Imagine being a data scientist in Silicon Valley in the 2000s. Talk about being in the right place at the right time! It's hard to imagine a better time or a place to have that set of skills.
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Or so you'd think.
Turns out, many Silicon Valley data scientists were scratching their heads wondering why they weren't getting job offers left, right and centre.
After all, the tech sector was booming, their skills were in ultra-high demand and they were living in the centre of the universe as far as tech jobs go.
What happened? A class action lawsuit solved the puzzle.
Turned out, some of the biggest tech firms in the world had an illegal agreement in place where they promised not to poach each other's workers.
"If you hire a single one of these people" threatened Steve Jobs to Google's Sergey Brin "that means war".
In economics, wages are fundamentally driven by how many outside options employees have.
If employees have lots of options available to them, their bargaining power is higher and they are much more willing to use it.
When employees have few outside options, their bargaining power is weaker and they get lower wages and conditions as a result.
It's brutal, but true.
The reason the wages of tech workers were lower than what they should have been was because this illegal agreement had removed those outside options.
Turns out, we have a similar problem in Australia.
New research from Australia's leading economic think tank, the e61 Institute, found that more than a fifth of all Australian workers are subject to what are called "non-compete clauses".
These are clauses in employment contracts that stop employees from going to work for a competitor or from starting up a competing business.
Anyone who has ever worked in tech, consulting or industries like pharmaceuticals is very familiar with these clauses.
But what e61's analysis showed is that these clauses are more common than first thought. They can be found in numerous employment contracts, from childcare workers to yoga instructors.
The problems with non-compete clauses are obvious.
First, they constrain the outside options of employees. If employees are prevented from going to work for a competitor or from starting their own business, then their bargaining power is reduced and thus so are their wages and conditions.
The second problem is that non-compete clauses stop (some) new businesses from being created. This is a big problem because it's new businesses which drive productivity growth and innovation and employment for young workers.
Research from the United States has found that the reason Silicon Valley is in California instead of the east coast is because California scrapped non-compete clauses.
Unsurprisingly, President Biden is pushing to ban non-compete clauses across America. Should Australia follow suit?
The evidence suggests that the answer is: yes. But we do need to be clear on why the opposing arguments don't stack up.
One argument in favour of non-competes is that they don't stop the creation of new businesses, they merely delay them. But this ignores a core lesson of microeconomics: thinking on the margin.
Non-compete clauses won't stop all businesses from being created. But, on the margin, they will stop some.
Entrepreneurs weigh up a range of costs and benefits in deciding whether to start a business. Requiring an entrepreneur to either risk being sued, have no revenue for 12 months or try to start the business while working somewhere else is very difficult. Non-competes are one of the biggest costs in an entrepreneurs cost-benefit equation.
Another argument in favour of non-compete clauses is that they protect trade secrets by stopping employees from taking those secrets over to the competition.
The problem with this argument is that stealing trade secrets is already stopped by intellectual property laws and other legal protections. It's not clear why additional protection is required.
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Another argument in favour of non-compete clauses is that employees should be free to bargain away their rights since, if they choose to do so, it must be in their interests.
But this is blind to the disproportionate bargaining power that exists between individual employees and large employers. Australia's markets are dominated by big businesses and, when all those businesses impose non-compete clauses, the idea that employees have any bargaining power at all is a joke.
Another argument in favour of non-compete clauses is that they protect the incentive of businesses to invest in their workers through training and development.
But if non-competes are made illegal across the board, then all businesses are in the same position. If you want to compete with your competitors, they will need to invest in your staff. Sure, your competitors might steal your employees. But you can also steal theirs. Heaven forbid businesses are forced to treat their employees well to try to retain them.
In sum, while some of these arguments in favour of non-compete clauses have merit, the benefits of these clauses are limited and can be addressed through other means. More to the point, the small benefits of non-compete clauses simply do not stack up against the big benefits of scrapping them.
If we want to boost competition, scrapping things that have "non-compete" in their title seems like a good place to start.
- Adam Triggs is a partner at the economics advisory firm, Mandala, and a non-resident fellow at the Brookings Institution and ANU Crawford School.
Adam Triggs
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
