Markets

In the job market, the devil is often in the details

There are good people in the field of economics. One of my favorites is the question of why real wage growth has slowed in a number of different countries over the past two decades. Economists have identified several possible culprits, from slowing global productivity growth to the decline of unions. I would add one more suspect to that list: lawyers. More precisely, in the fine print written by lawyers.

Until recently, economists did not pay much attention to the T’s and C’s of employment contracts. But what’s written in these documents is quietly shaping how labor markets work—and not necessarily for the better.

The story begins in the US, where economists and law professors such as Evan Starr and Orly Lobel have determined the extent to which employment clauses traditionally associated with top executives have actually extended to the workforce. Non-Disclosure Agreements; non-disparagement clauses; non-compete clauses — many American workers are now caught in the thick of it.

Non-competitors attracted the most attention. Nearly a fifth of American workers are bound by these clauses, which prohibit them from going to work or starting a competing business for a certain period of time after leaving their job. They are more common among professionals, but research shows that approximately 14 percent of people making less than $40,000 are also susceptible to them. The Federal Trade Commission took legal action this year against a security company that, according to the FTC, barred its low-paid security guards from working for a competing business within 100 miles of their workplace two years after they left the company. . The guards threatened a fine of $100,000 if they violated the clause.

The argument in favor of non-compete clauses is that they encourage employers to innovate and train workers, knowing that their investment will be protected. If an employee can just go directly to a competitor, why bother training them at all? People on this side of the argument admit that some companies apply overly restrictive non-competes to workers who do not have valuable trade secrets or training. But they point out that courts can and do find unreasonable clauses unenforceable. The problem is that workers may not know this or be willing to go to court to find out. One Starr study found that 70 percent of employees with non-enforceable non-compete terms mistakenly believed they were enforceable.

Critics believe they stifle innovation and “clog” the labor market by preventing workers from moving freely to where they would be most productive. They see non-competes as a way for capital to quietly stack the deck against labor.

A number of studies suggest that such clauses reduce labor mobility and wages. When Hawaii banned non-competes for tech workers, researchers found that worker mobility increased by 11 percent and wages for new hires increased by 4 percent. Non-competes also seem to make life difficult for young startups: another study found that in US states where non-competes were more enforced, new companies were more likely to die, and even those that survived were smaller in the first five years. It’s probably no coincidence that non-competes are legally unenforceable in California, the innovation capital of the world. The FTC announced plans to ban them entirely this month.

But the story does not end there. In Europe, many economists assumed it was a uniquely American phenomenon. But that doesn’t seem right. A recent study by Italian economists found what Andrea Garnero, one of the authors, called “strikingly similar patterns” of non-competitive use in Italy and the US. Research in Japan, again a different type of economy, also found similar patterns.

Lawyers are not necessarily bad guys. It is increasingly popular for employers to use boilerplate language which can result in more restrictive clauses than most staff actually need. “I try to advise clients all the time [that] that’s a bad approach [to stick the same clause in for everyone] but of course it happens,” says David Samuels, recruitment partner at Lewis Silkin.

But whether or not they have spread unintentionally, the effect of these clauses on productivity, pay, innovation and mobility is significant. It’s time to get out the magnifying glass: the small print economy could have a big impact on how we understand the world today.

sarah.oconnor@ft.com

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