ccording to an Economic Policy Institutereport, between 28 and 47 percent of U.S. private sector workers are subject to noncompete agreements. In brief, noncompete agreements (or noncompetes) are provisions in an employment contract that ban workers from leaving their job to work for a "competitor" that operates in the same geographic area, for a given period of time. In a way, it's an attempt to recreate the power dynamics of the employer-dominated company towns of old—with workers unable to change employers if they want to continuing working in the same industry.
It is not just top executives that are forced to accept a noncompete agreement. Companies also use them to restrict the employment freedom of many low wage workers, including janitors, security guards, fast food workers, warehouse workers, personal care aids, and room cleaners. In fact, the Economic Policy Institute estimates that almost a third of all businesses require that all of their workers sign noncompetes, regardless of their job duties or pay.
As for the impact of these agreements, a number of studies have found that noncompetes lower wages for all workers in the industry, even those not subject to noncompetes. And then there is this from CBS News:
"In the context of the pandemic, which caused millions of people to be laid off, it's safe to say at least a share of those workers are constrained [by noncompetes] in pursuing other opportunities during this crisis," said John Lettieri, head of the Economic Innovation Group, a think tank that advocates against noncompetes.
Indeed, at least four employers — including an accounting firm and a real estate brokerage — have tried to enforce noncompetes against workers they've laid off, with the lawsuits making their way through the courts.
On July 9, 2021 President Biden signed an executive order on "Promoting Competition in the American Economy" that, among other things, calls upon the Chair of the Federal Trade Commission (FTC) to work "with the rest of the Commission to exercise the FTC's statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility." While it seems likely that the FTC will take some action, the scope of that action remains uncertain.
Noncompetes and their use
There are no federal rules governing the use of noncompetes. It is up to the states to decide how to regulate their use. California, North Dakota, and Oklahoma are the only states with outright bans on their use; Washington DC also outlaws them. Several states have placed limits on the use of non-competition agreements. Illinois, Maryland, Nevada, Oregon, and Virginia all prohibit the use of noncompetes with low wage workers. Washington state banned noncompetes for those earning under $100,000. Hawaii has prohibited noncompetes for tech workers only. On the other hand, there are some states, like Idaho, which have actually passed laws making it easier for companies to enforce noncompete agreements.
Most workers live in states where there are few if any restrictions on the use of noncompete agreements. And as the results of a national survey that included firms with at least 50 employees show, the use of noncompetes is common in workplaces with low pay (see the table below). As the Economic Policy Institute report points out, although "the use of noncompetes tends to be higher for higher-wage workplaces than lower-wage workplaces . . . it is striking that more than a quarter—29.0%—of responding establishments where the average wage is less than $13.00 use noncompetes for all their workers."
Popular outrage has sometimes forced companies to change their policies or state authorities to intervene on behalf of workers. An example of the former: in 2015 Amazon began requiring its warehouse workers to sign noncompetes. As The Vergereported:
The work is repetitive and physically demanding and can pay several dollars above minimum wage, yet Amazon is requiring these workers — even seasonal ones — to sign strict and far-reaching noncompete agreements. The Amazon contract, obtained by The Verge, requires employees to promise that they will not work at any company where they "directly or indirectly" support any good or service that competes with those they helped support at Amazon, for a year and a half after their brief stints at Amazon end. Of course, the company's warehouses are the beating heart of Amazon's online shopping empire, the extraordinary breadth of which has earned it the title of "the Everything Store," so Amazon appears to be requiring temp workers to foreswear a sizable portion of the global economy in exchange for a several-months-long hourly warehouse gig.
The company has even required its permanent warehouse workers who get laid off to reaffirm their non-compete contracts as a condition of receiving severance pay.
The company eventually ended the practice after its actions were widely reported in the media, generating bad publicity for the company.
Jimmy John's offers an example of state action. In 2016, the attorneys general of New York and Illinois, reacting to public anger, forced Jimmy John to stop its franchises from using noncompetes that forbid its employees from working at any other sandwich shop within a 3-mile radius of the franchise for two years.
The cost of noncompetes to workers
When noncompetes are banned, worker pay rises. One of the most detailed and complete studies of the wage consequences of such a change is based on Oregon's 2008 decision to ban noncompetes (NCAs) for hourly wage workers. As the authors of the study explain:
We find that banning NCAs for hourly workers increased hourly wages by 2-3% on average. Since only a subset of workers sign NCAs, scaling this estimate by the prevalence of NCA use in the hourly-paid population suggests that the effect on employees actually bound by NCAs may be as great as 14-21%, though the true effect is likely lower due to labor market spillovers onto those not bound by NCAs. While the positive wage effects are found across the age, education and wage distributions, they are stronger for female workers and in occupations where NCAs are more common. The Oregon low-wage NCA ban also improved average occupational status in Oregon, raised job-to-job mobility, and increased the proportion of salaried workers without affecting hours worked."
Earlier studies of the consequence of changes in the use of noncompetes in other states produced similar results. For example, a study of Hawaii's 2015 decision to ban noncompetes for tech workers showed a 4.2% pay bump for new hires and a 12% increase in worker mobility.
But even a change in law doesn't necessarily bring an end to the practice, as highlighted by the California experience. California courts will not enforce a noncompete contract, but that hasn't stopped many California businesses from including them in their employment contracts. One reason according to worker advocates, as reported by CBS News, is that most workers don't know that noncompetes are banned in California:
As a result, employers in California use these restrictive contracts just as much as employers elsewhere in the U.S., and they have their desired effect: scaring workers away from leaving for better jobs.
"There's no disincentive for the employer to include it in the employment contract. The worst thing that would happen is a court would declare [the noncompete] void," said Harvard's Gerstein. "There needs to be a disincentive to employer overreach."
Possible federal action
President Biden pledged during his campaign to "eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets." On the other hand, his executive order speaks to "curtailing" their use. The best outcome would be an FTC ban on the use of non-competes in all situations and for all workers; noncompetes are just another tool that businesses can use to exploit their workers.
But it may be that the FTC will instead seek to place limits on the use of such agreements, perhaps outlawing their use with low wage workers or establishing federal regulations that restrict their scope and duration. Although such a step would be an improvement over the current situation, where most states do little to restrict the use of noncompetes, it may well result in an unsatisfying patchwork regulatory framework, much like that of our current unemployment system.
No matter how the FTC rules on the use of noncompete agreements, there are two other actions it should take that would significantly strengthen worker rights. Currently, many workers only learn they are subject to a noncompete agreement after they have already accepted a job. The FTC should mandate that employers include any noncompete requirements in all job postings.
And as the California experience shows, companies will continue to use noncompetes even if they are not enforceable, relying on ignorance, intimidation, as well as the financial costs of court proceedings, to get workers to accept their terms. Therefore, the FTC should also allow workers to sue for damages if a business is illegally attempting to enforce a noncompete agreement.
In the meantime, while we await FTC action, the greater the public knowledge about, and voiced opposition to the use of noncompetes, the better.
Michael Roberts Marxist approach to China development challenges is provocative. Plus, unlike some dogmatic Marxist tendencies, completely free of phrase mongering and anarchism.
A December 2020 meeting of the Chinese Communist party Politburo, vowed to end what it called a "disorderly expansion of capital". The Chinese leaders were worried that the capitalist sector in China had got too big for its boots. Companies like Jack Ma's Ant Group had expanded into consumer financing and looked to raise foreign funds to do so. In effect, the Ant Group aimed to take over household lending from the state banks. Ant was going to do what it liked and said so with a lot of fanfare in the press. Ant and other Chinese capitalist tech and media companies were increasingly engaged in typically 'Western'-type mergers, secret contracts and other financial irregularities.
China's regulators had been turning a blind eye to all this for years. Moreover, the financial faction in China's leadership had got agreement to allow foreign investment banks to set up majority-owned companies in China for the first time, with the eventual aim of 'freeing up' the finance sector from state control and allowing unregulated cross-border capital flows. In other words, China was set to become a full member of international finance capital. The authorities were also allowing uncontrolled cryptocurrency mining and operations in the country.
But the COVID pandemic changed all this. There was growing public anger at how the rich in China, as in the rest of the major economies, have gained hugely from the financial and property price boom during the pandemic, while the majority struggled through the lockdowns and faced increased costs in education, health and housing and a serious risk to decent jobs for graduates and others. Education, health and housing are the 'three mountains' that all Chinese households aim to climb to get a better life – and yet costs for these were spiralling while the rich made millions.
Now the Chinese leadership has been forced to zigzag back from 'disorderly expansion' and respond to the public backlash through a crackdown on the consumer tech and media giants and by introducing curbs on private education and speculative property development. It has also banned cryptocurrency operations.
Take education. The vast majority of Chinese parents pay for extracurricular private tutoring – survey estimates range from 65% of families with school-aged children in 2016, up to 92% this year. A 2019 survey from recruitment firm 51job Inc showed nearly 40% of parents spent 20-30% of their income on children's education. The private classes come at eye-watering costs that contribute to an industry worth more than $150bn (£108bn). The quality and resource of education varies greatly between urban and rural areas, from province to province, and between top- and lower-tier cities. There are few university places relative to the number of students and even fewer at prestigious universities, which are concentrated on the east coast and in major cities. It is in these areas where private tutoring has exploded in the past decade. Now China's state council is barring for-profit companies from tutoring in core curriculum subjects and foreign investment in such companies.
Take health. Approximately 95% of China's population is covered by a public insurance programme financed mainly from employee and employer payroll taxes, with minimal government funding. This supposedly funds universal health care but it is very basic. So most Chinese are forced to pay private fees to get better care, just as in many advanced capitalist economies. And during COVID, Chinese households faced exorbitant costs for healthcare.
And take housing. Property prices in coastal cities, where the best work and pay is, have doubled in the last ten years. In Shenzhen, the average apartment price has risen so much that some are finding it cheaper to live in Hong Kong, one of the most expensive property markets in the world. Since 2015, residential property prices have appreciated by more than 50% in China's largest cities. Over the past decade, average residential land supply per new resident in the top 10 cities is only 230 square feet—little more than the size of a typical hotel room—or less than 60% of the average per capita residential space in China.
Speculation has been rife as local governments try to raise funds by selling land to developers which then build estates through borrowing at low rates often from the unregulated shadow non-bank sector. "Property is the single most important source of financial risk and wealth inequality in China," said Larry Hu, head of China economics at the foreign-owned Macquarie Securities Ltd. And he is right.
So the government has had to respond to public disenchantment, echoing Xi Jinping's famous words that "housing is for living in and not for speculation." Vice Premier Han Zheng added that the sector shouldn't be used as a short-term tool to stimulate the economy. The banks have been told to jack up mortgage rates. Local governments are being directed to accelerate the development of government subsidized rental housing and have been told to increase scrutiny on everything from financing of developers and newly-listed home prices to title transfers.
But these mountains won't be climbed easily by the Chinese leaders, if at all. That's because the Chinese authorities have leant ever more towards expansion through the capitalist sector and particularly into unproductive sectors like property and finance – at the expense of productive sectors like manufacturing technology, residential housing, public education and health.
Much of the property speculation has been to build ever more commercial developments rather than housing. That's because the main prerogative for local governments is to accrue revenue. If they can attract more businesses into their jurisdictions and if those businesses become profitable, then the local government can collect more corporate taxes. At the same time, residential land supply is deliberately kept scarce so governments can make money on residential land sales. In effect, residential land sales serve as a cross-subsidy on local governments' pro-business land policy that sells commercial land cheaply.
Beijing is pushing hard for implementing a long-delayed property tax, which could provide an alternative source of revenue for municipal governments and reduce their reliance on land sales. But a property tax is unlikely to come anywhere close to offsetting the revenue loss that would result from selling less land. Given that average households will be exempt from the property tax, it seems unlikely to generate more revenue than income tax (1% 0f GDP), while annual land sales are currently on the order of more than 7% of GDP.
The real estate sector accounts for 13% of the economy from just 5% in 1995 and for about 28% of the nation's total lending. Given that local governments have $10 trillion in debt, land sales are the most crucial and reliable source of income for debt repayment. So any drastic changes would seriously raise the risk of local government defaults. So the new government crackdown on China's capitalist sectors will not be enough to alter the huge inequalities of income, wealth and access to jobs, housing and education in China.
Let's be clear, China has a high level of inequality of incomes by international standards, although it is still lower than many other 'emerging' economies like Brazil, Mexico or South Africa – and the gini inequality ratio peaked just before the Great Recession and has been falling since.
Source: National Bureau of Statistics
The main reason for the high inequality ratio is the disparity of incomes between urban and rural workers and between the wages in coastal and inland cities, as well as educational qualifications.
Much is made of the number of billionaires in China, but given the size of the population and GDP, the per capita ratio compared to the US and other major economies is relatively low. Despite the large expansion in the number of millionaires, millionaires in China remain relatively rare: about one for every 200 adults. Millionaires account for 3% of adults in Italy and Spain; France, Austria or Germany about 4%), and around 6% in social democratic Scandinavia; above 8% in the US and Australia and highest of all in Switzerland (15%)
And the inequality of wealth in China is centred on property, not financial assets (so far), unlike the main capitalist economies of the G7. And that is because finance has not been fully opened up to the capitalist sector.
But the contradictions of China's state-controlled economy alongside a large and growing capitalist sector intensified during the COVID pandemic. And that was expressed by the factions in the Chinese leadership. Officials in the financial and banking sector want to open up the economy to foreign capital and allow the renminbi to become an international currency. They argue that the economy is too biased towards investment and exports over consumption. Chinese economists trained in America and Europe, backed by resident foreign economists in Chinese universities and the World Bank, press continually for a 'switch from investment to consumption'. But has this worked in the G7 capitalist economies where consumption has failed to drive economic growth and wages have stagnated in real terms over the last ten years, while real wages in China have shot up?
Source: Penn World Tables 10.0, author's calculations
Indeed, consumption is rising much faster in China than in the G7 because investment is higher. One follows the other; it is not a zero-sum game. And not all consumption has to be 'personal'; more important is 'social consumption' ie public services like health, education, transport, communications housing; not just motor cars and gadgets. Increased personal consumption of basic social services is what is necessary. And it is here that China needs to act.
Much is also made of China's rising debt levels. Mainstream economists have been forecasting for decades that China is heading for a debt crash of mega proportions. It's true that according to the Institute of International Finance (IFF), China's total debt hit 317 per cent of gross domestic product (GDP) in the first quarter of 2020. But most of the domestic debt is owed by one state entity to another; from local government to state banks, from state banks to central government. When that is all netted off, the debt owed by households (54% of GDP) and corporations is not so high, while central government debt is low by global standards. Moreover, external dollar debt to GDP is very low (15%) and indeed the rest of the world owes China way more: 6% of global debt. China is a huge creditor to the world and has massive dollar and euro reserves, 50% larger than its dollar debt.
A financial crisis is ruled out as long as the state controls the banking system, but there are dangers because of the recent attempts to loosen it up for private and foreign institutions to enter the arena (eg there are a growing number of bankruptcies in speculative financial entities).
Chinese leaders want to curb the debt level. Controlling the debt level can come in two ways; through high growth from productive sector investment to keep the debt ratio under control and/or by reducing credit binges in unproductive areas like speculative property. Japan's secular stagnation was the result of the lack of applying these two factors in its capitalist economy. But given the power of state control over the levers of investment, China can avoid the Japanese outcome.
The basic contradiction of China's economy is not between investment and consumption, or between growth and debt; it is between profitability and productivity. The growing size and influence of the capitalist sector in China is weakening the performance of the economy and widening the inequalities exposed during the pandemic. Indeed, it was the state sector that has helped the Chinese economy climb out of the pandemic slump, not its capitalist sector.
I did a little empirical test of the relation between the profitability of Chinese capital and real GDP growth (based on data from the Penn World Tables 10.0 – details provided on request). What I found was that the state-dominated investment and capital stock in China meant that there has been no correlation between the profitability of Chinese capital and real GDP growth since the formation of the People' Republic – indeed it was negative. The profitability of capital did not decide the level of investment in productive assets and economic growth.
Source: Penn World Tables 10.0; IRR series for profitability; real GDP growth calculations
However, after Deng's reforms in the 1980s, the correlation turned positive, although less positively correlated than in the rest of the G20 economies or the G7. And since China entered the World Trade Organisation and privatised sections of its state sector in the late 1990s and early 2000s, there has been a significant correlation between the profitability of Chinese capital and real GDP growth. So the Chinese economy has become increasingly vulnerable to its capitalist sector and to international capital and their profitability.
This is the Everest facing China: how to raise productivity to meet the social needs of its 1.4bn people, in the face of vagaries of the profitability of its capitalist sector. China's workforce is falling. productivity growth has been slowing and China faces a technology and trade war with the US and its imperialist allies. The three mountains will not be climbed unless that Everest is also conquered.
As part of its 2021-25 national plan to reduce inequalities, various provinces are engaged in building "a common prosperity demonstration zone". According to the plan, in Zhejiang province, labour compensation will be raised to more than 50 percent of GDP by 2025; the enrollment rate in higher education to more than 70 percent; and the proportion of personal health expenditure versus the total health expenditure will be managed to be below 26 percent. Will this work and be applied to other provinces? We shall see.