The Federal Trade Commission has shifted focus in recent months away from its traditional goal of protecting consumers and toward one of protecting workers instead. Most recently, the agency issued a rule that would ban essentially all noncompete agreements in employment contracts. The rule would forbid new noncompetes, and in existing contracts, only noncompetes covering senior executives would remain enforceable. 

The FTC’s stated aim is to protect workers from unfair restrictions on their ability to change jobs. That’s a laudable goal, but the agency is pursuing it in a misguided way.  Such a sweeping regulation is fundamentally at odds with established U.S. antitrust principles.

Noncompetes prohibit employees from working for a competitor or starting a competing business for a period of time after leaving a job. Traditionally, they were used primarily for executives or employees with access to trade secrets, as a supplement to nondisclosure agreements. In recent years, the use of noncompetes has expanded to cover an estimated 18 percent of all U.S. workers, including even those in low-wage jobs. Their broad use is likely what caught the FTC’s eye.

U.S. antitrust law condemns some business practices as per se violations of the law if they are always, or almost always, harmful to competition and consumers. For example, if two firms agree to fix prices, there is no need to investigate whether their collusion will harm competition. Price-fixing overwhelmingly has anticompetitive effects: it maintains high prices and reduces the availability of goods and services.

Over decades of economic research, law enforcement, and judicial decisions, the field of per se violations has narrowed significantly. While some types of conduct meet the “always or nearly always” anticompetitive test, most do not.

For most kinds of potentially anticompetitive conduct, antitrust law takes a case-by-case approach, assessing specific practices and applying the “rule of reason.” The rule of reason considers the likely impact of these practices, given relevant facts and circumstances, in light of market-specific knowledge, economic research, enforcement experience, and legal precedent. Antitrust agencies block a firm’s conduct when it is expected to reduce output and raise prices in a particular case.

The FTC’s blanket ban on noncompetes brushes aside these nuances in favor of a one-size-fits-all prohibition. The commission assumes that noncompetes are so inherently damaging that they warrant a blanket ban, regardless of circumstances.

But experience in both the U.S. and abroad suggests that noncompetes aren’t always harmful. Most U.S. states that limit the enforcement of noncompete agreements do so for specific categories of employees, whether by occupation or income level. Nearly all states apply a case-specific “reasonableness” test on the specific terms of a noncompete, instead of a per se ban.

Some noncompete restrictions—such as Oregon’s ban on noncompetes for workers making less than $100,000 per year—may have raised wages, at least on average. That might be a reason to support similar legislation in other states, even if the evidence is not definitive. But it’s not much of a reason for a national ban across income levels and occupations. 

We don’t have enough research to determine whether noncompetes are always harmful or nearly always harmful. The best we can do is to continue to monitor research on noncompetes and broader studies of labor-market power—that is, where employers can set the terms of employment unilaterally. If we see labor-market power in most sectors, then we may have reason to believe workers are signing noncompetes without competitive options.

In a recent paper reviewing the economic and legal literature on labor-market power, my coauthors and I found a more complex picture. Studies that directly estimate employers’ wage-setting power have found mixed results. While some labor markets appear to involve monopsonies that can drive down wages, many appear quite competitive, with little evidence that employers can suppress worker pay.

Because it’s generally difficult to estimate wage-setting power, many studies use market concentration as a proxy for firms’ market power. The idea is that, if a market is concentrated, then it is not likely to be competitive. But studies with the best data find average levels of labor-market concentration well below those that typically worry enforcers in other markets.

If we were analyzing a merger, the average labor market would not matter. We would be interested only in market power and concentration directly relevant to the merger. But with its new rule on noncompetes, the FTC isn’t investigating a merger or any other type of business conduct; the agency would apply the rule to nearly everyone. 

To draw an analogy: according to its latest guidelines, promulgated jointly with the U.S. Justice Department’s Antitrust Division, the FTC believes that mergers with an HHI (a measure of concentration) of more than 1,800 are presumed harmful. But they are still not per se illegal. Moreover, the FTC wouldn’t dare pass a rule saying that all such mergers are illegal simply because, on average, they expect problems with this class of mergers. Established antitrust law would not permit that.  

While overly broad noncompetes can cause harm in some circumstances, noncompete terms vary widely, as do the contexts in which they are used. Noncompetes can also produce benefits that the FTC’s rule downplays or ignores. Research suggests that, by temporarily restricting direct competition from departing employees, noncompetes can encourage firms to invest in worker training, commit to long-term employment, and share more proprietary information. Whether these benefits outweigh the costs depends on the facts of each case.

Banning noncompetes across the board prevents workers and businesses from voluntarily entering into mutually beneficial arrangements in situations where employers lack market power. It overrides more tailored state policies and sidelines courts’ traditional role in developing competition law case-by-case.

Until Congress passes legislation to change antitrust law or labor law, a wiser path would be to align antitrust enforcement with established principles like the rule of reason, grounded in rigorous analysis of case-specific facts. Doing so would protect workers and promote competitive labor markets, without the overreach embodied in a categorical ban.

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