Biden Is Right to Call for Rolling Back Occupational Licensing and Non-Compete Agreements

President Biden’s executive order today calling for occupational licensing and employment non-compete agreements to be rolled back is a good idea that could benefit individual workers. Whether the White House actually has the authority to regulate them is a different question, but at least it is addressing the right issue: expanding the freedoms of individual workers.

The proposals were part of the Biden administration’s “Executive Order on Promoting Competition in the American Economy.” I’ll leave it to others to dissect the order’s proposals outside of labor policy, but non-compete agreements and occupational licensing are in most cases limits on competition. They are barriers that prevent workers from being able to get the maximum value for the commodity they sell: their labor.

Non-compete clauses are contract provisions that businesses often insist that workers sign prohibiting them for working for a competitor for a certain period of time after that worker is no longer with the first businesses. Studies vary on often businesses do this. The Treasury Department estimated in 2016 that 16 percent require them. The Biden administration cites research by the union-backed Economic Policy Institute that puts it at about 32 percent. Whatever the correct figure actually is, it is too high.

Non-compete clauses are often justified by employers on the grounds that they have made an investment in the worker’s training and therefore deserve to recoup that. However, the practice has spread across all industries and it serves to prevent workers from being able to bid up the value of their labor.

This is bad for the economy and bad for consumers. It is not even clear that non-compete clauses are that good for business. A company that uses non-compete agreements might be able to prevent a rival from luring away, say, a talented engineer. But such provisions also prevent the same company from hiring talented engineers away from a rival. As a result, the pool of available workers becomes shallower and job openings are more likely to go unfilled.

State job licensing requirements are better justified, at least in theory. Certain professions affect public health and safety, after all. It is perfectly reasonable to require nurses or emergency medical technicians (EMTs) to be licensed. But as with non-compete requirements, the practice has spread far beyond those instances and now cover 25-30 percent of all professions according a 2018 Federal Trade Commission (FTC) report. Workers in numerous states require professions like beautician, tax preparer, and tour guide to be licensed. There is bipartisan consensus that these practices should be limited.

The problem with these practices is that it is unclear what can be done about them at the federal level. There is no precedent for the federal government regulating either. It has generally been accepted by the courts that states have the right to license professions and are exempt from antitrust regulations when doing it. The Supreme Court did put some limits on that in a 2015 case called North Carolina State Board of Dental Examiners v. Federal Trade Commission. The case found that if the licensing boards’ members included “active market participants”—businesses directly affected by the board’s actions—then they weren’t exempt from antitrust regulations. But that’s about it. The FTC’s 2018 report accepted that the practice of licensing was the purview of states. It proposed that the federal government promote interstate compacts to job licenses more portable.

The Biden administration’s executive order calls on the FTC to “ban or limit non-compete agreements” and “ban unnecessary occupational licensing.” That’s unprecedented and to do it, the FTC would have to show that the practices create unavoidable injury to consumers and are not outweighed by any benefits to the public of the state’s regulation. In the case of job licensing requirements, it is likely that those that provide clear public health and safety benefits like nurses or EMTs would be protected, but licenses for beauticians could be challenged. Federal regulation of non-compete clauses would be harder for the administration to make the case for, since, while the clauses hurt workers, the impact on consumers is more indirect and harder to quantify.

In short, if the Biden administration tries to do this on its own, it’ll probably become an issue for the courts.

At least the administration is attempting to expand individual worker freedoms. This is starkly contrasted by the executive order also calling on Congress to pass the Protecting the Right to Organize (PRO) Act which would roll back numerous longstanding rights enjoyed by individual workers through such actions as the elimination of all state right to work laws. Individual workers deserve more freedom, not less.