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On Non-Compete Contracts

Here’s a letter to a high-school student in Ohio:

Mr. V__:

Thanks for your e-mail.

Your teacher is correct that “competitive labor markets are the best way to be sure that workers’ pay is fair.” Indeed, I’d argue that such markets are the only means of attaining this outcome. But I disagree with your teacher’s claim that, as you word it, “so non-compete clauses should be against the law since it reduces competition.”

A non-compete clause is a contractual term. As with all contracts, each party agrees to sacrifice some consideration (as lawyers call it) in exchange for some other consideration. Because no one is compelled to sign a non-compete clause, if worker Jones agrees to such a contractual clause with Acme Corp., two things must be true. First, in exchange for her agreeing not to compete against Acme if and when she parts ways with that company, she must receive something of value from Acme. What she receives might be higher pay, a promise of specialized worker training, or some other benefit. But we can be certain that she receives something in exchange for her agreeing to the non-compete clause.

Second, whatever she receives in exchange for agreeing to the non-compete clause must be something that she values more highly than she values the prospect of working in that same occupation soon after parting ways with Acme.

It follows that prohibitions on non-compete clauses make workers worse off. Any such prohibition strips workers of a valuable bargaining chip – namely, the right to agree to non-compete clauses – and, thus, denies workers the ability to use that chip to ‘purchase’ from prospective employers better pay or work conditions that they, the workers, value more highly than they value their unrestricted right to compete.

I emphasize that non-compete clauses are simply contracts. And every contract results in some voluntarily agreed to restrictions on each party’s freedom of action. For example, your parents likely borrowed money to buy their home. In exchange for receiving cash from the bank to purchase the home, your parents voluntarily agreed to make regular monthly mortgage payments. Now ask yourself if homebuyers would be made better off if government were to prohibit people from agreeing to bind themselves contractually to repay funds borrowed to buy homes. It’s easy to see, right?, that your parents would have been made worse off were they prohibited from binding themselves contractually to repay their mortgage. Such a prohibition would have resulted in an unwillingness of any bank to lend them money to buy their home.

Non-compete clauses are no more “anti-worker” than mortgage-loan contracts are “anti-homeowner.”

Good luck with your college applications!

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030