I’ve spilled quite a few pixels defending the modern U.S. economy from charges of rampant monopoly power. My point has always been that market contestability mattered more than the size or profitability of the companies. Now courtesy, of Rachel Abrams at the New York Times, comes a report of explicit efforts to limit the contestability of labor markets.
Some of fast-food’s biggest names, including Burger King, Carl’s Jr., Pizza Hut and, until recently, McDonald’s, prohibited franchisees from hiring workers away from one another, preventing, for example, one Pizza Hut from hiring employees from another.
The restrictions do not appear in a contract that employees sign, or even see. They are typically included in a paragraph buried in lengthy contracts that owners of fast-food outlets sign with corporate headquarters.
Yet the provisions can keep employees tied to one spot, unable to switch jobs or negotiate higher pay. A lack of worker mobility has long been viewed as contributing to wage stagnation because switching jobs is one of the most reliable ways to get a raise.
As always, I hold that there is some economic rational for this…but this sure looks like a contract in restraint of trade. Moreover, the arguments in favor are less than compelling.
Turnover rates are high in the industry, and maintaining a talented work force requires investing in training and recruitment. Prohibiting franchisees from hiring one another’s workers protects that investment, said Stuart Hershman, a lawyer with the firm DLA Piper. He estimated that he had drafted hundreds of franchise agreements, many of which contained some kind of recruitment prohibition.
“There has never been, ever, any intention, by drafting this type of provision, to restrict employee mobility, restrict wage competition, or suppress employee pay,” Mr. Hershman said.
Defending your investment by restraining competition is precisely the goal of collusion. It only works through restricting wage competition. The very reason why noncompete agreements need to be signed between the worker and the individual employer is so that employers are forced to compete over whether or not they force employees to sign noncompete agreements!
Nor is this analogous to consider all workers as part of the big corporate family. The very reason for offering franchises is that the monitoring costs of running a massive multi-location corporation would be higher than simply letting an independent franchisee run the local show. In particular, it would be key to hire and retain good store managers. This makes the defendants case particularly compelling.
Ms. D was promoted to department manager, she said, and the next step would have been for her to fly to Illinois to attend “Hamburger University,” where McDonald’s runs its management-training programs. But the training was canceled when she got pregnant, she said in her suit, and the promotion never came.
She was frustrated, she said, and tried to take a job at a different McDonald’s, but was blocked because of the no-hiring rule. “That’s what hurt the most,” she said.