Now, economists used to think that the balance of power between labor and capital was pretty fixed. In other words, workers would always get a certain share of their company's earnings, and owners would get the rest. For most of the postwar period, this certainly seemed to be the case: the split between labor and capital stayed roughly the same throughout, although it did start to slowly shift in management's favor during the 1970s. Despite that, labor's share of income was still close to its longer-term average in the late 1990s.
But, as you can see below, labor's share plummeted at the turn of the century. What changed? Well, for one, globalization really got going. China joined the World Trade Organization in 2001, and the cost of its increased trade with the U.S. was an estimated 2 to 2.4 million jobs here, mostly in manufacturing. All this offshoring, of course, let U.S. multinationals pay their shareholders more at the expense of U.S. workers. And then the financial crisis all but finished labor off. That's because the government did enough to save the economy, but not the unemployed, so companies could squeeze their workers even more while booking record earnings. Not only that, but, for reasons that aren't entirely clear, the middle-class jobs we lost during the Great Recession have just been replaced by low-paying ones during the not-so-great recovery. That's kept labor from catching up at all the past few years.
So the crisis has let Corporate America gobble up an even bigger slice of the income pie for itself, while the rest of America is stuck hoping for some wage crumbs. Indeed, S&P 500 companies have spent 95 percent of their earnings this year on boosting stock prices with dividends and share buybacks. No wonder the stock market is sky high, the recent volatility notwithstanding, while median income continues to stagnate.
Companies, in other words, have so much power that they can make their employees do almost anything. Including, it turns out, signing away their right to work for a competitor.
This, to use a technical term, is nuts. Non-compete clauses, after all, are usually reserved for top executives who really could take sensitive information—and not how to put together a sub—to a rival. Or at least they used to be. As Stephen Greenhouse of the New York Times reports, it's not just Jimmy John's that's trying to keep its entry-level workers from jumping ship. It's everything from hair salons to yoga studios to even summer camps. Yes, your kid's camp counselor might have a contract that bars them from taking their arts and crafts talents to any other.
But why are companies even doing this? Easy: Because they can. And because it makes it harder for their employees to demand higher pay. If you can't switch jobs after all, the only way you'll get a raise is if your boss gives you one. Now, big chains like Jimmy John's would rather replace workers than pay them more, but they'd also rather not have to replace them and train new people. Non-competes make it easier for companies to hold on to the workers they want at the low wages they want.
Corporate America's victory has been the economy's loss. That's because job-switching, which has already been on the decline, tends to boost wages and productivity. It's how people find out what they're best at and can be paid the most to do. If you don't let them do that, then you sacrifice some of their long-term potential for company's short-term profits.
Shareholder value, ain't it grand.