Noncompete contracts

At the Conversable Economist blog Timothy Taylor discusses noncompete contracts. A noncompete contract is one in which one term in the employment contract states that the employee will not work for a competing firm for some period of time after leaving their current employer. What is the use of such contracts?

Taylor refers to a March 2016 report from The Office of Economic Policy at the U.S. Department of the Treasury: "Non-compete Contracts: Economic Effects and Policy Implications" (pdf). The report states,

The conventional picture of a workplace characterized by non-compete agreements is one that features trade secrets, including sophisticated technical information and business practices that firms have a strong interest in protecting. By preventing a worker from taking such secrets to a firm’s competitors, the non-compete essentially solves a “hold-up” problem: ex ante, both worker and firm have an interest in sharing vital information, as this raises the worker’s productivity. But ex post, the worker has an incentive to threaten the firm with divulgence of the information, raising his or her compensation by some amount equal to or less than the firm’s valuation of the information. Predicting this state of affairs, the firm is unwilling to share the information in the first place unless it has some legal recourse like a non-compete contract.

Also as Taylor explains,

[...] a noncompete can be a way for firms to seek out employees who intend to remain with the firm for a time. When the firm that knows its workers will not be decamping for the competitor down the street, it finds it easier to share trade secrets and company methods across all workers in the firm, and to provide training in these methods as needed.

So in areas where hold-up problems could occur noncompete contracts can make sense. But as Taylor notes these contracts are used in situations where trade secrets, technical information and particular business practises are not a issue. For example,

[...] the Jimmy John's sandwich chain was requiring sandwich makers and drivers to sign a noncompete contract in which they agreed that when they stopped working for Jimmy John's they would not work for “any business which derives more than 10% of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches,” if that new employer was located within three miles of any of the 2,000 Jimmy John's restaurants anywhere in the country.

Its not clear what role noncompete contracts play here. After all if you want to know what is in a Jimmy John's sandwich you don't have to get one of their employees to work for you and tell you, you just have to buy a sandwich and take a look.

There is also the issues of whether such contracts are enforceable. As Taylor notes,

Noncompete contracts often include provisions that are not enforceable under state law: for example, state law in California makes noncompete contracts (with a few limited exceptions) essentially unenforceable, but 19% of California workers sign such agreements.

I don't know about the situation in New Zealand.

Also firms have other measures they can take to protect information and keep employees. To protect information and relationships with clients law firms use an "up or out" procedure. After a time with the law firm you are either promoted to partner or fired. The timing of this decision is such that the lawyer in question  has had enough time to prove their worth to the firm but not enough to have gained enough information about the firm's clients and built a good enough relationship to get clients to move with them if they are fired.

Also when it comes to keeping good employees firms have a number of alternatives to noncompete contracts. The "up" option in the lawyer example or options such as paying bonuses related to length of time on the job.

So the question is, Are noncompete contracts socially useful?

Natural disasters: insurance costs vs. deaths

In a posting with the above title at the Conversable Economist blog Timothy Taylor writes,

The natural disasters that cause the highest levels of insurance losses are only rarely the same as the natural disasters that cause the greatest loss of life. Why should that be?

This doesn't seem that odd to me. Insurance claims are large when you get a lot of expensive, well insured property being damaged. But one reason for things like buildings being expensive is that they are well built and can withstand, to a large enough degree, the effects of a disaster without killing the people inside them. Cheap poorly build buildings give rise to less expensive insurance claims but suffer greater damage in a disaster and thus kill a great number of people as a result.

Taylor then gives two lists:

The first list shows the 40 disasters that caused the highest insurance losses from 1970 to 2014 (where the size of losses has been adjusted for inflation and converted into 2014 US dollars). The top four items on the list are: Hurricane Katrina that hit the New Orleans area in 2005 (by far the largest in terms of insurance losses), the 2011 Japanese earthquake and tsunami; Hurricane Sandy that hit the New York City area in 2012; and Hurricane Andrew that blasted Florida in 1992. The fifth item is the only disaster on the list that wasn't natural: the terrorist attacks of September 11, 2001. 

The Christchurch quake comes in 8th on this list,

The second list is

[...] a list of the top 40 disasters over the same time period from 1970 to 2014, but this time they are ranked by the number of dead and missing victims. The top five on this list are the Bangladesh storm and flood of 1970 (300,000 dead and missing); China's 1976 earthquake (255,000 dead and missing), Haiti's 2010 earthquake (222,570 dead and missing), the 2004 earthquake and tsunami that hit Indonesia and Thailand (220,000 dead and missing), and the 2008 tropical cyclone Nargis that hit the area around Myanmar (138,300 dead and missing). 

Taylor notes that there is little overlap between the two lists.

Only two disasters make the top 40 on both lists: the 2011 Japanese earthquake and tsunami, and Japan's Great Hanshin earthquake of 1995.

His reasoning for the lack of overlap is a more sophisticated version of the argument I gave above.

[...] the effects of a given natural disaster on people and property will depend to a substantial extent on what happens before and after the event. Are most of the people living in structures that comply with an appropriate building code? Have civil engineers thought about issues like flood protection? Is there an early warning system so that people have as much advance warning of the disaster as possible? How resilient is the infrastucture for electricity, communications, and transportation in the face of the disaster? Was there an advance plan before the disaster on how support services would be mobilized?

In countries with high levels of per capita income, many of these investments are already in place, and so natural disasters have the highest costs in terms of property, but relatively lower costs in terms of life. In countries with low levels of per capita income, these investments in health and safety are often not in place, and much of the property that is in place is uninsured. Thus, a 7.0 earthquake hits Haiti in 2010, and 225,000 die. A 9.0 earthquake/tsunami combination hits Japan in 2011--and remember, earthquakes are measured on a base-10 exponential scale, so a 9.0 earthquake has 100 times the shaking power of a 7.0 quake--and less than one-tenth as many people die as in Haiti.

In other words being a high income country which can afford good building codes, resilient infrastructure and a quick and quality disaster response is big factor is reducing deaths from natural disasters. In short, being rich saves lives. Another plus for the effects of economic growth.

Selling a kidney: would the option necessarily be beneficial?

This is the question asked by Timothy Taylor at this blog Conversable Economist. Important here is the claim, popular among economists, that offering people an additional option--in this case to sell a kidney--must make the people better off, because they don't need to choose the option, but if they wish to do so, they can. That is to say, the basic idea that trade is voluntary.

Taylor is responding to an argument by Simon Rippon against this idea,

[...] that when an option is available, at least some people will find themselves under social pressure to select that option, or will be held responsible for failing to choose it. "For example, imagine a cashier at a rural filling station that is potentially vulnerable to an overnight robbery. It may be better for the cashier to have no key to the safe (and to have a prominent sign displaying that information) than for the cashier to have the key which gives him the option to open it. Possession of the key would make the cashier vulnerable to threats, and the filling station worth robbing."If selling a kidney was a legal option, Rippon argues:

"This means that even if you have no possessions to sell and cannot find a job, nobody can reasonably criticise you for, say, failing to sell a kidney to pay your rent. If a free market in organs was permitted and became widespread, then it is reasonable to assume that your organs would soon enough become economic resources like any other, in the context of the market. Selling your organs would become something that is simply expected of you as and when financial need arises. ...

We should ask questions such as the following: Would those in poverty be eligible for bankruptcy protection, or for public assistance, if they have an organ that they choose not to sell? Could they be legally forced to sell an organ to pay taxes, paternity bills or rent? How would society view someone who asks for charitable assistance to meet her basic needs, if she could easily sell a healthy ‘excess’ organ to meet them? ... Wherever there is great value in not being put under social or legal pressure to sell something as a result of economic forces, we should think carefully about whether it is right to permit a market and to thereby impose the option on everyone to sell it."

These are interesting arguments but do they not apply to any number of things we already allow to be traded, eg in the US blood, tissues, sperm and eggs? Do these bad things happen in these other markets? If not, why are kidneys different? If so how are they dealt with in these other markets? Surely the question is one of balancing the costs and benefits of allowing trade, not just pointing to a few possible bad outcomes and banning trade on that basis.

Taylor makes two points in the conclusion to his post,

First, at present, the main source of kidney donations is people who die unexpectedly, with a few voluntary donors. In the meantime, thousands of Americans die every year awaiting a kidney transplant. I can easily imagine that a substantial group of healthy people might not be willing to donate a kidney for free, but would be willing to do so for substantial compensation, and encouraging transplants from healthy donors could save thousands of lives. Second, it troubles me that we often expect the donors of kidneys and blood to act out of sheer altruism, but we have no such expectation of any of the other participants in an organ transplant, like the health care providers or the hospital.

The falling income share of labour

At his blog Conversable Economist Timothy Taylor quotes from a International Labour Organization report that shows that labour’s share of income has declined between 1990 and 2009 in 26 out of the 30 countries that were considered for the report. Taylor then makes an important but often missed point that when looking for an answer as to why labour's share has fallen, looking within country isn't likely to be fruitful. If the trend affects many countries the cause is likely to be something had has affected all countries and not something particular to one country.

When a trend cuts across so many countries, it seems likely that the cause is something cutting across all countries, too. Looking for a "cause" based on some policy of Republicans or Democrats in the U.S. almost certainly misses the point. The same is true of looking for a "cause" based in policies more common in Europe, or in China.

So just blaming the previous government or the current government isn't going to cut it as an explanation for the fall. And who reads ILO reports anyway?