Economic Perspective: Non-Compete Contracts

MARY WALDEN:

“Today’s program looks at non-compete contracts. Mike, most workers like to be able to quit their job, and take another job they like better or with better pay, but I understand this isn’t always possible. Please explain.”

MIKE WALDEN:

“Well it has something to do with non-compete contracts. Now I’ve been aware of these contracts for a long time, and particularly I know of people in the news business, local news, who if they quit their job a particular station in the city they can’t go get a similar job at another station in that same city. And you can understand perhaps that.”

“But I was not aware when I did the research on this that 20 percent of all jobs in the country have some kind of a non-compete clause in them. And again, what this means is that the worker can’t quit their current job, and take a similar job with a rival firm for a certain number of years. Now there are two reasons given by firms as to why they want these.”

“One: they may have given that worker who quits specialized training so they don’t want that training to be used by a rival. And secondly the worker may have some specific knowledge, inside knowledge if you will, of that firm that the company does not want rival firms to know.”

“Studies that have looked at these non-compete clauses say, ‘Yeah, that explains some of them, but a lot of them there’s no obvious reason for that.’ For example, there’s a sandwich shop chain, I won’t name it, who has a non-compete clause for their workers. And I used to work in fast food, and I thought, ‘Gee, I didn’t know anything that I would share with a rival.’”

“So these have become very extensive, and studies do show that the workers pay for that. Their wages are going to be lower if they’re working under a non-compete clause. Now there is one upside. Those same studies have shown that firms that have non-compete clauses for their workers actually invest more in the company. And that makes sense that they’re willing to invest more in the company which translates to investment in their workers because they know they’re able to keep those workers more.”

“Many states now, though, are considering curtailing by law the use of non-compete clauses. So something that I did no know was so pervasive. Something that every worker probably ought to look in to.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.