Why Non-Competes Are Anti-Competitive

From FEE.org:

Non-Compete Agreements Limit Competition

Competition is the life-blood of a free market economy. The pushes and pulls of resource supply and demand work to efficiently digest risks and opportunities in the economy.

Non-compete agreements limit competition in labor markets by artificially decreasing labor supply creating situations of sub-optimal labor use. Workers are bound to jobs, working environments, and pay levels that are unnatural to the wider economy and businesses are unable to hire the best talent to produce the best results.

Non-compete agreements vary in scope but generally are contractual agreements between an employer and an employee governing when and where an employee is allowed to work. Effective non-competes are limited in their temporal and geographic scopes with a narrow focus in what they attempt to accomplish and what knowledgeable parties they are given to.

Benefits of non-compete agreements might include the protection of trade secrets, an increased incentive to invest in worker training and education, and the protection of client and sales lists.

Decreased Worker Mobility

Workers who have signed non-compete agreements cannot test the job market to fulfill their labor potential. After signing a non-compete, workers have to either stay at their current job, not work, or transfer outside the confines of a non-compete that likely encompasses the areas they are most skilled and experienced.

Because workers can’t test the market for the most preferable jobs, they are more likely to stay at their current job and accept inferior working conditions and lower wages.

Normally in a free market, we would argue that if an employer does not pay market rates or offers bad working conditions they will be naturally pressured towards more efficient outcomes. Whether that is in raising their standards, becoming less successful as employees leave, or reshuffling who they employ. With non-competes, however, the threat of workers leaving is lowered because their alternatives are artificially limited, which decreases the market pressures on companies to improve.  [read more]

The article says: “Non-competes benefit businesses by distorting labor markets in the same way that labor unions benefit organized labor by distorting labor markets.”