The Biden administration's plan to boost competition in labor markets has a shot at delivering pay raises for U.S. workers without triggering higher inflation, economists say.
The Federal Trade Commission this month proposed a ban on noncompete clauses in employment contracts, which make it harder for workers to switch jobs. The measure could add
With U.S. labor markets running hot, the Federal Reserve is warning that pay hikes could prolong the worst bout of inflation in decades. But the FTC proposal could unleash a different dynamic, by helping millions of workers to find a rapid match with the jobs where they can be most productive, instead of leaving them sidelined for what can be months at a time.
"The productivity generated by those people who no longer have to stay out of the workforce would certainly give a boost to growth — and offset that inflationary pressure from those higher wages," says Beth Ann Bovino, chief US economist at S&P Global Ratings.
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Noncompete agreements — which affect roughly
Advocates of the proposed ban say noncompete arrangements deprive workers of higher wages — either from accepting a rival offer, or using one as leverage to get a raise — and prevent employers from accessing the widest talent pool. By stymieing new entrants, they can also limit the number of firms that compete in a given industry, helping established businesses to keep their prices high.
Ending the practice "would promote greater dynamism, innovation, and healthy competition," the FTC's Khan says.
Critics say noncompete clauses help businesses to safeguard their trade secrets, which could otherwise be carried to a rival by a defecting employee. The U.S. Chamber of Commerce says it will sue the FTC if the ban goes ahead.
Labor has been scarce since the pandemic hit, and that's helped many U.S. workers to get a pay raise, even if most have struggled to keep up with the soaring cost of living. It's also gotten the Fed worried: Chair Jerome Powell says wage growth is running well above what's needed to hit inflation targets, and he's promising more interest-rate hikes to stomp it out.
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One key part of the equation is what economists call labor productivity — put simply, a measure of how much output is generated for each hour worked.
The data on that has jumped around during the pandemic, but has generally been disappointing, and the longer-run direction is downward. Reversing that trend is crucial, because when productivity is growing at a decent clip, it means the
Unlike the wage inflation the U.S. is currently experiencing, the FTC's proposal has the potential to "increase wages in a good and desirable way" that doesn't fuel broader price growth, says Jason Furman, a Harvard University professor who was head of the Obama administration's Council of Economic Advisers.
"The worry now is we're increasing wages too much through the demand channel," Furman says. "This is about changing productivity and bargaining power."
As of now, it's up to individual states to decide on the rules for noncompete agreements. California forbids employers from enforcing them, for example, while Florida permits them.
Economists have tried to study the impact in specific industries or regions.
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State laws also vary as to whether the agreements are valid if an employee is laid off, as opposed to leaving voluntarily. That distinction could be critical to how quickly people can get back to work, now that US tech and finance firms are starting to shed workers.
That spate of high-profile layoffs has added to concern about the risk of a US recession, even though labor markets remain broadly strong.
In that event, widespread noncompete agreements could hamper the economy's ability to bounce back, according to
"Noncompetes would prevent workers from finding a job in their industry" when they get laid off, he says, "and as a result, drag out a recovery."
