Andrew Leigh

NON-COMPETE CLAUSES: PREVALENCE, IMPACT, AND POLICY IMPLICATIONS

Joint Treasury – e61 Institute Webinar, Sydney

Wednesday, 18 October 2023

I acknowledge that I am attending this webinar from the lands of the Ngunnawal People who are the traditional owners and custodians of the Canberra region. I also acknowledge the traditional custodians of the various lands across Australia on which others in this webinar are joining from, and any Aboriginal and Torres Strait Islander people participating in this webinar.

Thank you Dan for your introduction. In opening today’s webinar, I want to thank the excellent line up of speakers and welcome our international guests. I also want to acknowledge Australia’s e61 Institute for jointly hosting this event with Treasury. E61 has done a great job shining a light on the prevalence of non-compete clauses which has really kick started the debate here in Australia.

Competition Review

Competition is very much at the forefront of public discussion and thinking globally, driven partly by the rapid increase in cost-of-living pressures.

But this cyclical spike in inflation comes on top of deeper, structural challenges facing the Australian economy, and other advanced economies.

At the heart of this challenge is a growing sense that our economies have become more oligopolistic, less dynamic and not serving the interests of consumers and workers as well as they could be.

We believe competition policy has a role in turning around sluggish productivity growth, boosting wages and getting better consumers outcomes.

And it was in this context that the Australian Treasurer Jim Chalmers and I announced in August a two-year Competition Review to examine Australia’s policy settings to help build a more dynamic and productive economy.

We’ve established a Taskforce in Treasury to run the Review. The Taskforce will be supported by an Expert Advisory Panel, some of whom are in attendance today.

The Taskforce will provide the Government with continuous advice on competition issues.

While its remit is broad, initial issues we’ve asked the Taskforce to consider include:

• merger reforms
• options for coordinated reforms with our states and territories
• competition issues raised by new technologies, net zero transformation and the growth in the care economy
• and, of course, potential reforms to non-competes and related clauses.

Competition reforms

Australia’s current living standards are in part a product of substantial competition policy reforms.

Sweeping reforms to our competition policy settings in the 1990s set us up for a surge in productivity growth, averaging just over 2 per cent in that decade.

These reforms included:

• restructuring publicly owned businesses and making them more efficient
• reviewing around 1800 laws and regulations (National Competition Council n.d)
• and reforms to essential infrastructure services in the energy, transport and telecommunications sector.

The Productivity Commission estimated that the National Competition Policy reforms of the 1990s permanently increased the size of the Australian economy by at least 2.5 per cent (Productivity Commission 2005).

Productivity challenges

However, Australia’s productivity growth has slowed, averaging about 1.2 per cent in the past two decades (Treasury 2023). 

We recently published the Intergenerational Report which projects the Australian economy to grow by an average 2.2 per cent per year in real terms over the next 40 years compared to 3.1 per cent over the past 40 years – in part driven by a lower productivity growth assumption.

As I alluded to above, comparable productivity trends in other advanced economies suggests there are some shared reasons for the productivity slowdown.

Many measures of dynamism, such as firm entry, exit and job-switching rates have declined in Australia and overseas. Similarly, measures of market power, such as concentration and mark-ups have increased in Australia and overseas.

While there is no single ‘productivity lever’, ensuring we have the right competition policy settings is vital in supporting a more dynamic and competitive economy.

Non-compete clauses

Which brings me to non-compete clauses. 

While these clauses have gone under the radar, I have a long-standing concern that they, along with no-poach clauses, are having a negative effect on the labour market and workers.

I have been following closely the growing body of international evidence of the increasing prevalence of these clauses, and the dampening impact they have on labour mobility and wages growth.

Among lower paid workers these clauses simply seem unfair.

While among middle and higher wage occupations, the literature shows clauses are likely to be stifling productivity and innovation.

They slow the dispersion of ideas and technologies across an industry.

This partly reflects the barrier that non-compete clauses create for new, innovative firms trying to enter an industry.

They deprive these firms access to the most productive workers.

That is why we’ve asked the Taskforce to investigate this issue.

Relative to the United States and United Kingdom, Australia is at an early stage in investigating non-competes.

But we will learn a lot from your experiences and your contributions today, and I very much see this as the start of an ongoing dialogue.

So thank you everyone for attending today’s webinar on this important issue.

References

National Competition Council (n.d) National Competition Policy Outcomes, accessed October 2023.

Productivity Commission 2005 Review of National Competition Policy Reforms, 28 February 2005.

Treasury 2023 Intergenerational Report 2023 Treasury.