of executive contracts. But, they’re also, common as you move down the income spectrum.

So even for low wage workers, workers below median income for a family of four, for example, you’ll find them, at about, 15% of the of the workforce or so. for tech workers and workers, higher skilled, you’ll find higher, percentages, around 50% for physicians, around 50%, based on some, some, some older data. you know, I think one thing it’s important is that the average worker found by an orthopedic regiment actually is not some high tech worker.

It’s not some executive. Because even though those workers are more likely to sign non-compete agreements, they make up such a small sliver of the workforce that the typical worker bound by a non-compete agreement is actually an hourly paid worker who makes at the median about $14 an hour.

Matt Bahl:
Yeah, and I think that was one of the real eye opening insights, particularly as the FTC, the Federal Trade Commission, moved through the rulemaking process. You saw some of the public letters coming in from workers, and then the examples were really eye opening. So, for example, one of them was a person who works for a gravel company, and this individual had an idea about how they saw a path for innovation. But they had signed a non-compete and so they were prevented from bringing this idea and this innovation to the market because they felt bound by this. It’s also interesting that you had started by noting employment contracts. Well, Jimmy John’s workers don’t have employment contracts. They’re at will employees, but they may have signed a piece of paper as part of like employee onboarding or some other mechanism where, to use a legal phrase, to consider was your continued employment is predicated upon you signing this agreement.

So I think even when people think about this is not as though Jimmy John’s workers are negotiating their own salary and things like executives maybe do. These are folks that are working primarily paycheck to paycheck, trying to make ends meet. A piece of paper is put in front of them, and they sign it and, you know, so how have you seen workers think about, like, when they’re presented with a sheet of paper that’s a non-compete.

How are workers navigating that? What is your research showing us about this?

Evan Starr:
Well, so we’ve learned about this in a few different ways. One is that we’ve asked workers directly, did you negotiate over your non-compete agreement? And so among those who have signed a non-compete, about 10% of them say that they have negotiated over the terms of the non-compete or for other benefits in exchange for signing. So most workers are not negotiating over their non-compete agreements, based on what they what they’ve told us.

The other thing we’ve done is we’ve asked workers when they were asked, to sign the non-compete agreement, or at least when they first learned that they would be asked to sign a non-compete. And what we learned from that is that, about a third of workers in our sample were asked to sign the non-compete, either on the first day or, or after they started, work already, in which case, they didn’t really have any opportunities to to negotiate.

They’d already joined the company. Maybe they moved their family. And the non-compete was was thrust in front of their face at that point in time. And and as you can imagine, almost nobody negotiates. and that in that circumstance. The other way that we’ve learned about this is actually from a very recent experiment that I’ve run with, Bo Cowgill and Brandon Friberg at Columbia University, where as part of the experiment, we hired, we tried to hire about 14,000 workers.

So we made them job offers. And then those job offers we randomized whether we asked them to sign a non-compete agreement. And so some workers, got enough to put on that contract. Other workers did not have a not to get agreement in their contract. And we then because we were the ones working sending them the contract, we programed it such that we can see how long they spent on every page of the contract.

And so the non-compete appeared on page seven, and we found that about 33% of workers skipped it entirely. They didn’t read the page seven at all. And then it’s, about 75% of workers spend less than 10s reading page seven. And so I can tell you that most workers do not read these contracts. The ones that do see the non-compete clause in this experiment, they do, they are deterred by it.

But most workers, when they see this contract, they just tend to sign it.

Matt Bahl:
Yeah. And you think about as you highlight the beginning, the average worker subject to this, you know, an hourly paid worker making $14 an hour. These are folks that are often just trying to get to the next paycheck. And so to expect them to be experts in navigating the complexities of a non-compete system, really, I think underscores what a disservice Non-compete. I have been to a lot of workers who simply don’t have the capacity or time in which to fully evaluate these trade offs. And then the moment at which they’re presented is sort of I’ve already accepted the job. Maybe I’ve said no to other jobs. I’ve lost any potential bargaining power that may have even a company that so taking just a step back, how did you get into studying non-compete? What what drew you to this field? And and give us a little bit about your background.

Evan Starr:
I was a graduate student in economics at the University of Michigan. Partway through my PhD. And as part of a PhD, you’re trying to come up with new knowledge that that changes how we think about the world. And, I really stumbled into non-compete agreements through the, the advice of an advisor. And I was interested in the time, in a question about what happens to, how to managers manage attention when clients become loyal to their employees.

So if you are, an auto mechanic and your employee, your customers would follow you to the end of the Earth. then how would a manager manage you? Because, did they give you a little bit more money to keep you? because if you do leave, then the business is going to lose a lot of business because of the clients following you everywhere.

So it’s interesting how managers manage this tension because they can’t control the clients. And one of my advisors, Francine Lafontaine, who was actually one of the former, chief economist at the FTC, said, well, have you thought about non-compete? So that’s one way to solve this problem. This is around 2011 or so, and I did never heard of that term before and she said, go talk to this guy. Norm Bashara. And Norm is a professor at the University of Michigan in the business school who was doing legal research on non-compete. And Norm pointed me to this literature, and I thought, okay, not only is this one way to solve this problem of an idea of client loyalty, which is that you don’t solve where the clients go, you just prevent the employee from moving.

But I learned by reading this legal literature on non teammates that documents dated back 600 years, that some people attributed the rise of Silicon Valley to California’s ban on non-compete. Economists tend to believe that whenever workers do something voluntarily, that it would be in their best interest. Because why would you agree to a contract that hurts you? And so there’s this tension, which is that some people say markets are terrible. Other people would not. This is really good. And I just thought, wow, what do we know about non-compete agreements? And have we made progress on this debate over 600 years? And the answer was that we had we there were a few studies by Matt Marks, a few studies, a few empirical studies by Sorensen and Lee Fleming. But we didn’t know how common non-compete were. We didn’t know how banning them would affect workers or firms or markets. And that really set the agenda for the last decade of my research.

Matt Bahl:
Yeah, I definitely want to talk about innovation in the context of Silicon Valley and California. And interestingly, Oklahoma has long banned non-compete as well. So it’s not as though this is just coastal tech places. These are places all around the country that have, even before the FTC’s rule had placed, restrictions on the applicability and use of non-compete, and then certainly some of the economic routes are really interesting.

But I want to on the economic piece, I want to go into wages. You know, we have seen over the last 40 years, real wage growth really stagnate for the vast majority of the US population. And one of the things that was in the FTC rulemaking documents, and certainly some research that you and your colleagues have been putting out, is the effects of, the effects on wages of restrictive covenants like non-compete. How do you think about what this ban may do to wages of workers?

Evan Starr:
It’s such a great question. Matt, and the way that we’ve tried to study this is two ways. One is that you survey workers and you see who’s bound by not to be and who’s not bound by not giving. And you compare their wages. and it turns out if you do that, you will find, you will find that workers with non-compete agreements earn more than workers without non-compete agreements.

And it turns out this is this is almost certainly due to correlation and not causation. And the example I like to give is that, if you wanted to know if hospitals make people sick, and the way that you tested, that was by comparing people who went to the hospital, and compare that to people who did not go to the hospital, you would inevitably find that the people who go to the hospital are sicker than the people who did not go to the hospital. And of course you would, because the reason they went to the hospital was that they were sick. And so this is, this is the same correlation here. So what do you want to do? You know, in the hospital example, you want to take someone who’s going to go to the hospital and then somehow observe them in a world where they didn’t go to the hospital and see what that difference is. Right. That’s what you’d like to do, but you can’t. So the same is true with non-compete. So they want to take a worker who’s got a knowledge beat and figure out what would their earnings have been had, did they not have a non-compete agreement? And this, comparison of workers with versus without not means is just not a good comparison, because workers with non-compete turned out to be very different on a whole variety of factors.

And so what we’ve done instead is exploit state policy shocks. So we’ve studied what happens when states ban non-compete agreements for low wage workers, like in Oregon. In 2008, we studied what happens when when states ban not so high wage workers, like in Hawaii in 2015, when Hawaii banned non-compete only for high tech workers, or in the state of Washington when they banned them for workers making under $100,000.

And all the various bans that we’ve had over the last ten years or so, and approximately a dozen states that have banned them for workers of different types. And if you if you study those state policy shocks, what we’re effectively doing is we’re going to we’re going to compare. We’ll take the Oregon example, Oregon in 2008 ban non-compete for workers earning below the median income for a family of four and for all hourly workers.

And so what we do in that study is very straightforward. All we do is we look at earnings of hourly workers in Oregon before versus after the ban, and we compare them to hourly earnings of workers in neighboring states, which did not pass any such policy over this time period. We call this difference in difference in differences. And the econometrics lingo.

And, and as long as you believe that the states in which the ban did not happen map out the trends that would have happened in Oregon had they not passed a ban, then you can use this approach to estimate causal effects. And if you do this, what you’ll find across basically all of these bans is that after these bans come into play, mobility tends to rise in some cases, by 5%. Other cases 11% or 17% at the highest is what we saw. And that we also find that wages tend to rise on a magnitude typically around 2 to 4%, depending on the particular specification. And so when you bend down to beats, workers move more frequently. Wages go up. And this has been replicated across several studies at this point.

Matt Bahl:
What effects have you seen on removing non-compete around things like innovation entrepreneur ship, economic growth? When we give people freedom of mobility and we take away some of these restraints, what does that done for economies and what does that done for human flourishing and well-being?

Evan Starr:
Yeah, it’s such a great question. So let me let me first, talk about the purpose of non-compete. So in the states that do enforce non-compete, why why do they do it? The reason that they do it is because the non-compete is are purportedly protecting a legitimate business interest, which is typically, a trade secret, a client list, a client relationships or other sort of company goodwill.

Specialized training is one example. And the idea of it is that suppose that I am, I’m Coca-Cola, and I’ve hired Matt as my brewer, and, I, I as Coca Cola have a formula for Coke, and I need to share that with Matt. And, Matt is, is, is a nice guy, and he’s going to use that formula. And I got to trust him with it. But what if Matt takes that formula and he walks across the street and he starts Coca Cola two with that formula? Now, Matt didn’t pay me for the value of that trade secret, which he’s just taken. And, and so, Coca Cola, who wanted to create the trade secrets is going to be harmed. And some might say that’s unfair competition. And so we we do have a body of law in this country related to trade secrets. We have other ways to protect trade secrets, but non-compete agreements are one way to ensure that Coca Cola has the proper incentives to create that trade secret, the formula for Coke, and to share it with Matt so that he can do his his job and brew delicious Coca Cola. Okay, so that’s the basis by which non-compete are enforced in the US. They have to be protecting the legitimate business interest and they can’t unduly harm the worker or society. And that’s the typical test that most states apply. And again, the threshold question in my mind is whether or not those, non-compete agreements actually necessary to protect those interests in the first place.

When you do have other tools, like NDAs and trade secret law. And I’ll just give you one quick example. what if, let’s say NDAs are actually also very effective in protecting Coca-Cola’s formula? Well, it turns out not to be to almost always comes, come along with NDAs. It’s very, very rare to see a non DP without an NDA. Imagine the NDA is effective. Then Matt has this NDA. He’s not going to share the formula for Coca Cola. So what is the non-compete then doing? All it’s doing is it is preventing Matt from taking jobs or started companies that he would have started. And there’s no extra protection added from the non-compete agreement and just,

Matt Bahl:
Just so that we’re clear, NDA refers to non-disclosure agreements, which is another type of restrictive covenant that prevents an individual leaving a company from disclosing certain protected information within that company.

Evan Starr:
Absolutely, yes. Thank you. Thank you for that. so so the question really is, I don’t know if it’s even necessary to protect this information. And lawyers will argue that they are, because NDAs and non-disclosure agreements and trade secret law, they operate after a secret has been shared and the damage has been done. A non-compete is a prophylactic measure that works ex ante by preventing the move in the first place and thereby preventing that, secret from being shared.

Okay. So, so when it comes to innovation, the people who, who are going to want to argue that non-compete are good, they’re going to make these arguments. We need non-compete because we need to protect investments in valuable information. We need to protect the ability to share that information freely within the company. Announcements are going to serve that purpose.

Okay. So, on the flip side, you might wonder what happens then. We’ve been on debates. If you believe this argument, you would believe that when we get rid of non-compete agreements that firms would invest less and the innovation would go down. Now, that’s actually the opposite of what we see. We see it when there’s several studies now which look at what happens when, let’s say you enforce, not reach more vigorously. And the results of these studies, won by Tait run us and Morocco, another one by, Matt Johnson. Mike Ellipsis and Allison Pay. They both find that when you enforce non-compete some more vigorously, the innovation actually falls. And it’s not just innovation for, big companies. It’s innovation for small companies, for startups. You might wonder why innovation falls, right.

And when when we enforce non-compete more vigorously, firms actually do invest a little bit more based on these studies. It’s that the other inputs to innovation go down. Okay. So it might be that and the case monopolies are enforced. Well, you can’t hire the right people that you want to hire. You can’t get the ideas that you were going to work on in the first place, because workers are not moving across firm lines. You have new companies that aren’t forming to pursue new innovations. And so the result is that even though one dimension of, of innovation firm investment rises, the other inputs go the other direction. And the net effect is a reduction in innovation. At large.

Matt Bahl:
What are these other inputs into innovation? What are the things that, you know, we may see by removing that barrier of non-compete that would help these other inputs thrive?

Evan Starr:
Yeah, yeah, a great a great example is from the history of Silicon Valley. And of course, there’s a big debate over whether California’s ban on non-compete clause, the rise of Silicon Valley. I don’t read I don’t want to get too much into the weeds of that debate. But if you just look at the history of Silicon Valley and the companies that formed it, there’s a famous company called Fairchild, and there were so many spin outs of Fairchild, which is a semiconductor company, where employees of Fairchild went on to form their own semiconductor companies. And those companies then formed many of the companies that were the basis of Silicon Valley. And, those if you if you could influence non-compete. So those companies may not have been founded in the first place. And so I think that is the, the, the idea here is these companies had new ideas to go pursue innovations that they wanted to work on, that they felt like they couldn’t at Fairchild. And they went and go on and they they then start Silicon Valley. And so absent that ability to, to start a company, we may not have seen those innovations in the first place. So that was a some of the inputs. The other ones are, you know, what happens in a labor market when nobody’s moving around, let’s say, not to be too super common. Nobody can move. who if you’re going to move and and so those your company wants to go in a new direction, pursue something. well, how are you going to do that? You can’t hire the expertise that you need to move in that new direction. You either have to build that expertise internally, which maybe you do by acquiring a company, because you can’t actually hire the workers yourselves. Right? or, you know, you you have to try to do it, but maybe you don’t have the ideas because ideas are not flowing in this industry, because workers are not planted in this industry when it comes to freight, to move, is it better for the firm to have that, or is it better for the worker to have that? And I think the evidence suggests that when the workers have the freedom to move, to pursue their own ideas, to get the gains from their, their innovations, they they’re the ones who are kind of pushing innovation more so than giving that right to firms.

Matt Bahl:
Yeah. You know, it’s interesting, you know, Lina Kahn has come in and really re-energized the FTC, both in terms of its antitrust agenda, but also in terms of bringing some of these concepts about, you know, sort of economic mobility and freedom as the restriction on those as so prima facia anti-competitive. And obviously, the FTC has cited much of your and your colleagues research in doing this.

But, you know, how do you think about non-compete in the broader arc of sort of, monopoly power of some of the other challenges that are starting to percolate to the surface from the FTC? And it’s just as we look at, you know, some of the recent examples where we have these large monopolistic enterprises, and the sort of lack of competition maybe impacting the investments in things like safety and other components. How do you think about the non-compete in the broader context of sort of antitrust and anti-competitive practices?

Evan Starr:
Yeah. So let me let me say two things here that I think are important. So one is that the FTC likes to cite this study of mine, with Justin Frank and Ross Krieger, while on the point of this study is, could there be externalities to not to the mass use of non-compete agreements? And so the idea is, let’s look at a labor market where non-compete are really common. 50 or 60% of workers in a labor market has a non-compete agreement. what what happens to the other workers, the other 40%? And that labor market, are they somehow affected because maybe the whole labor market is slower moving. Right. And basically, the results of that study is that when you have the mass use of enforceable non-compete agreements, the workers who don’t have non-compete agreements also suffer. The whole labor market, receives fewer job offers, has longer tenures as lower wages. And and so this is I think the the point about that Lina comments about affecting competitive conditions, which is that, you know, effectively the mass use of these agreements in parallel, while any single one non-compete may not move all that much, the mass use of them in parallel has degraded the competitive conditions in the labor market, which affects everybody.

So I think that’s the first point. The second point is where the rubber really meets the road. Here is when it comes to like executives. So how can you get behind any non-compete, even for executives, if you look to the north, Canada a few years ago banned non-compete for everybody but executives in the Ontario province. And so, there is some question about like, should you just carve all executives out? You know, executives have legal teams to negotiate. They also have access to all of the firm’s valuable information. So why would you ever want to then not compete for executives? Well, the logic isn’t that executives are going to be hurt by non-compete agreements. There actually is some evidence of that. But but you’re never going to fly on that, on that. So the argument is, that non-compete agreements actually cause externalities that the rest of us suffer from. Okay. So the, the there’s a paper, by Leanne, she at Carnegie Mellon, which studies the executive labor market. And her point is that when two parties come together to contract, they choose terms of the contract that maximize their benefit to their joint benefit. But when there’s only two parties who are contract, they choose terms that are too restrictive and that extract surplus from other parties. So in the case of an executive, if an executive signs of non-compete with firm A and firm B comes along and wants to hire that executive, even though that executive might be a much better fit at firm B and might be much more productive and innovative, the non-compete agreement prevents that move from happening, and it is therefore a firm B that gets hurt because of this non-compete agreement.

Okay, Mike ellipsis and Mark Triplett make a similar point, which is that an executive can be seen as a potential competitor among all potential among all competitors, an executive is the most likely to be a potential competitor. And so some people want to say non-compete are vertical restraints, and that they operate in a vertical chain from the employer down to the employee. But if you think of the executive as a potential competitor, then as you think of the executive as like the executives, maybe maybe making the following choice, maybe in a series I’m going to start my own company. And if I go start my own company, I’m going to increase competition in this market. And if I increase competition in this market, that’s going to reduce prices for consumers, and the consumers are going to be better off. Okay, so what if so, what if instead of competing, I agree to this non-compete and I agree that’s great. But then I actually bargain for some share of the rents that would have gone to consumers instead, because prices now can can stay high. And so in this sense, you’re you’re giving the non-compete is basically a way to extract rents from consumers by giving the firms some monopoly power.

So this is this is the other sense in which there are externalities. There are costs to other firms. There are costs to, to consumers. and let me just begin with one with one, anecdote here, which is my favorite. And that as a lawyer, you I’m sure you know this, but, there’s only one job in the whole United States for which non-compete agreements are banned. And that’s the practice of law and model. Rule 5.6 of the, code of Conduct prohibits attorneys from entering into non-compete agreements. And if you look at the ABA’s justification for that rule, it actually has a has a little bit to do with their autonomy to practice. But but the bulk of it is that when an attorney agrees to a non-compete agreement, they might have to stay out of the market because they might have to, to sit out, before they join another company. And if that happens, it’s their clients who suffer. Their clients don’t get to access their attorney of choice. And so the clients bear that cost. The same argument is made with doctors and other sorts of service occupations all the time. And so this is the same thing. It’s an externality. The customers, the clients, the patients, they were not part of the non-compete when it was signed. They didn’t have a choice. And yet they’re the ones who are going to suffer the cost. And so that’s how you get to an executive ban on non-compete agreements.

Matt Bahl:
Yeah, I mean, there’s eight hours worth of discussion there. And I really hope that our audience will will dive into some of the research and studies. We’ll have some links in the show notes so that folks can do that. You know, one of the big things that we hear is, hey, by removing these non-compete, it’s going to disincentivize me as an employer from investing in training my workforce. What evidence do we have of that? And how do we think about this potential disincentive to invest in training and skill based work for for workers across the country?

Evan Starr:
You know, I think and it’s it’s a it’s a really excellent question. And I think that, from the employer perspective, you can you can understand it and that if you, if you provide, a lot of cost to train a worker, and that worker leaves, then, you know, you don’t get to experience any of the returns of that investment anymore. And so this is always true. This is true with non-compete. That’s true without non-compete agreements. And the question is what what is the marginal value of a non-compete on, on incentivizing more of this training? And the first thing I’ll just mention, actually, from a legal perspective, which is that in no state and no state, would they enforce a non-compete agreement on the basis that the firm has provided general training. So and a general fund is not a legitimate business interest in any state? In fact, specialized training as legitimate interest only in a few states. And so, by and large, this training argument doesn’t even pass legal muster by existing standards. Okay. at the same time, I think the first reaction I always have to this is that non-compete agreements are very blunt way to protect training and they’re generally overbroad.

And I’ll give you a specific example here. Suppose you take a worker and you have to pay, let’s say, $5,000 to train them up, and then they start producing. And over the course of two years, they cover their training expenses of $5,000. Okay. If that was the case, then why should a non-compete agreement still be applicable after two years? A non-compete agreement, as it’s currently written in most cases, applies regardless of how long you’ve been there, regardless of whether or not you’ve paid back any initial training expenses. And so not two bits are still applicable after ten years, 15 years, 20 years. And and so there’s a question about, okay, now we’re going to force this now to be on the basis of training that happened 20 years ago, that we’ve paid back 100 times over, that seems it seems insane. There are better tools to protect that training. If you’re concerned about training investments, then what you want to do is, get the worker to agree to a training repayment contract. My students in Maryland love this. their employer pays for an MBA, and if they leave before a few years, then they have to pay back some portion of the MBA. And the students love that deal. They don’t have to pay for the MBA. They get this great training. and so that’s a that’s a way to protect training, investments that is directly tied to the interest at stake, which is training here, which again, no court would would sanction an entrepreneur on the basis of training. I think I’ll be pushing back.

The other argument I hear most commonly is that trade secrets will be at risk. If you’ve been known to be, it’s trade secrets will be at risk and workers will move more, and they will share secrets and companies will will be hurting as a result of this. And so I want to highlight a few of the studies recently that I’ve worked on where we’ve tried to tackle this like head on. Okay. So in the first study we actually ran an experiment and we worked with, we worked with one company and as I said, we hired about we had about 14 we solicited 14,000 workers. We hired about 2000 of them. And what we did is we randomly assigned them non-compete, and then we gave them some secret information to do a task for this company. Okay. And then what we did is we worked with a second company in the same field. And after they finished the task with the first company, we waited a little bit and then we poached everybody, which we reached out to, everybody that was hired, the 2000 people that were hired and the company that’s doing the poaching here, everybody could work for that company. And do the task that companies requested simply by sharing the secret information that was given to them by the first company. Okay. So that’s the setup. And so the question is, and everyone has an NDA. So some workers at NDA, everyone has an NDA and some workers have a non-compete on top. And the question is, if I give you an additional non-compete, does that reduce the extent to which you share secrets? And the answer from the study is no, it doesn’t. In fact, the NDA is very strong, especially after the firm reminds the workers of their obligation. So now have to be doesn’t have anything extra to the protection. Okay, so that’s one study. The second study is looking at what happens to trade secret litigation. Astronaut tickets are banned. The argument goes if you ban non-compete workers are going to move, they’re going to share information. And without non-compete firms are going to have access. They’re going to have to use trade secret litigation, to protect themselves. And that’s very costly. And lawyers are very concerned about that. There’s lots of discovery. So all we did is very simple. We just looked at the non-compete bans we’ve had in the last decade, about a dozen of them. And we looked at what’s happened to trade secret litigation across all the states. And the answer was that after you ban non-compete, trade secret litigation is about the same for the next five years, and then it actually falls and actually drops. It doesn’t it doesn’t go up as everyone is claiming it will, because that’s the second piece of evidence.

And the third one is another study in the state of Washington where they banned non-compete. So workers making $100,000 or less. And the idea of this study is that we can use this sort of arbitrary threshold to understand whether firms value the ability to enforce non-compete. Okay. So think of it. This might take a worker who’s making $99,000 before this law comes into play in the state of Washington, you could potentially enforce this workers non-compete. It has to be reasonable along the typical guidelines. But in 2020 and afterwards, if this work is still making $99,000, the firm cannot enforce that workers non-compete. A judge will throw it out. You’re under the threshold 0% chance 0%. But here’s the thing the firm doesn’t have to leave that worker’s wage at $99,000. It’s a they could choose to give that worker a small raise to get them to the threshold. Right. It’s a voluntary choice that the firm can choose. And so when we look at the so the question is why would a firm give that worker a raise. They don’t have to. But they would do that if they valued what the non-compete enforceability was giving them, which is the protection of trade secrets. It’s giving them the protection of company. Good. Well, and so the empirical implication is we should observe more workers earning $100,000 or just above after this threshold comes into play, because firms are giving workers raises. And so that’s the empirical test. And so we got data on every, worker in the state of Washington for a 20 year period. And we’re looking at after this law comes into play, do workers appear to be making more than the threshold afterwards versus before? And the answer is no, not in any industry. Do we find any evidence that firms are giving workers raises to, have the ability to enforce their non-compete agreements, including in professional technical services, including in manufacturing? And so I joined the Washington State Bar Association, and we surveyed Washington employment attorneys, and we said, why is this happening? And they told us that for workers at 100 K, you typically don’t have to go to court. And the other tools suffice NDAs agreements not to solicit clients or coworkers. And they’re not they’re not willing to pay for them not to be. So for these workers. Now that’s it. So $100,000 is the 80th percentile of earnings. So that’s not the highest. But you know that’s that’s still a big chunk of the population.

Matt Bahl:
I want to go back to, you know, thinking about the basis upon which companies now need to compete for work and workers, because I think one of the big things we at the financial network have been really, focused on is how do we help organizations compete for workers on the basis of the value and the humanity and the dignity they bring, as opposed to the risks that they pose and managing the risks and not actually driving business?

And to me, this non-compete layer has always been, sort of a, it’s been a red herring. And I can say this both as a recovering labor and employer, but also someone who has signed non-compete before. and to me, it’s really it’s really this thing of like the new basis upon which companies are going to have to compete for workers on is how do we ensure we’re, you know, bringing talent in work or keeping that talent to be successful? And we’re creating a workplace where they want to stay, as opposed to getting folks there and saying, well, you can’t leave because of this artifice of restrictive covenants. So even if there is a better fit or better job, you can’t go do that because we’re protecting these interests. So how do you think, just as a practical matter, how this is going to change the way that companies need to compete for talent and for the labor pool?

Evan Starr:
It’s a really great, great, good point. And let me let me flip it around just briefly, which is that companies often say we can never find workers, right? We need to retain our workers. Retention is such a problem. We have to retain them. We can’t. It’s hard to find qualified workers. This is where I think companies actually have it backwards, because they think they need non-compete agreements to retain their workers.

But the truth is that as workers out in the market are all bound by non-compete agreements, then that’s why you don’t have access to these workers, right? And so when when you have a ban on non-compete agreements, yes. Like you might suffer a little bit because the workers who are unhappy at your company are probably going to leave, and that’s possible. But what I opens up to you is all of the other workers that are out there in the market, and there might be a great fit at your company and then might come and be happy. if you have a bad culture and no one wants to work at your company, then that that, then why are we keeping those workers there in the first place?

So I think I totally agree with you that when workers are free to move it, it forces employers to figure out how are we going to recruit workers, how are we going to keep them happy? Pay them well, give them incentives to be productive and non-compete agreements, actually, you know, sort of counterintuitively, if everyone else is using them, make it actually harder for you to bring in those workers.

Matt Bahl:
Yeah. I mean, there’s a study. Maybe you’ve done it, but there’s a study that I’ve always thought that would be interesting to do, which is, you know, particularly given that the most common worker subject to a non-compete is an hourly wage worker making about $14 an hour. Right. So these are folks where they’re often making employment decisions based upon, the wage rates, they’re making employment decisions based upon. What do I get the best opportunities to grow? They’re making very practical determinations. I mean, our own research has demonstrated that those who are the most financially vulnerable, paying inordinate amount of their income on interest in fees just to get by. And so a quota raise for someone who’s, maybe also paying, for a payday loan or some other high interest credit card or subject overdraft fees, that’s all that is as rational a decision as you could possibly make but it also then sort of puts the onus on companies that do rely on hourly wage, primarily frontline workers, to reimagine, the value prop they offer.

And I think you’re certainly seeing some wage growth. You know, the Oregon example is a good one, but I think there’s a opportunity for a re-imagination within these companies around how do we actually think about and value our people, not some fancy corporate comms message that is just really fancy words that really mean basically, you know, nothing but competing for workers at all levels of the economic strata. And that, to me, is a place where there’s really exciting opportunities because we just continue to see, particularly as our economy continues to change. There’s more service industry, there’s more trade work than we’ve got. And so how do we think about the future of these jobs in the context of freer mobility within the talent pool? So that’s one study maybe someone’s done. And you can you can enlighten us. but the second part of this question is given where we are, and let’s assume the legal challenges don’t curtail this. and I think there’s some evidence to suggest that this has got a stronger chance of going through than other administrative rules, even with the current composition of the Supreme Court.

You know, there’s a major case doctrine which we won’t bore people with. So there it’s you know, it’s there’s some tricky questions, but ten years from now, if the non-compete ban is upheld, what does our economy look like? Or what do you think our economy looks like ten years from now?

Evan Starr:
Yeah, it’s a great question. My my guess is that, if this ban goes through, we’ll have higher job mobility, higher entrepreneurship rates, higher wage growth, most likely more competition and product markets and, and probably, lower prices for consumers. that’s based on the evidence cited in the report and elsewhere. Let me just say one other thing, which I think is that the evidence is citing the report, all comes from these state policy shocks.

And I think there’s an argument to be made that a federal policy, would actually have substantially more power. And, and part of the reason is because even in California, where non commutes have been banned for over 100 years, firms still use non-compete agreements. And what they were doing for many, many years is they were using choice of law clauses which stipulated another state’s law.

So it’s like you’re in California, but if you violate this contract and you get sued, we’re going to apply New York law or Florida law or whatever it is. And and so, you know, those clauses still existed. And there’s significant amounts of research now that even unenforceable non-compete agreements that no court would sanction can also chill worker mobility.

And that’s true. And some of this observational studies, it’s true and experimental studies and that it particularly effects workers who cannot afford to get out of even a frivolous non-compete lawsuit. And so this is why the FTC rule, by getting rid of non-compete from employment contracts, removes the ability of employers to threaten their workers over the few sentences that that the non-compete was in their employment contract.

And so, most likely, we’re going to see larger effects and those we’ve estimated and these in these state level studies.

Matt Bahl:
Yeah. Ladies and gentlemen, Professor Evans star, thank you so much for spending time with us today on Emerge Everywhere.

Evan Starr:
Thank you Matt.

Matt Bahl:
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