Non-Compete Clauses Trigger Lower Wages
Non-compete clauses, which limit the professional activity of the employee following the termination of an employment contract, are significantly present in the US labor market, characterized by high flexibility and high turnover rates. On 23 April 2024, the Federal Trade Commission (FTC), which oversees market and consumer protection in the country, prohibited the use of such clauses. Non-compete clauses are also used in Europe, including Italy.
The paper “Non-compete agreements in a rigid labour market: the case of Italy”, written by Tito Boeri (Department of Economics, Bocconi), Andrea Garnero (OECD) e Lorenzo Giovanni Luisetto (University of Michigan), and published by the Journal of Law Economics and Organization investigates the use of non-compete clauses in Italy, where the labor market is more rigid, strict employment protection rules apply and all employees are, at least on paper, subject to collective bargaining. However, unions do not play any role in regulating the use of these clauses, while the law only specifies the formal requirements that allow their use. More in detail, non-compete clauses are legitimate only if the employee receives compensation, has access to confidential information and are limited in time and space.
The research takes into consideration a representative sample of 2,000 employees working in numerous sectors and jobs in Italy. What emerges is the spread of non-competition clauses in our country: around 16% of private sector workers are bound by them, with an incidence slightly lower than in the United States. Such clauses are particularly frequent among employees with low levels of education, who carry out low-paid manual and unskilled job, who do not have access to any type of confidential information, nor have they received training and/or do not have well-defined times, sectors and geographical limits of the application of such clauses. In addition, in more than two thirds of cases these clauses seem not to comply with the law. They are therefore unenforceable in court. Nonetheless, workers are unaware of such missing minimum requirements, fear sanctions in case of violations and behave as if such clauses were effective, fearing legal action from their employers, creating a fertile ground where the abuse of non-compete clauses is rife.
Furthermore, non-compete clauses reduce worker mobility (already low in Italy compared to international standards) and give rise to instances of monopsony, i.e. the abuse of market power by employers, who can afford to pay their employees less: this can explain why salaries in Italy are so low, contributing to widening wage inequalities. In the case of low-skilled workers, non-compete clauses constitute a greater deterrent to abandoning a job than in the case of more highly skilled workers, who benefit from greater bargaining power.
In light of the consequences of non-compete clauses on the labor market, according to the authors we need to promote fairer use and strengthen protection and transparency in the employment negotiation process. To this end, the Italian antitrust authority should address the issue of non-compete clauses, given their effects on competition in the product market.
An intervention by trade unions would also be urgent, with a real information campaign among workers, unions, employers and HR managers, to make employees more aware of their rights and, more generally, to raise awareness in public opinion around the issue. It may be useful to accompany each non-competitive clause with an explicit reference to Article 2125 of the Italian Civil Code, which indicates the minimum requirements for the validity of the clause. Finally, it would be useful to report the presence or absence of non-competition clauses in the mandatory communications that employers must send to the Italian social security service to discourage abuses.
