The fine print costing Australians a pay rise

By MILLIE MUROI, Economics Writer

Hidden in the job contracts of about one in five Australians are little clauses weighing down their chances of landing a pay rise or a better-fitting role.

They might, for instance, ban you from working for any of your employer’s competitors for a set amount of time – even after leaving your job. Or, they can prevent you from setting up your own business in the same industry. These are called “non-compete” clauses, and they’ve been on the rise for the past five years.

From 2027, non-compete clauses on workers earning less than $175,000 a year could be banned by a Labor government. But why are these clauses so bad? And will banning them make much of a difference for workers or the economy?

Non-competes are mostly in place to protect business interests, but in some roles, they can be reasonable. For example, they might stop a big bank employee from sharing timely and confidential information or business secrets with a competitor or prevent them from taking client relationships they’ve developed through the bank to another bank.

But in some cases, these clauses simply handcuff low-paid workers to their jobs, stopping them from seeking better jobs. Roughly 3 million Australians are affected by these clauses, including childcare workers, construction workers and hairdressers. Who knew childcare was so full of sensitive trade secrets?

Non-competes are generally not enforceable – unless a court rules that it’s “reasonably required” to protect a “legitimate interest”. But as former Fair Work Commission president Iain Ross points out, these “interests” have expanded to concepts such as a “stable workforce”.

The open-endedness also tends to benefit employers because they usually have more resources to back them up, and workers aren’t often willing to foot the legal costs and spend time arguing their case in court. A 2013 study, for example, put the cost of legally challenging the validity of a non-compete at between $20,000 and $100,000 – a year’s worth of salary or more for some employees.

Another 2020 study in the US found that non-competes tended to discourage workers from leaving for a competitor by roughly the same degree regardless of whether it was enforceable or not.

That means workers tend to just suck it up and stay in their jobs – even if it means missing out on a pay rise. And it’s often the lower-skilled and lower-paid workers with weaker bargaining power who are hit hardest.

Economic research institute e61 found people who work for companies that use these clauses are paid 4 per cent less on average than similar workers at similar firms that don’t use them. Lower-skilled workers bound by non-competes were even harder hit, earning about 10 per cent less after five years than those who weren’t bound by these clauses.

For a worker on a median wage, banning non-compete clauses could lead to a wage increase of up to $2500 a year.

But non-competes aren’t just an issue for workers. They are also a drag on the economy.

Lower job mobility – that is, less ability for workers to switch jobs – can be a downer for productivity. Why? Because they’re less able to move to jobs they might be a better fit for, and because it dampens the incentive for businesses to better themselves in order to attract and retain their workers.

Ross also points out that some of the key barriers to Australia improving its productivity include weak business investment and a slowdown in business dynamism: meaning fewer new firms, less movement of workers between firms and weak adoption of new technologies.

Banning non-competes will boost productivity because it allows workers to move to jobs they may be better at. It also forces businesses to innovate and find ways to improve the way they do things – including investing in training and support they provide to their workers – in order to stay ahead of their competition and stay in business.

Research from the Productivity Commission suggests the proposed ban on non-compete clauses could fast-track productivity and add $5 billion – or 0.2 per cent – to Australia’s GDP.

Neither major party has been game to tackle the big issues such as tax reform (which are crucial to improving our productivity and living standards), but banning non-compete clauses for those earning less than $175,000 a year is a start.

Of course, the details of this change are yet to be ironed out. And business groups have been quick to leap out against it.

The Victorian Chamber of Commerce, for example, called it “workplace overreach” while the Council of Small Business of Australia said it made life harder for small businesses already struggling with skills shortages.

There’s valid criticism that banning non-compete clauses puts some confidential information at risk. But this could be covered by non-disclosure agreements, which are less of a drag on job mobility and wages – and, in any case, the positive impacts for the economy will outweigh the negatives.

Critics also claim non-compete clauses encourage businesses to invest in areas such training and upskilling their workforces because they can be less worried about losing their workers and wasting resources if those employees decide to leave the job.

But stronger competition could also drive businesses to offer better training opportunities and foster more productive work environments to maintain their edge over competitors.

The Coalition is on the fence about the proposed change, saying it believes employees shouldn’t be “unreasonably restrained” from changing employers or starting their own business, but that small businesses shouldn’t face having their sensitive commercial or customer information “taken by an employee and given to one of their competitors”.

It’s worth noting large businesses are twice as likely to use non-compete clauses as small businesses and that non-competes tend to favour large, existing businesses over small and new firms.

There are certainly limitations in the government’s proposed policy, and details yet to be ironed out. For instance, would the change apply only to new contracts drawn up from 2027 onwards, meaning it would have no effect for the millions of Australians currently bound by them? These questions won’t be answered until the government completes its consultation process.

There’s also evidence that a full ban on non-competes – not just for those earning under a certain threshold – can have widespread benefits. Evidence from California – home to the Silicon Valley – for instance, suggests a complete ban could foster a more dynamic labour market where workers can move around more freely and share knowledge.

It’s taken a long time for the government to care enough to pursue this change – most likely because of the backlash it knew would come from business owners. But if we want agile and innovative businesses, productive workers and a stronger economy, a ban on non-competes is a no-brainer.

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Fixing the economy is like training for a marathon: not much fun

By MILLIE MUROI, Economics Writer

It used to completely baffle me how addicted runners seem to be to their sport. My dad, who has run nearly 200 marathons, used to drive my brother and I to park runs at the crack of dawn as kids. Not my idea of fun.

But the more I think about it, the more I realise running is like competition reform: often a pain in the glutes, but a habit that’s rewarding (and actually a bit enjoyable) if you stick the course. In August, I’ll be attempting – if all goes to plan – my first marathon.

Running is what Dr Andrew Leigh, former economics professor and now assistant minister for competition and treasury, would class as “type one” fun. Following him on Strava – Facebook for fitness buffs – is proof of this: for Leigh, running is intrinsically fun.

For me, it has long been “type two” fun: unpleasant in the moment but satisfying after the fact – much like competition reform for economists, as Leigh points out in a speech he gave to the Economics Society of Australia in Perth this week. “It’s no policy paradise or island stroll, but it’s no data desert either,” he says of reform: it’s hard work at the time but worth the effort.

The Hilmer reforms in the 1990s are a good example. While the process took nearly a decade and there was plenty of disagreement, the pay-off was massive. Leigh says it permanently boosted average annual household incomes by roughly $5000.

Just as you might be pushed to perform better in a race against other people, greater dynamism and competition is generally a good thing for a more productive economy.

One lesson from those reforms was that money talks. Much like a promise agreed to (but not yet fulfilled) by my parents to pay me $5 for every second I take off my “per kilometre” pace, incentives matter. Turns out I can run much faster when I’m financially compensated for it.

In the late 1990s, the Australian government made national competition policy payments to states and territories based on their populations – but only if they made satisfactory progress on their reform commitments. This helped push through changes such as removing restrictions on retail trading hours, setting up the national electricity market and abolishing controls on the price of milk.

Today, Leigh says the Australian economy faces different challenges. And while reform may not be anyone’s idea of “type-one” fun, it can make us better at what we do.

That is, the easier it is to switch jobs, and the less dominated an industry is by a fistful of firms, the better it is for our economy. Why? Because it keeps businesses on their toes, pushes them to work harder and smarter, and allows workers to move more easily to jobs that are a better fit.

And as Leigh points out, we’ve become better at crunching the numbers. “Using bigger datasets, better econometric techniques and updated theories, economists have provided new insights on trends in market concentration and the relationship between competition and productivity,” he says.

This is important because it’s difficult to make improvements (in running and in economics) without data.

We know from economists Dan Andrews (not that one) and David Hansell’s look at firm-level data, for example, that job switching rates have dropped in recent years. And we see from Jonathan Hambur’s look at tax data that Australian industries dominated by a handful of big players have tended to increase their prices the most.

The hard work, of course, is making the changes we need. Tracking my running form during runs has been weirdly fun. Actually fixing my technique? A bit tedious.

Last year, the government ramped up the country’s merger reforms so that businesses above a certain size as measured by their turnover – or buying a business over a certain size – would have to (from January 2026) notify the Australian Competition and Consumer Commission whenever they wanted to merge. That is, notification would no longer be voluntary.

This was partly thanks to a database built by the Treasury’s Competition Taskforce, the Reserve Bank and the Australian National University, which found about 1500 mergers were happening every year, many involving big firms. Yet only about one in five were voluntarily notifying the competition watchdog.

Enforcement and the paperwork required for all the additional notifications might be a bit cumbersome. But the hope is that keeping track of big (or serial) mergers will help keep concentration in check.

And the fun doesn’t stop there. Leigh says there’s currently work underway on a tool to identify parts of the economy where there are only a few big businesses. Using geographic data from the Australian Bureau of Statistics, the tool will help to zero in on concentration hot spots: regions or segments of the economy where further merger activity could pose the greatest risk to competition.

Then, there’s “non-compete clauses” which handcuff more than one in five Aussies according to economic research institute e61. These sneaky clauses are written into employment contracts to restrict an employee from joining a competitor, or starting their own business to compete with their ex-employer, usually for a set time or within a geographic area.

Non-competes can protect intellectual property, but their use in sectors like childcare, Leigh says, shows they’re probably also being used unreasonably to stop workers moving to more desirable jobs, too. This, he says, is “type three” fun: that is, no fun at all.

The Productivity Commission reckons reforming non-compete clauses could permanently boost Australia’s productivity and output by allowing workers to move more easily to higher value jobs and making it easier for new businesses to challenge old ones.

It’s one of 19 potential reforms under a new National Competition Policy signed last year, which the commission reckons will increase the income of every Australian household each year by up to $5000.

It might not be easy to execute, but the commission says these reforms would ease cost of living pressures, pushing down prices by between 0.7 to 1.5 per cent over the long term.

Leigh says work is already underway on the 10-year reform agenda, starting with changes like streamlining commercial planning and zoning and making it easier for care workers to move around. In a modest nod to the Hilmer reforms, there’s also a $900 million National Productivity Fund which will pay state governments to implement reforms.

Like training for a marathon, competition reform requires focus, commitment and some sacrifice. The “runner’s high” is still an elusive phenomenon for this amateur runner. But if I can make it through that finish line in August, I’m optimistic the nation can hit the ground running with more of the reform we need for a better-performing economy in the long run.

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How two economists got themselves more say in government policy

By MILLIE MUROI, economics writer

For all the havoc it has wreaked, some good things were born from the pandemic: widespread hybrid working for one. Another was the emergence of e61: a novel name – not for a virus or robot – but for a factory for economic findings.

“What’s new about that?” you might ask. Well, it’s breaking a decades (perhaps centuries) old habit of people sticking to their lanes. Despite the important work done by academics and policymakers, the two rarely join forces.

Part of that is because some of our best academic talent gets sucked overseas to places like the US or UK. It’s also because academics and policymakers don’t tend to go out of their way to engage with one another, and because rigorous research skills and policymaking passion and practice don’t often manifest in a single person.

There are politicians such as federal Labor MP Dr Andrew Charlton with a doctorate in economics from Oxford University, who have put themselves through the wringer of high-level research – but few who are tuned into both the cutting edge of research and the front line of policymaking.

Charlton, who stepped down as director of the non-partisan, not-for-profit think tank when he was preselected to run as a Labor candidate in 2022, teamed up with University of Chicago economics professor Greg Kaplan when the two found themselves back in Australia during the pandemic.

Together, they founded the e61 Institute to attract and develop Australian economists, including those who have lived overseas, and pair academic rigour with a policy focus right here in Australia (hence the “61″ in its name: the number you dial from abroad when calling Australia).

Its economists have released a raft of work in the past three years which has fed into policy decisions and debate. Their approach includes using microdata (anonymised but detailed information about people, households, and businesses from surveys, censuses and administrative systems), to offer insight – not just to policymakers, but to the broader public.

From the way non-compete clauses are slowing down wage growth, to putting a number on the costs of caregiving, and identifying consumer inertia as a barrier to stronger supermarket competition, e61 has shed light on many of the issues facing the country.

Their work has fed into top decision-making processes, appearing in House of Representatives economics committee inquiries, meetings and submissions.

But funded by the Susan McKinnon Foundation, the Macquarie Business School and the Becker Friedman Institute, e61’s work is also freely available to the public. And the things you can learn from them are fascinating – providing insight into how economics applies in the real world – beyond the abstract, and beyond the bookish or theoretical.

Matthew Elias, for example, looked at the role we – as consumers – play in the highly concentrated supermarket sector.

As you know, Coles and Woolworths control about 67 per cent of supermarket retail sales nationally, and they’ve been under the scrutiny of the competition watchdog which is due to release its final supermarket inquiry report this year. While the supermarkets have copped some heat from frustrated consumers convinced that the lack of competition in the sector has led to excessive price growth, Elias found part of the problem was that customers don’t tend to shop around.

Shopping around, and the threat of customers leaving, is an important way to put pressure on businesses to deliver the best prices and quality they can. But looking at consumer shopping data, Elias found even in areas with several providers, shoppers tended to exhibit inertia: that is, they don’t tend to change their shopping habits over time, instead returning to certain supermarket brands – especially Coles and Woolworths.

Why? The answer is unclear, but some possibilities include costs including time spent learning the layout of a different store, the effort needed to compare the costs of various items, proximity to certain stores and brand loyalty promoted by schemes like Flybuys or Everyday Rewards.

Jack Buckley, Ewan Rankin and Dan Andrews meanwhile looked at non-compete clauses: where an employee agrees not to compete with their employer by, for instance, working in a similar industry, for some time even after their job ends.

About one in five of us are tied up in a non-compete clause, and it’s coming at a cost – not just to our economy (people switching to better-suited jobs can help improve innovation and lift productivity), but also to our pay.

The researchers found evidence that the fall in job mobility (people moving between jobs) was linked to lower wage growth for workers with non-compete clauses. On average, they found, people with non-compete clauses earn 4 per cent less than similar workers with just a non-disclosure agreement (aimed just at preventing employees from sharing trade secrets).

Then there’s research by Rachel Lee, Dan Andrews and Jack Buckley which sounded a warning for policymakers looking to tweak their payroll tax settings. When South Australia bumped up the payroll tax-free threshold (which also sharply increased the marginal tax rate for firms over that limits), it led to a phenomenon called “bunching.”

Basically, e61’s analysis of business income tax data found lots of new businesses in South Australia were ending up just below the new payroll tax threshold. Since firms with an annual wage bill of less than $1.5 million could be exempt from payroll tax, there was a jump in the number of firms just under that size – despite a lot of those businesses being productive and growing firms which you’d expect to continue growing.

The conclusion? That little tweak in the payroll tax settings may have stunted the growth of many businesses, which cut back on their workers in an effort to slash their payroll tax. Sure, it benefited some smaller firms which were able to grow within that threshold, but the costs of businesses shrinking their payrolls was bigger.

Kaplan says he wants to see e61 be at the forefront of major policy movements over the next debate: both avoiding bad policy mistakes and guiding good policy. It might take a while for the new kid on the economics block to become a hard-hitter, but linking some of the brightest academic economists with crucial policy problems is helping to inject rigour into our understanding of economics – and that of our policymakers.

e61 supported the reporter’s travel from Canberra to Sydney.

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Bosses are finding more innovative ways to handcuff their workers

When I joined the John Fairfax superannuation scheme 50 years ago on Wednesday, I little knew my new boss was trying to handcuff me. Fortunately, they were “golden handcuffs”. But these days, bosses use other, more blatant ways to tie their workers to them and stop wages growing so fast.

The Fairfax scheme I joined decades ago must have been fairly common among big companies in the years after World War II, when shortages of skilled labour were almost continuous.

From memory, the company offered to contribute an extra 6 per cent of my pay to the scheme, provided I contributed 4 per cent. That 4 per cent stopped many people joining the scheme, but not me.

What I didn’t realise was that, if you left the scheme before reaching retirement age, you got your own contributions back, with 3.75 per cent interest, but forfeited the company’s contributions and the accrued earnings on them.

But here’s the trick: the company didn’t keep the forfeited contributions and earnings, but transferred them to the scheme’s general fund, to be shared between those loyal employees who did stay until retirement.

Get it? The longer you’d worked for the company, the more you had to lose by leaving. Plus, the more you had to gain by staying on until retirement. You were bound to the company by golden handcuffs.

(A side-benefit to the Fairfax family was that much of the huge sum in the general fund was held in Fairfax shares, thereby increasing the family’s protection against a hostile takeover.)

Relax. My handcuffs are long gone, removed by Paul Keating’s introduction of compulsory super for employees and related reform of existing company super schemes, in the early 1990s. Today, all employer contributions and earnings are immediately "vested" in the employee, meaning you take them with you when you leave the company.

Now, I should remind you that mainstream economists are great believers in "the mobility of labour". The freer workers are to move to another employer offering a better job, or to start their own business, the more efficient the economy is likely to be, and the faster productivity will improve.

So the last thing economists approve of is employers being able to discourage, delay or even prevent their staff from moving on. That is, able to prevent market forces from working the way they should.

But as assistant minister for competition Dr Andrew Leigh reminded us last week, there’s much research showing that employers around the world are increasingly using "non-compete clauses" in their employees’ contracts. To get the job, you have to agree not to leave and work for one of its competitors for a set period, or to yourself set up in competition.

Couldn’t happen in a decent place like Australia? Don’t be so sure. Just as it’s taken longer for our chief executives to start believing they’re entitled to pay themselves many multiples more than they pay any of the company’s other employees, so they’ve been slower to follow the Yanks and Brits in handcuffing those who work under them.

Even so, an online survey conducted by Dan Andrews (not that one) from the e61 Institute, and Bjorn Jarvis from the Australian Bureau of Statistics, found that as many as one in five Australian workers is subject to a non-compete clause.

Smaller percentages of employees must agree not to poach the company’s workers after they’ve left, or not to solicit the business of their former employer’s clients.

The survey found that, as well as applying to senior executives, non-compete clauses may apply to many workers who have close contact with the customers: childcare workers, yoga instructors and specialists in IVF.

It also found that competition clauses applied to 39 per cent of managers, 26 per cent of community and personal service workers, and to 14 per cent of clerical and admin workers.

Leigh says that shifting jobs is typically associated with a substantial jump in pay. Yes, that’s probably why few recruits resist when the new boss slips in some clause about what happens if you leave. Leave? I haven’t even arrived yet.

But Leigh says even many low-paid workers are constrained from shifting to a better job. Don’t forget that, these days, many government-subsidised services are provided by small, for-profit providers.

I hire you to work in my childcare or aged care (or yoga) business, but you prove good at it, and popular with the parents or the oldies’ children, so you leave and set up for yourself, taking some of my customers with you.

Leigh says that, even if some non-compete clauses wouldn’t stand up in court, they are rarely tested. (That’s another yawning gap between theory and practice. In theory, we’re all equal before the law. In practice, lawyers cost big bucks – and the boss has a lot more bucks to play with than you do.)

“In most cases,” Leigh says, “workers subject to a non-compete clause will either choose to suffer the period of enforced ‘gardening leave’ [the months or years that you’ve agreed not to join a competitor or become one] or will stay with their existing employer.”

But this is about more than employers treating you like you’re their slave. It’s also about wages. Especially where workers possess skills that aren’t easy to come by, competition between employers pushes wages up. If you can find a way to dampen that competition, you’ve kept a lid on wage costs.

“This means that workers miss out on potential wage gains,” Leigh says. “It also makes it harder for start-up firms to attract the talent they need to challenge incumbents. In turn, productivity suffers.”

The Bureau of Statistics has added a question about non-compete clauses to its regular survey of employee earnings and hours, which it will publish later this month.

The competition taskforce within Treasury, set up by the government last year, will be looking closely at this information to learn more about the effects of non-compete clauses on workers and businesses in Australia.

Have you noticed how, whenever the (Big) Business Council reads us another lecture on the need for major reform to get our productivity improving again, non-compete clauses never rate a mention?

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