A dangerous clause
OPINION |

A dangerous clause

MONOPSONY POWER CAN NEGATIVELY AFFECT WORKERS' WAGES AS WELL AS INFLATING INEQUALITIES IN WAGE LEVELS ACROSS FIRMS AND EMPLOYEES. FOR THIS REASON, THE WIDESPREAD PRESENCE OF NONCOMPETE CLAUSES THAT REDUCE THE OCCUPATIONAL MOBILITY OF WORKERS SHOULD COME UNDER THE SCRUTINY OF THE ITALIAN ANTITRUST AUTHORITY

by Tito Boeri, Full Professor at the Department of Economics
Translated by Alex Foti


In a competitive labor market, individual companies have no market power over their employees, since they cannot independently set wages. If they paid workers less than other firms, workers would change employer. In other words, firms that seek to impose lower wages end up running out of workforce. A growing number of empirical studies have instead documented that many companies, even medium and small firms, have significant market power over their employees and are able to set wages at levels below than the value of the contribution that workers give to production, i.e. lower than labor productivity measured in monetary terms. These same firms that succeed in setting wages, thus imposing a markdown on labor productivity, also end up hiring fewer workers than they would have done in a competitive environment. The possible sources of this market power, called monopsony power, are manifold and range from concentration of hiring in a few firms to collusion of employers in not bidding for workers already employed by other firms, from the use of various limits to the mobility of workers, to employment search costs and frictions present in the labor market.

In a recent work with Andrea Garnero and Lorenzo Luisetto, I have analyzed the presence of non-compete clauses in employment contracts in Italy. A non-competition agreement is a contract, or a clause in a labor contract, in which an employee agrees not to compete with the employer after the employment contract has ended. In most countries, non-compete clauses are allowed (under certain conditions) and justified by the need to protect trade secrets and specific investments in the employee’s human capital by the employer (such as certain types of training and investments in specific knowledge). However, non-compete clauses can also be used simply to reduce the mobility of workers, thereby limiting their opportunities outside the firm and bargaining power inside the firm.
In Italy, non-compete clauses are regulated by the Civil Code, but the law provides only minimal requirements, without providing a detailed framework. Over the years, the jurisprudence has clarified some aspects but, beyond the respect of basic formal requirements, Italian courts maintain a significant margin of discretion in the assessment of each individual case. Despite their importance in regulating many aspects of employment relationship, collective labor agreements surprisingly play no role in regulating the use of non-compete clauses in Italy.
To understand the relevance of non-compete clauses in the Italian labor market, we carried out a survey on a sample of 2,000 employees representative of workers in the private sector. Our survey shows that around 16% of private sector employees in Italy are bound by a non-compete clause, which corresponds to around 2 million workers. More than one in five workers has agreed to a non-competitive agreement at least once in their careers. These deals aren't limited to highly skilled professionals or managers, or employees with access to confidential information, but are much more widespread than that. Non-compete agreements are also relatively frequent among workers employed in manual and unskilled occupations with low levels of education and wages, even if they have no access to any type of confidential information. Non-compete clauses are not the only legal tool for regulating the labor market after the contract ends: in Italy, 39% of private sector employees are covered by a non-disclosure agreement; 12% by an agreement that gives the employer ownership of any invention created during the employment relationship; 11% by a customer non-solicitation clause; 10% by a reimbursement clause for benefits and bonuses; 8% by a non-solicitation clause with respect to colleagues; and 7% by a reimbursement clause for training costs.

The likelihood of being bound by a non-compete agreement is negatively correlated with the concentration of the local labor market, particularly for medium-skilled workers. This suggests that non-compete agreements, insofar they are tools for limiting competition in the labor market, are less important when local labor market is highly concentrated, because a small number of companies dominate hiring.
Analyzing the content of the non-compete clauses, more than half do not seem to comply with the minimum requirements set by law, i.e. they don’t specify indemnity and duration, sectoral and geographical limits. This means that a good part of the clauses re probably void, therefore not enforceable by a judge and/or that workers are unaware of their content (even those who are sure they have signed one and claim to have read it carefully before signing it). At the same time however, since there is no correlation between the perception of the risk of being taken to court and being found guilty by a judge and the likelihood of the clause being enforced, non-compete clauses may have deterrent effects on labor mobility even when they are not applicable.
The majority of workers currently bound by non-compete clauses became aware of the clause before starting work, when signing the contract (40%) or even earlier when the worker is offered the job (28 %). However, 15% of the clauses were introduced after the contract was signed, but in exchange for a promotion, salary increase or increased responsibility, while 5.6% were introduced after the contract was signed without no change in the job duties performed. Among workers bound by a non-compete agreement, 44% read it very carefully before signing it, while 28% read it only quickly. Only 21% of employees with a non-compete agreement attempted to negotiate. Most employees did not try to negotiate it because they thought it reasonable or assumed the clause was non-negotiable.
Prior to this investigation, the only evidence available in Italy on the use and characteristics of non-compete clauses was based on jurisprudence. Given the limited number of trials, essentially involving highly skilled employees, this suggested that the phenomenon was relatively limited and of little interest. However, as is known in the literature on the economic analysis of law, the outcomes of the trials are not representative of the population of cases and provide partial information since only a selected sub-sample of them arrives in court.

The evidence emerging from the survey suggests that, due to a mix of abuse by employers and a lack of awareness on the part of workers, in a non-trivial number of cases non-compete clauses generate distortions in the labor market, further limiting the mobility of workers, which is already low in Italy compared to international standards. It would therefore be possible to promote a more balanced use of non-compete clauses, improving transparency and fairness of the negotiation process without placing an undue burden on employers or preventing them from protecting their legitimate business interests.
The widespread presence of clauses that reduce the occupational mobility of workers should also come to the attention of the Italian antitrust authority. It is often argued that antitrust should deal only with competition in markets for goods, but there are strong interrelationships between monopoly and monopsony, i.e. market power in the product market and market power in the labor market. These interactions generally operate by further lowering wages compared to what would happen in a firm that has monopoly power only in the labor market, because lack of competition in the product market reduces the quantity produced and, therefore, the number of workers hired, exerting a further negative effect on wages. At the same time, under conditions of monopsony, monopoly firms can further restrict supply and, for a given level of demand, this leads to an increase in the price of final goods. Moreover, the interactions between market power in the two spheres can inflate inequalities in wage levels across firms and workers, posing problems not only of fairness, but also of efficiency due to the reduced mobility of workers. Finally, the two market powers can feed each other, for example by favoring collusive behavior such as agreements between companies not to snatch workers from each other (no-poaching agreements), leading to greater market concentration in both areas. For this reason, the US antitrust authority has issued guidelines on the matter and has begun to monitor concentrations between companies more carefully that were market competitors before the operation. For this reason, certain antitrust authorities also in the EU (for example the Portuguese Competition Authority) have recently dealt with clauses that limit the mobility of workers. However, the European Commission’s guidelines on collective agreements between self-employed workers clarify (albeit indirectly) that no-poaching and wage-fixing agreements are illegitimate. It is time for the problem to be addressed in Italy as well and for collective labor agreements to delve into the issue instead of continuing to ignore it.

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