Dec 10, 2019

Workers locked down with noncompetes

Dion Rabouin, author of Markets

Illustration: Sarah Grillo/Axios

Nearly half of U.S. companies have required at least some of their employees to sign noncompete agreements, a study released today from the Economic Policy Institute finds.

Why it matters: The agreements force workers to sign away their right to take jobs in similar fields, often for months after leaving a job. These are increasing income inequality and helping hold down Americans' wages, EPI analysts say.

  • Previously a rare clause, the number of companies using noncompete agreements has swelled, as they are now being used in the contracts of "janitors, receptionists, customer service workers, fledgling journalists, even employees of a day care center."

What they're saying: “Noncompetes limit competition among businesses and stifle workers’ wage growth — given that changing jobs is where workers often get a raise," says study co-author Alexander J.S. Colvin, a Cornell University professor.

  • "The rise of noncompetes is likely an important contributor to stagnant wages and declining job mobility in the United States in recent years.”

By the numbers: The study estimates that somewhere between 36 million and 60 million private sector workers in the U.S. have signed noncompete agreements, with 49.4% of businesses surveyed saying that at least some workers were forced to sign them.

  • The wide range of people with noncompetes is due to firms that only require some employees to sign not specifying how many, an EPI spokesperson tells Axios.

Between the lines: The clauses were first introduced as a way to prevent upper-level employees from taking trade secrets to rival businesses, but have since proliferated to low-wage and low-skill workers.

  • More than a quarter (29.0%) of responding businesses with an average hourly wage below $13.00 require noncompete agreements for all workers.
  • The survey also found noncompetes were used for all workers in 27% of workplaces where the typical worker has only a high school diploma.

The intrigue: A similar study in 2014 found that just 18% of workers had noncompete agreements, compared to roughly 28%–47% of private-sector workers in 2017.

Of note: Data was collected from March to July 2017 from 1,530 establishments with 634 complete answers, yielding a 95% confidence interval for top-line estimates of ±3.9 percentage points. More details here.

Expand chart
Reproduced from Economic Policy Institute; Table: Axios Visuals

Noncompete agreements are widely used nationwide, EPI notes in its study, with more than 40% of businesses in each of the 12 largest states having at least some employees covered under the agreements.

  • That includes 45% of firms in California, despite the fact that noncompetes are unenforceable under California state law.

What they're saying: "As employers increasingly use restrictive contracts like noncompetes and mandatory arbitration to undermine workers’ rights, there is an urgent need for stronger worker protections, including prohibiting noncompete agreements," says study co-author Heidi Shierholz, a senior economist and EPI's director of policy.

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