Banning noncompetes is good, actually (with Evan Starr)

Episode Summary

Executive Summary: This episode examines non-compete agreements, arguing they suppress worker mobility, wages, and competition while mainly benefiting incumbents. Economist Evan Starr discusses the history of non-competes, evidence from Washington State’s 2020 law limiting them for most workers, and why firms did not raise pay to preserve enforceability. The episode concludes that broad bans are economically justified and consistent with middle-out economics.

Main Topics: What non-compete agreements are and how they work (Priority: 5/5): The hosts and guest define non-competes as post-employment restrictions that prevent workers from joining or starting competitors for a set time and within a geographic area. Historical origins and modern spread (Priority: 4/5): Non-competes are traced back to a 1414 English case and guild-era apprenticeship arrangements, then to their modern spread from executives to low-wage workers. Washington State’s 2020 law as a policy test (Priority: 5/5): The conversation centers on Washington’s ban on non-competes for workers earning $100,000 or less, used as a natural experiment to see whether firms value enforceability enough to raise pay. Effects on workers and businesses (Priority: 5/5): The episode reviews evidence that banning non-competes increases job mobility and wages, while the Washington study finds no measurable negative effect on publicly traded firms. Why firms use non-competes if they may not enforce them (Priority: 4/5): The guest explains that the contracts may work mainly through chilling effects and intimidation, while firms rely on NDAs, non-solicit clauses, and trade-secret law instead. Broader policy implications and FTC ban debate (Priority: 5/5): The discussion argues that even executive non-competes may impose third-party harms and that the FTC’s broader ban aligns with evidence and middle-out economics. Equity and professional carve-outs (Priority: 3/5): The episode highlights the irony that lawyers are barred from non-competes nationwide because of client harms, even as lawyers often defend non-competes for everyone else.

Key Arguments: Non-competes are directly anti-competitive and reduce worker bargaining power, allowing firms to pay less and treat employees worse. Historical evidence shows non-competes have existed since at least 1414, originally tied to guilds and apprentice protection rather than modern innovation. Washington’s 2020 threshold created a test: if firms valued non-competes, they would raise near-threshold salaries to keep contracts enforceable; they generally did not. The absence of salary bunching near $100,000 suggests firms do not economically value non-compete enforceability for most workers. Prior research indicates banning non-competes improves wage growth and mobility for low-wage and high-tech workers. Washington firms already have alternative protections such as NDAs, non-solicitation agreements, and trade-secret law. Non-competes may primarily deter worker movement through fear and confusion, even when unenforceable. No evidence was found that the Washington law harmed publicly traded firm values, suggesting limited business downside from the ban. For executives, third-party harms to competitors and consumers can justify near-total bans as well. The episode frames non-compete bans as consistent with middle-out economics because they expand inclusion and competition rather than protect incumbents.

Data Points: First known non-compete case: 1414 - The guest cites the Dyer’s case as the earliest known non-compete case. Washington wage threshold: $100,000 per year - 2020 Washington law invalidated non-competes for workers at or below this earnings level. Inflation-adjusted Washington threshold: About $116,000 today - The law’s threshold was indexed to inflation. Share of Washington workers covered: Roughly 80% - The wage cutoff covers about four-fifths of workers in the state. Estimated current use of non-competes: 20%–24% of workers (most estimates) - The guest summarizes survey estimates of workers currently bound by non-competes. Low-end estimate of use: 16% - A broad estimate from worker/firms surveys. High-end estimate of use: 50% - Upper-end estimate from surveys of non-compete prevalence. Ever bound by a non-compete: About 40% - The guest notes lifetime exposure is higher than current prevalence. Occupations with notable litigation: Hair stylists are the fifth most common litigants - Used to illustrate how non-competes affect service workers with loyal client followings. Policy impact on public firms: No effect detected - The Washington study found no negative effect on the value of publicly traded companies. Attorney carve-out timeframe: Over 50 years - Lawyers have been prohibited from entering non-competes in every state for decades. California non-compete unenforceability: Since 1872 - Used as a long-running example of a state without enforceable non-competes.

Pivotal Quotes: "They're anti-competitive, bad for innovation, bad for everything except the profits of the largest enterprises." — Nick Hanauer: He states the episode’s core normative critique of non-competes. "The Washington paper suggests that it's pretty straightforward to justify a ban covering at least 80% of workers." — Nick Hanauer: He summarizes the policy takeaway from the Washington study. "The value to the firm of the non-compete is often in the chilling effect that it has on workers." — Evan Starr: He explains why firms may still use non-competes even when enforcement is limited.

Implications: The episode argues that broad non-compete bans would likely raise wages, improve mobility, and boost competition without harming most firms. For listeners, the takeaway is that worker-friendly labor rules can strengthen the whole economy, not just individual employees.