Andrew Leigh

Cut non-compete clauses and clear a creative path

The Daily Telegraph, 10 July 2023

In 1956, William Shockley shared the Nobel prize for silicon semiconductors. A brilliant scientist, he was also a bad boss. At his US company, he spied on employees and was both racist and paranoid.

So eight of his top engineers left, founding Fairchild Semiconductor. Shockley called them “the traitorous eight”, but couldn't stop them.

A decade later, two of them left to create Intel. Then another departed to create AMD. One reason why Silicon Valley came to dominate technology was that workers could walk out to create new firms.

Yet millions of Australian workers today don't have that freedom. New research from economist Dan Andrews at the thinktank e61 finds that 22 per cent of employees are bound by non-compete clauses.

Their contracts mean they can't take a better job if the company competes too closely with their current employer.

Advocates of non-compete clauses claim that non-competes are necessary to protect company secrets, such as client lists and product designs. But stealing is already illegal. As the example of Silicon Valley shows, building an innovative economy is easier if workers aren't shackled to their jobs.

Another argument made in favour of non-compete clauses is that they only apply to a handful of elite executives who are merely required to go on ‘gardening leave' between top jobs. Alas, the e61 research shows this to be wrong.

Non-compete clauses apply to 43 per cent of gig workers, 26 per cent of community workers and 14 per cent of clerical workers and labourers.

Non-compete clauses apply to hairdressers, early childcare workers and yoga instructors. Even gardeners can be required to go on ‘gardening leave' in between jobs.

The proliferation of non-compete clauses across the economy arises for a simple reason - no one ever negotiates their employment contract. Knowing this, employer lawyers put non-compete clauses into many of the contracts they draft.

As author Cory Doctorow points out, Silicon Valley is the living embodiment of the principle that businesses can thrive even if they can't obstruct former employees. If non-competes had been legal in California, Silicon Valley may not have transformed the world.

For employees, non-compete agreements can dampen wage growth. The largest earnings gains over a career typically come when workers switch jobs. So less jobswitching can mean less wage growth.

Non-compete agreements might have an impact on the economy, too. A major driver of productivity is the establishment of new firms. Preventing start-ups from getting workers risks putting a handbrake on the economy.

If escaping a dodgy manager like William Shockley helped spur the growth of Silicon Valley, might allowing more job mobility also be good for wage growth and productivity in Australia today?

Originally published in the Daily Telegraph on 10 July 2023.