"Noncompete Clauses" Should Be Outlawed - but Not in the Name of "More Competition"

Suresh Naidu / Jacobin

The Federal Trade Commission has proposed banning “noncompete clauses” in labor contracts. It’s a win for workers, but the FTC’s rationale — a blind devotion to “competition” as the solution to injustices in the labor market — is wrongheaded and dangerous.

Earlier this month, the Federal Trade Commission (FTC) proposed a new rule that would ban noncompete clauses in labor contracts. The rule, which is part of the agency’s effort to enforce the federal ban on unfair methods of competition, has received ample coverage and support in the mainstream press. Yet it also raises a host of questions about the relationship between labor law, antitrust, and notions of competition.

In the following text, which first appeared on the website of the Law and Political Economy Project at Yale Law School, Columbia University economist Suresh Naidu reflects on the problematic yet widespread assumption that monopoly (or monopsony) power is the fundamental driver of inequality in the labor market and that “more competition” is the solution.

The FTC has been rightfully lauded for this announcement. Those worried about the exercise of private power in the labor market, like labor unions and their allies, can cheer the loosening of bonds to particular employers. Those attached to economic welfare can celebrate potential increases in output, employment, and wages. Everybody, except maybe overzealous human resource managers, can leave feeling happy.

But behind the no-noncompete consensus lies an unsettling division. The rule comes as a blanket ban from the FTC, under the aegis of increasing competition. In a recent Wall Street Journal op-ed, Chair Lina Khan reiterated that antitrust law stipulated preserving competition, regardless of what other sources of countervailing power exist (e.g., union neutrality).

Competition itself should not be the primary desiderata for the labor market. For one thing, employers have considerable power even in decentralized, competitive markets, so the scalpel of antitrust is poorly suited, compared to either labor law or macroeconomic policy, to tackle the bulk of the monopsony power in the labor market. Regulators can police the behavior of large employers with bureaucratic modes of worker control, but have a harder time neutralizing the diffuse workplace despotism of many small businesses.

Second, competition is often the source of many labor market harms (including, historically, racial conflict), and can easily destroy existing norms of fairness and networks of solidarity, as was recognized by the Clayton act. Other sources of countervailing power can be broken by an activist antitrust regime exclusively focused on competition as the preeminent property of functioning markets.

Finally, by relying too much on competition, we forgo other, deeper and more democratic, principles that could undergird an expansive notion of economic non-domination. Ironically, owing to our history of coerced labor, American law has deep resources for fighting unfree labor contracts. One of the earliest uses of the 13th Amendment came with the 1867 anti-peonage statute, which outlawed the widespread indentured servitude in the newly added New Mexico territory. We could have gone after noncompetes under the banner of “no contractual surrender of liberty,” encompassing binding arbitration, nondisclosure, no-strike clauses, and yellow-dog contracts as well as noncompetes, rather than the narrower mandate of “more competition.” Although labor rights generally have been won as forms of economic regulation, rather than as entrenched freedoms, there’s no reason to concede to that. And in the context of wider interest in rethinking the Constitution and ideas of economic freedom, it might be time to bring those ideas back to the fore as a way of thinking about the labor market generally.