Gentlemen Prefer Bonds: How Employers Fix the Talent Market
27 Pages Posted: 17 Apr 2019 Last revised: 24 Apr 2019
Date Written: 2019
The labor market is precisely as the name indicates: a market. The currency of this market is talent. Competition principles apply in equal force to the labor market as to the product market, with the added effect that human capital is a living resource—its quality is endogenous to the competition for it. Competition among firms in the product markets spurs innovation, competitive pricing, and higher quality products and services. Competition among firms over talent ensures higher wages, better work conditions, and higher quality human capital. The strength of competition in the labor market depends on a range of factors, but a key measure of competition is the number of alternatives available for employees to consider. A powerful armor employed by companies to reduce alternative job opportunities is the restrictive covenant. The purpose of this article, written for a symposium on frontier in antitrust law, is threefold. First, it explains that beyond the traditional non-compete, firms use many restrictive covenants that prevent competition in the talent market. The article introduces this broader landscape of anti-competitive restrictions that are routinely placed on employees including horizontal collusion between employers agreeing to fix wages or refraining from poaching each other's employees and vertical arrangements between employers and employees, which include employees agreeing not to solicit customers or former co-workers post-employment, exit penalties, and overreaching NDAs and pre-innovation assignment clauses, which reach beyond IP and trade secrecy protections and into information that should remain in the competitive markets public domain, such as customer lists, compensation information, and general know-how. Second, while many of the harms potentially caused by non-competes are well-documented, the article introduces a neglected aspect of labor market concentration: the perpetuation of wage gaps and inequalities. The article argues that mobility restrictions have a disproportionate effect on certain protected identities—primarily women, minorities, and older workers. In particular, I provide an original analysis of the effects of restrictive covenants on the gender wage gap and present supporting empirical evidence. Third, the article considers a pervasive problem in the landscape of restrictive covenants: the prevalence of unenforceable contractual terms. I argue that the problem of unenforceable anti-competitive restrictions in employment contracts calls for a proactive approach, including notice requirements in employment contracts, regulatory action and penalties that target these contracts, including the attorney that drafted them, before litigation has been pursued, and a private right of action, including class actions by employees who have been harmed by unenforceable contracts.
Keywords: labor market, talent, competition, unenforcable contract terms, non-competes, do not hire agreements, wage fixing, Labor Market Monopsonies, monopsonies, Non-solicitation of customers clauses, Pre-Innovation Assignment Clauses, Non Disclosure Agreements, Exit Penalties, Ex-Ante Proactive Policies
JEL Classification: J41, J42, J44, J45
Suggested Citation: Suggested Citation