I’m not sure why economists think they have exclusive ownership of the law of unintended consequences.
It’s basically common sense to realise the quest to achieve an objective can lead to unfortunate outcomes that don’t serve the primary purpose. But most economists regard themselves as experts when it comes to pointing to the perverse consequences that can occur when well-intentioned policy is badly designed.
Take the decision made years ago to significantly increase the rate of excise on tobacco products – by 500 per cent across a decade. To deter smoking as well as provide additional revenue, the policy looked like a no-brainer. Legally obtained cigarettes in Australia are now the most expensive in the world.
There was always a degree of contradiction in the policy. To maximise revenue, it’s best the demand for cigarettes is inelastic – relatively unresponsive to the price of a pack. Only if smokers keep consuming (legal) cigarettes would the rising flow of revenue be substantial.
Even so, the policy’s effectiveness was always subject to one major qualification.
It would work only if there were adequate compliance measures to ensure only tobacco products subject to excise were available for sale. Illegal products, often referred to as chop-chop, thus would be harder to obtain. In practice, it has worked out extremely badly. The illegal outlets have flourished and organised crime gangs have done very well.
Government policy has inadvertently created a highly profitable business opportunity for organised crime. Instead of the revenue for tobacco excise continuing to rise as Treasury expected, there has been a marked decline since the beginning of this decade. Compared with previous estimates of likely revenue by 2025 of around $14bn a year, the estimate is now half this figure. Further falls in revenue are expected for the rest of the decade.
It might seem obvious enough – that without powerful compliance measures in place the high official excise rate policy would generate very strong incentives for suppliers to avoid the tax – but the Treasury naively assumed it would be OK on the day.
That the federal government is not mainly responsible for ensuring compliance complicates the policy. Let me give you another example of potential unintended consequences that relate to a measure announced in the budget to outlaw non-compete clauses in employment contracts for workers earning less than $175,000 a year. (Whether this figure includes bonuses and commissions is unclear; this is an important consideration for some jobs, particularly sales.)
We are led to believe this prohibition will boost productivity and enlarge the size of the economy by $5bn or about 0.2 per cent of GDP. Evidently, about three million workers have non-compete clauses in contracts, including hairdressers, some construction workers, aged-care workers, childcare workers, nurses, sales agents and bookkeepers. Without these clauses, workers will find it easier to change jobs and achieve higher wages, so the argument goes.
The three million figure is easy to misinterpret. Increasingly, small businesses, when taking on new workers, will access standard employment contracts available cheaply on the internet. These wordy documents typically will have a section dealing with non-compete obligations but neither the employer nor the worker will take them seriously in many cases. The more interesting data point would be how many workers are sued for breach of their non-compete obligations. I’m almost certain the numbers are very low, particularly in respect of small businesses. This raises the question whether the measure is a solution in search of a problem.
Of course, there is the possibility workers refrain from seeking out alternative opportunities because of a non-compete clause. But the reality is that there are several perfectly legitimate reasons some employers regard non-compete clauses as both reasonable and important.
When workers are trained in valuable information technology products, including ones modified for a particular industry, there is potentially an issue of protecting intellectual property. In practice, this is likely to be a grey area, but employers have a right to protect investments in IP.
In other cases, the key issue is whether departing workers may seek to lure away clients with whom they have developed relationships. This is particularly the case in hairdressing as well as sales but is a concern for many small business owners. In some instances, clauses seek to prevent departing workers from working for any employer in the same industry within a defined geographical area. For some sectors, this provision does look unreasonable and anti-competitive. Surely an aged-care worker should be able to work for another operator close by? But the point is that the reasons for non-compete clauses go beyond unjustified anti-competitive restrictions on worker turnover.
In some instances – protecting IP, retaining clients – it is not unreasonable for employers to seek to constrain the behaviour of workers who may leave. After all, it is a common practice among professional service firms – legal practices, accounting and consulting firms – although the affected workers earn considerably more than $175,000.
Some of the penalties for partners, for instance, moving to competing firms or setting up in competition include the loss of shares and bonuses as well as an insistence on periods of “gardening leave”. Immediate denial of access to client lists and other files is also common. The rub is this: outlawing non-compete clauses, even for lower-paid workers, may have unintended consequences.
It could cause employers to limit the training they provide or to restrict how comprehensive it is. Clients may end up being rotated between staff members. New workers may be offered lower wages because the firm is less able to defend its investment in the workers. In some cases, the prohibition may dissuade small business owners from taking on new workers. There is the broader issue of whether a government should be seeking to interfere with the private contractual arrangements between employers and their workers if everyone is informed of their obligations.
Whether there are net benefits from banning non-compete clauses is unclear, with the size of any effect also debatable.
It’s always important to take the unintended consequences into account.
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