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Minneapolis Federal Reserve Study Undermines Assumptions About Noncompetes Harming Employees on the Eve of Minnesota’s Noncompete Ban
Monday, June 26, 2023

On June 21, 2023, the Federal Reserve Bank of Minneapolis issued a report entitled “New data on non-compete contracts and what they mean for workers” that calls into question the assumptions made by the Federal Trade Commission (FTC) in its recent rulemaking efforts.[1]

The report begins by stating what we have been saying for a long time: that “relatively little survey evidence [is] available” about the actual effect of noncompetes on workers. In other words, it is not that there is substantial evidence that noncompetes help workers (although there are studies showing that they can in certain circumstances), but rather that the data is slim and, contrary to what the FTC and the media might lead the public to believe, there is likewise not settled evidence that noncompetes harm workers. As the Minnesota Fed points out, “[t]he recent explosion of public discussion about non-competes has made clear the need for better and more systematic data collection.”

The Minnesota Fed wanted to look more deeply at this issue, so it added a question about the use of noncompetes to its annual Survey of Household Economics and Decisionmaking (SHED). According to the report, “SHED data are valuable because they are broadly representative of the U.S. workforce and collected annually.”

What the Minnesota Fed found is unsurprising. Specifically, it found that “overall, 11.4 percent of adult workers currently have non-competes.” This is a far cry from the 20% that the FTC assumed. It also found that “workers on the West Coast are substantially less likely to have non-competes than workers in the South Atlantic, at rates of 9.0 percent and 13.3 percent, respectively,” and that “workers are less likely to have non-competes in the three states that do not enforce them (California, North Dakota, and Oklahoma), where the overall rate is 7.0 percent, than in the other 47 states, where the overall rate is 12.0 percent.”

The Minnesota Fed also found that “non-competes are much more common among mid-career workers (35- to 44-year-olds) than among younger and older workers,” with “13.2 percent of 35- to 44-year-olds report having non-competes, while only 7.3 percent of 65- to 74-year-olds have them.” As for the breakdown of “the incidence of non-competes by gender, race/ethnicity, educational attainment, industry, and income,” the Minnesota Fed found that “men are somewhat more likely to report having non-competes, as are workers with four-year college degrees. Industries vary widely in their use of non-competes: workers in professional services (19.2 percent) and finance (18.2 percent) are more likely to have non-competes than workers in construction (7.1 percent), education (7.8 percent), or public administration (4.7 percent).” In addition, “workers with higher family incomes are more likely to have non-competes than those with lower incomes.”

What is most illuminating, however, are the findings about the correlational effect of noncompetes on workers. With respect to whether workers have “emergency or rainy day funds that would cover [their] expenses for 3 months in case of sickness, job loss, economic downturn, or other emergencies,” the Minnesota Fed found that there is no correlation between having a noncompete and a “rainy day fund” when other worker characteristics are considered:

Looking strictly at the association between non-competes and having an emergency fund, we find that workers with non-competes are 10.8 percent more likely to have an emergency fund. However, the association is complicated by the fact that, . . . non-competes are more common among mid-career, highly educated workers who tend to have more savings. We therefore present unadjusted estimates as well as estimates adjusted for differences in worker characteristics.

When we adjust for those differences . . . , we find much smaller and statistically insignificant associations between non-competes and savings. While workers with non-competes are more likely to have emergency funds than are workers in general, they appear to have emergency funds at similar rates to workers with similar backgrounds and jobs.

Another important dimension of personal finances is how easily someone could handle a relatively modest expense. The SHED’s “$400 question” asks how respondents would cover an unanticipated $400 expense; we distinguish those who would pay the expense using cash (or a credit card they would pay off in full at the next statement) from those who would pay it in some other way, including with a loan or sale of property.

Overall, people with non-competes are more likely to handle a $400 expense with cash or its equivalent, despite a substantial share still reporting that they would use something else. However, the gap closes and even reverses when we adjust for differences in worker and job characteristics. After adjusting for differences in age, education, and gender, that gap is eliminated. After further adjustments for rural location, occupation, industry, and state—in addition to age, education, and gender—those with non-competes are actually 4.4 percentage points less likely to say they would use cash or its equivalent to meet the emergency expense.

With respect to job search and negotiations, however, the Minnesota Fed found that “workers with non-competes are 10 percentage points more likely to ask for a raise or promotion and 7 percentage points more likely to apply for new jobs,” even “after adjusting for the worker characteristics described above.”

Here’s the kicker:

The results are somewhat in contrast to findings that non-competes (and/or their stringent enforcement) tend to reduce workers’ job-search activity (Prescott and Starr 2021), wages (Lipsitz and Starr 2019), and mobility (Balasubramanian et al. 2022). As before, however, we do not have reason to believe these estimates reflect a causal effect of non-competes, but they suggest avenues for deeper investigation.

These are the very same studies the FTC relied upon in its rulemaking in support of its assertions that noncompetes harm workers.

The fact that this report was issued by the Minnesota Fed is somewhat ironic, as Minnesota is the most recent state to ban noncompetes – the first in well over 100 years, in fact. With New York not far behind, the FTC’s recent rulemaking and enforcement actions, the NLRB flexing its regulatory muscles with respect to noncompetes, and both the U.S. Congress and other state legislatures considering noncompete bans and limitations, perhaps this is a good reminder that it is far from settled that noncompetes have a negative impact on workers, and in some respects they can be beneficial, as the Minnesota Fed’s report outlines.

[1] Thanks to Jonathan Crook of BluePencilBox for bringing this to our attention.

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