The Government’s Competition Taskforce is currently investigating potential reforms to restrict the use of non-compete clauses (NCCs). Roughly 1 in 5 Australian workers are now bound by an NCC, preventing them from joining or starting a business that competes with their employer – and the practice is becoming more widespread.
Unions have welcomed the Taskforce’s investigation, highlighting the possible benefits of restricting NCC use, including greater job mobility, boosting worker bargaining power and higher wages.
But some business groups and legal experts have warned of the potential unintended consequences. They argue that existing laws already prevent NCCs from being misused and that curbing their use would reduce productivity enhancing investments in worker training and intangible capital.
Are these concerns justified? Would restricting NCC use increase workers’ bargaining power and wages at the expense of productivity?
International evidence suggests it’s not so simple. There are trade-offs.
On the one hand, it’s true that restricting NCC use would likely reduce investments in worker training and intangible capital. But on the other hand, restrictions could also boost productivity by increasing worker mobility, which supports better job matching, the creation of new firms and innovation.
In the US – where the most comprehensive research on NCCs to date has been conducted – restricting NCC use has had a positive effect on productivity. Earlier this year, the US Federal Trade Commission (FTC) introduced a complete ban of NCCs citing this work. Some economic modelling suggests this was close to the optimal policy response, at least in the US where NCCs are bad from both a growth and fairness perspective.
But the costs and benefits of NCCs vary from country to country. And other countries have chosen to restrict the use of NCCs rather than ban them altogether.
Until recently, there was a lack of Australian evidence to inform policy makers of the trade-offs of implementing reforms here. This has now begun to change thanks to new data from the ABS.
Using this data, e61 research has now explored for the first time the relationship between NCCs, worker mobility and wages in Australia.
It found that increased use of NCCs is associated with a decline in worker mobility, especially for switches to firms within the same industry. NCCs appear to restrict the mobility of most workers, including many lower-skill workers in occupations where NCCs would generally not be legally enforceable but nonetheless appear to have a “chilling effect.”
NCC use also impacts workers’ wages.Workers at firms that use NCCs extensively are paid about 4% less on average compared to similar workers at similar firms that do not use NCCs. This effect is driven by lower-skilled workers, such as care workers and labourers, who experience slower wages growth over the first few years of their employment if they are at a firm that uses NCCs extensively (Figure 1).
Figure 1: Non-compete clauses and workers’ wage growth
The findings of our research suggest that restricting the use of NCCs would likely increase worker mobility and raise the wages of lower-skilled workers.
But how much of this would simply be a redistribution effect – how we slice the pie – and how much would result from productivity gains – growing the pie?
That’s a tricky question to answer given Australia lacks the kind of policy “experiments” that researchers have studied in other countries.
But the large negative associations between NCC use and worker mobility and wages suggest that restrictions could deliver both efficiency and equity gains. It would, after all, be surprising if NCC use was improving productivity while significantly reducing wages.
Recent Productivity Commission analysis supports this view. Using the effect that NCCs have on wages, they estimate that restricting NCC use could increase GDP by 0.1% to 0.19%, a gain of about $250 to $500 per household.
Our recent research also highlighted another avenue through which NCC reform could boost productivity. We found that high-skill workers at NCC-using firms are significantly more likely to spend at least 6 months out of employment between jobs. NCCs are stopping these workers from contributing to the economy.
Critics may still be worried about the impact of NCC restrictions on business innovation and investment. But US research shows that NCCs hurt, rather than help, innovation on net. And, in any case, firms would retain other tools to protect their legitimate interests, such as non-disclosure agreements, which our research found do not reduce worker mobility.
At the end of the day, policymakers must act on the best evidence they have available to them. That evidence currently says that restricting NCC use represents a rare opportunity to boost both equity and efficiency in the Australian labour market.
