New rules proposed by the Federal Trade Commission to ban workplace noncompete agreements have stirred a lot of opinions. Workers’ rights advocates say the move will help wages finally break out of their stagnant pace. However, some aren’t so sure about that. One of them is Brian Albrecht, chief economist at the International Center for Law and Economics, who the Federal Drive with Tom Temin had a chance to speak to about the proposal.

Interview transcript:

Brian Albrecht
So a few weeks back the Federal Trade Commission proposed basically a total ban on noncompete clauses. Which noncompetes are an agreement you signed when you start with the new employer that says after, say, a year you won’t go and work for any competitor. And they have different restrictions, different timelines. But they’re pretty general, or they’re pretty common, they show up around 20% of contracts, about 40% of people have signed one in the past. So now the FTC says, OK we’re proposing to ban them. We have a 60 day comment period and then after we’ve heard from people, we’ll issue our final ruling at some period after that. So at this stage it’s still proposed, but kind of the general vibe on the street is that the general proposed rule is basically what the final rule is. That there’s no new information that’s going to come in, there’s some stories that will come in, but like the basic research has been done by the FTC.

Eric White
Got it. And as somebody who signed one of those, I can say that you described it perfectly well. Were you or any one of your organizations, are you going to be among the commenters on the proposed rule?

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Brian Albrecht
Yeah. So the International Center for Law and Economics, where I work, has not submitted our comments yet, but we will submit official comments. Right now, we’re in the more general public conversation stage of it, while we’re working on finishing up our comments. It’s something we’ve worked on for a while. So we have a lot to kind of build on. But by the end of the current period, where we’re beginning in March, we’ll have something

Eric White
Well, don’t make me wait now. Can you give me some insight on what those comments will contain?

Brian Albrecht
So our general skepticism, we have a general skepticism towards the ban. We’ll see what the official institutional comments come down. I’ll say more about where I’m coming from. It’s early in the research phase on this topic, what we know the effects, the cost and the benefits. And there are costs and benefits, everyone seems to be talking as if it’s just a cost on the worker. But we have research that suggests workers who sign these have received more training; certain industries that have higher wages, like doctors who signed them have higher wages. So there’s a cost and benefits to allowing these and we’re at a very early stage in the research of it. And so we think a universal ban across the United States is a little dramatic, and probably unjustified. Now, I work with a bunch of lawyers who will make the lawyer case of why the FTC isn’t allowed to do this. I’m an economist. I’m not going to make that type of argument. I don’t know the ins and outs of the legal rules. But when I, as the economist, look at the evidence, look at the costs and benefits, I could see it going either way. Maybe they’re sometimes really bad. I mean, there’s stories about Jimmy John’s and enforcing them on line workers, but they never were actually enforced. That seems not a good use of noncompetes. At the same time CEOs, it seems reasonable to not allow one CEO to go to a competing company. It seems like a reasonable contract to tie the CEOs hands. And unless it’s a CEO owner, the proposed rule would ban that.

Eric White
And so from your standpoint and listening to you it sounds as if you’re saying you can do this rule, but it’s kind of a wash maybe. You said there are some instances where it actually helps workers, which is obviously the intent here is to try and get wages higher, since they’ve been stagnant for so long. Can you elaborate a little bit on that?

Brian Albrecht
So yeah. So there’s evidence that banning these raises wages. So we have the state of Oregon as one example that ban this in 2008. The best research on this looking at that episode, finds that wages for workers goes up about 2%, 3% maybe. Which is a big number, that’s a huge effect and that’s the number that the FTC is running with. That’s basically one study, it’s a well done study. I’m really impressed by the work that the authors did on it, but who knows what the next episode would be. There’s lots of confounding factors in any one study; that’s why in general in economics you try to trust a giant literature. And this literature is growing, but it’s not like the effects of taxes or the effects of regulation, which we have 100 years of research on. We really only have about 10 years of research. And econ research is not super fast. So there is benefit, there’s reason to believe that wages for particular workers, particularly low skilled, low income, low wage workers will rise under a ban. At the same time, there’s evidence that other wages will drop. And kind of the net effect is what economists are fighting over what that looks like, at the moment.

Eric White
Yeah, and something that’s always been curious to me, and you talked a little bit about it in Jimmy John’s case, was regarding the enforceability factor of these noncompetes. I can personally say, in the radio industry, I know several people who are moonlighting, going against their noncompetes. And I guess they just kind of hope their employer doesn’t find out. Can you talk a little bit about what you’ve seen in your study of the topic and of industries on where these things are super highly enforced.

Brian Albrecht
So they do exist, and people sign them in lots of places where they shouldn’t be signed, if you’re kind of reading the letter of the law. So California has banned these for many decades. If you are someone working in California — again, not a lawyer — they shouldn’t be allowed, you shouldn’t be signing them, yet people do in different circumstances. And the general reason is, companies across many states, many job levels of stuff have kind of uniform contracts. They just have everyone sign the same, just as you sign the same, you fill out the same W-2, you fill out the same non disclosures, and the same noncompete. And so they exist in places where they will not be enforced. Now, you can think of that going two ways. One is like, well, it’s something you signed, but it’s not enforced, so why do we care about it? Why do anything about it? It’s just like, it doesn’t have any meaning. I think people are worried and rightfully so that workers don’t know that it’s not enforced. And therefore the chilling effects, the unwillingness to leave, has an effect even if they’re, quote unquote, illegal. And so it’s a tough thing to tease out in the data too, because, how do you get a sense of how much people are affected by these non binding contracts that they signed? You can ask them surveys. Survey questions of difficult legal matters are notoriously a hard thing to understand. So we don’t quite know. So I’m not ready to say that just because they’re not enforceable means they have no effect, and therefore we should ignore them. At the same time, courts have done a good job of kind of starting to say that, ok, these are situations where these are legitimate. These are situations when they’re not legitimate, based on common law things that I don’t really understand. But doing this more fine grain, sometimes we can have noncompetes to have good value for the company and the worker, sometimes they’re clearly kind of meant to hurt the worker. But instead of just a blanket ban that says everything is bad, it’s a little more on the margin, as economists would say, it’s a little more fine grain. And there’s, I think, important benefits to that. In the sense that we can discover, we can learn over time, who is benefiting? Who is hurting? Instead of just nope, the science is settled, quote, unquote, science is settled. Let’s ban it.

Eric White
And as you reiterated several times, I know you’re not a lawyer. But as somebody who studies the effects of regulations on the economy, and what different agencies do. I was just a little surprised that this came from the FTC. I just thought that maybe the Labor Department would be someone who got involved in this. And I thought the FTC was more talking about antitrust issues in different industries and things like that. What can you say about that? And were you surprised at all?

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Brian Albrecht
I was completely surprised on one hand, because yes, like this is rewriting labor contracts for everyone. This applies retroactively. So if your noncompete that you signed, if this rule goes through, will be voided. OK. And that seems like something that the Department of Labor would do, traditionally. On the other hand, the current Federal Trade Commission has made it clear going back through speeches over the last two years, that this is something that they want to do. So I wasn’t surprised from that angle. But it’s the reason that they think it’s in their jurisdiction, is they think that something called an unfair method of competition. That they’re doing something that is unfair, and that is in their purview. And it’ll be up to the courts to decide and litigate between defendants in the FTC or the FTC and people suing them, who is going to be right on that point. But yeah, this is a new labor regulator. But I would have guessed the Department of Labor.

Eric White
Got it and yes, and there will be I’m sure challenges up the wazoo to this rule, if in what you’re saying when it goes into effect. I don’t want to hamstring into a prediction. But what do you think is in the future for this? And does this mean that there may be more of a crackdown in a more case by case basis, like you said, that you think would be more ideal?

Brian Albrecht
So I think that the FTC is going to push through the proposed rule as it is, basically. There might be some minor concessions that they make versus this blanket ban, but I think the proposed rule is going to become a rule. Now the question is, what happens in the courts? And I think this is from my reading of precedent, that’s basically unprecedented, and it’s going to get challenged, it’s going to go through a long legal mess that’s going to get it stayed at different points, there’s gonna be a lot going on. If I’m going to make a prediction, I think that the courts will curtail it some. And then instead of having this dispute between the worker and the employer and kind of saying, is this allowed or that allowed, I think courts are gonna step in and say this is within your jurisdiction, this is not within your jurisdiction.

Now, one thing that would make it unlikely to stand as a blanket ban, is this idea that comes out of the recent case between the West Virginia V. Environmental Protection Agency. Which is that the Supreme Court said, well, basically, if you’re going to make some major change, this has to be something that you were given the power by Congress. It can’t be that there’s some vague wording that then opens up a can of worms, that you could do whatever you want. It’s called the major questions doctrine. If it’s a major question, Congress has to give you authority to do it, or at least a little more direct authority to do it. And I don’t see anything besides a vague comment about unfair methods of competition that says, OK, now we can rewrite labor contracts across the entire United States. Maybe if the Department of Labor had done this, it would be different. I don’t know the Department of Labor, I studied the FTC and their purview. But it seems to me that this is not at all what was intended, in the kind of plain meaning of any text that the FTC is drawing on. I think it’s important to always put policy on par with our evidence. So people have heard news about the proposals to ban gas stoves. And it’s based on very weak evidence from my understanding, and there’s rightful pushback that the evidence corresponding to the policy proposals are kind of not in line. And I think that’s the case here. I think there is better evidence, there’s good evidence being done, but a good research being done. At the same time, it’s not the type of thing that I would say is on equal footing with a national ban by the FTC of a proposed rule or a rule that they just make up themselves, three of the commissioners. I just think that that’s too much of a leap. And I have faith in economic research. I think it’s something that guides our understanding, but I also have an understanding of how ignorant we all are and we need to kind of discover this together instead of a handful of papers, boom, rewriting all of labor contracts in the U.S.

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