FTC Fails to Show Its Work

In its announcement of its proposed rule to ban non-compete clauses in all employer contracts, the Federal Trade Commission (FTC) justifies its drastic action by claiming the move will positively affect Americans’ wage growth. In its press release, the agency states “By stopping [non-compete agreements], the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”

That is a large effect but not one the FTC backs up with any statistical evidence.

Let’s look at the figures separately. There are about 159 million Americans employed as of the end of December 2022. If there are 30 million of them with non-competes, that’s about 1-in-5 workers. There is no way to know for sure whether that figure is accurate because the FTC provides no source for that claim other than itself.

By the numbers

It follows that the starting point for calculating the $300 billion in higher annual wages is those 30 million workers with non-competes. But since there is no way to know if that 30 million is accurate, the foundation of the wage benefits is likely grossly overestimated.

We also do not know whether the FTC includes the benefits that non-compete agreements confer on employees, and subsequently subtracts them from the wage gains it calculates. Failure to do so would suggest – at best – that the agency is being intentionally misleading about the accrual of associated wage increases with its proposed rule.

For instance, workers signing non-competes give up some of their future career flexibility and logically want compensation for that. This effect will tend to push up their annual wages. In a world of no non-competes, wages will tend to fall by the amount this effect was bolstering them. An accurate assessment of the benefits of non-competes would need to account for this negative effect.  through which workers gain transferrable skills, if they believe those workers will stay at their firms for longer periods of time. Without non-competes they will do less of this investment, which too will impose a cost on workers. We don’t know if the FTC included this important downside to abolishing non-competes in its estimate.

Impacting all workers

Non-competes don’t only just benefit the workers that sign them. Workers within a firm – even those without non-compete agreements – are hurt by the lack of them the FTC’s proposed rule would require. When their former coworkers leave and take important proprietary information to competitors, it hurts the competitiveness of their former employer. The workers remaining at the former company see their wages suppressed. This is another downward pressure on wages that should be included in a wage analysis of non-competes.

Abolishing non-competes is not all upside for the mobility of workers either. While workers may be able to move jobs more easily, employers may be less willing to hire. Employers value trustworthiness in employees and want to know they will not share proprietary information with competitors should a worker leave. A non-compete agreement contractually obligates workers to stick to their word. In the absence of such a binding contract, employers will need to do more background research on potential employees so they can be extra sure the person meets their standard for trustworthiness. This will take time, which will delay offers and slow hiring, imposing another cost on workers. Again, this cost needs to be reflected in the calculation of the benefits of abolishing non-competes. But there is no way to know if the FTC took it into account.

Lastly, the FTC rule would reverse existing non-compete agreements. Retroactively changing contracts exacts a large economic toll because it calls into question the sanctity of all existing contracts. This creates uncertainty throughout the economy that slows investment, which lowers wages. This too would impose a cost on workers. Whether the FTC included that effect in its calculation is of course unanswerable.

Bottom line

A sweeping regulation like banning non-competes should be based on sound data that is widely understood and vigorously vetted. The data the FTC uses to argue for its ban of non-competes is none of those things, and as such should not be relied upon as the FTC makes the case against the agreements. The lack of economic rigor wouldn’t be surprising as part of the  FTC’s analysis in support of this rulemaking,  unfortunately, it is consistent with Chair Khan’s efforts to divorce economics from its approach to competition policy and antitrust enforcement.