Collusion

Employers collude in labor markets in a variety of ways. They fix wages, agree not to poach each other’s workers, and exchange information. They also collude with employees by entering covenants not to compete. All of these actions are anticompetitive and they often violate the antitrust laws, but it is difficult for workers to challenge them in court, and few cases have been successful. When workers challenge covenants not to compete, courts defer to the relatively lax common law standard, under which employers do not pay penalties. And strict antitrust standards developed to address product market cases doom labor market cases, where collusion is both easier for employers and easier to hide from authorities. Regulators and courts should be more attentive to the peculiarities of labor markets and more open to antitrust actions.

Introduction

Antitrust law has very rarely been used by workers to challenge anticompetitive employment practices. Yet recent empirical research shows that labor markets are highly concentrated and that employers engage in practices that harm competition and suppress wages. These practices include no-poaching agreements, wage-fixing, mergers, covenants not to compete, and misclassification of gig workers as independent contractors. This failure of antitrust is due to a range of other failures—intellectual, political, moral, and economic. Until recently, economists assumed that labor markets are usually competitive when in fact recent studies reveal that they are usually not competitive. Commentators and politicians also seems to have assumed—falsely—that employment and labor law adequately addresses inequality of bargaining power and the resulting risk of wage suppression. The impact of this failure has been profound for wage levels, economic growth, and inequality.

The Failure of Antitrust

Antitrust law has frequently been used by private individuals and the government to challenge anticompetitive behavior by sellers of goods and services. It has rarely been used to penalize firms for engaging in anticompetitive behavior against workers. Yet labor monopsony is common. Recent work by economists and recent events show that employers frequently engage in anticompetitive acts, including no-poaching agreements, wage fixing, misclassification of workers as independent contractors, and the imposition of covenants not to compete on employees. For a variety of historical, intellectual, and practical reasons, courts have been reluctant to find in favor of workers who challenge employers on antitrust grounds. As a result, labor markets are uncompetitive, resulting in low wages and reduced output.

How Antitrust Failed Workers

Antitrust law has very rarely been used by workers to challenge anticompetitive employment practices. Yet recent empirical research shows that labor markets are highly concentrated, and that employers engage in practices that harm competition and suppress wages. These practices include no-poaching agreements, wage-fixing, mergers, covenants not to compete, and misclassification of gig workers as independent contractors. This failure of antitrust to challenge labor-market misbehavior is due to a range of other failures—intellectual, political, moral, and economic. And the impact of this failure has been profound for wage levels, economic growth, and inequality. In light of the recent empirical work, it is urgent for regulators, courts, lawyers, and Congress to redirect antitrust resources to labor market problems. This book offers a strategy for judicial and legislative reform.

Noncompetes

Employee covenants not to compete, which bar workers who leave their jobs from working for a competing employer for a period of time, should be subject to heightened antitrust enforcement. While noncompetes may serve legitimate purposes, they also create entry barriers and reduce labor market competition. The threat to competition has been highlighted by new research, which suggests that employers overuse noncompetes and that noncompetes reduce labor market competition. A likely explanation is the inadequacy of the existing legal regime. Antitrust law nominally applies to noncompetes, but courts have eviscerated it by imposing an excessive burden of proof on plaintiffs who challenge noncompetes. An appropriate doctrinal framework for evaluating noncompetes under antitrust law would shift the burden of proof to employers. Employers would be permitted to rebut challenges to their noncompetes only by showing that the noncompetes raise wages for their own workers and workers in the broader labor market.

Consider This: Training, Wages, and the Enforceability of Covenants Not to Compete

Using data from the Survey of Income and Program Participation, the author examines the effect of noncompete enforceability on employee training and wages. An increase from no enforcement of noncompetes to mean enforceability is associated with a 14% increase in training, which tends to be firm-sponsored and designed to upgrade or teach new skills. In contrast to theoretical expectations, the results show no evidence of a relationship between noncompete enforceability and self-sponsored training. Despite the increases in training, an increase from non-enforcement of noncompetes to mean enforceability is associated with a 4% decrease in hourly wages. Consistent with reduced bargaining power, noncompete enforceability is associated with a reduction in the return to tenure, and less-educated workers experience additional wage losses in the face of increased enforceability relative to more-educated workers. Suggestive evidence indicates that policies that tie the enforceability of noncompetes to the worker receiving additional consideration in exchange for signing a noncompete are associated with higher wages.