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Noncompete agreements have pushed U.S. wages even lower, says a new Biden administration report

Noncompetes were originally created for jobs with trade secrets, but now many lower-wage workers in the service sector are bound by them.

Noncompete agreements have pushed U.S. wages even lower, says a new Biden administration report
[Source Images: CSA Images]

The Treasury Department has a new report out showing how anticompetitive behavior by U.S. employers has decreased worker wages by 20%, sometimes even more—a remarkable finding.

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The 68-page study, which is a collaboration with the Justice and Labor departments and Federal Trade Commission, puts four individual Biden administration agencies’ stamp on the argument that when companies compete, it’s the workers who win, not the companies, which is why many big employers believe it’s better if they just stop competing. The report breaks down the creative ways they’ve found to do this, from excessive occupational licensing requirements to simply sharing their employee pay rates.

But one of the most flagrant tactics is using noncompete agreements to block workers from taking jobs at rivals (and their cousin, no-poach agreements, which stop employers from hiring each other’s workers).

Noncompetes were originally created for jobs with trade secrets—proprietary tech or some innovative business practice that the company has a keen interest in protecting. But the Biden administration’s report serves as a reminder that, like other controversial practices that have spread lately—such as mandatory arbitration—they’re actually present throughout the entire U.S. workplace now.

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Studies show around one in five workers works under a noncompete today, and twice as many say they’ve been under one in the past. A recent paper estimates it’s 21% of the top one-fifth of income earners, but still very high—8%—among the bottom one-fifth. Additionally, companies with multiple locations are more likely to use noncompetes, meaning the places where most low-wage restaurant and grocery chain, bank branch, and hotel employees tend to work.

While noncompetes can help top earners make more money, if they’re willing to lose some occupational mobility in the trade, the authors write that noncompetes “appear to reduce both wages and mobility for lower-income earners.” Low-wage workers generally don’t negotiate contracts either—they’ll often sign theirs on the first day of work—or have as much access to legal advice as other workers.

Fast-food chains McDonald’s, Carl’s Jr., Arby’s, and Jimmy John’s got in trouble a few years back for their no-poach agreements, which banned one store from hiring another store’s workers, which of course suppresses wages. It turned out at least 32 chains had a version of this; 23 of them said they had removed the clauses after public pressure and letters from 11 state attorneys general. But a recent study found that one in six workers in the broader service industry is still bound by one.

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The report notes that these contract agreements present extra hurdles, on top of employers’ already general unwillingness to raise worker wages. The CEO-to-worker pay gap has widened even more during the pandemic, but layer on employment rules and agreements that stifle competition and worker bargaining power, the report writes, and this creates a worrying situation that “may stymie the drivers of U.S. economic growth.” And data suggest that one way to nudge wages upward is to remove noncompetes: When Oregon recently ended enforcement of noncompetes for hourly workers, their wages climbed by 2% to 3%.

The Treasury’s paper comes on the heels of a sweeping executive order President Biden signed last July to bolster what he called the “competitive economy.” It contained 72 different initiatives, one of which was a directive to ban, or at least limit, the use of noncompetes in hiring contracts. The order didn’t ban the practice itself, obviously, but directed federal agencies like the FTC to draft new rules. That’s a process they haven’t completed yet, but the report also encourages FTC chair Lina Khan to use the agency’s authority “to curtail the use of noncompete clauses and other clauses that may unfairly limit worker mobility.”

Biden has also endorsed a $15 minimum wage, and hiked the starting pay for federal workers to $15 an hour. But those anticompetitive contracts are an irritation to him. When he signed that order, Biden actually made a point to throw shade on hypothetical burger chains that demand workers sign noncompetes, stopping them from taking a better-paying job across town. “Come on,” he said, “is there a trade secret about what’s inside that patty?”

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