Adam Smith saw it 250 years ago. ‘We rarely hear,’ he wrote, ‘of the combinations of masters, though frequently of those of workmen’. And anyone who imagines employers do not combine to lower wages, he added, is ‘ignorant of the world’. Such arrangements, Smith observed, are conducted ‘with the utmost silence and secrecy’.
He could have been writing about Silicon Valley.
For years, some of the biggest names in American tech operated what looked less like a labour market and more like a private arrangement among insiders.
Apple, Google, Intel, Adobe, Intuit, Pixar, Lucasfilm and eBay entered no‑poach arrangements under which they agreed to avoid recruiting one another’s staff.
In some cases, they went further. If an employee applied to move, the current employer could be tipped off. In some instances, hiring required permission. At least one arrangement barred bidding wars.
It was cartel conduct, translated from the product market to the pay packet.
The secret deals were made by those at the top: senior executives and board members.
Recruiters were told which firms were off limits. Some human resources teams kept ‘Do Not Call’ lists. This was organised conduct, carried out by the companies’ leadership teams.
And it was done with the furtiveness one would expect from people who understood the stakes.
Google’s Eric Schmidt worried about creating a paper trail ‘over which we can be sued later’.
When Steve Jobs complained that Google had cold‑called an Apple employee, Schmidt replied that the recruiter had violated policy and ‘will be terminated within the hour’. Jobs responded with a smiley face.
That smiley face deserves a place in the museum of corporate arrogance. Those involved knew that if powerful firms agree to stop competing for labour, workers lose bargaining power. Fewer outside offers mean smaller raises and weaker promotion prospects.
Labour markets work best when employers compete. The textbook case for competition does not stop at the supermarket shelf. It applies just as strongly in hiring.
If firms compete for software engineers, nurses, apprentices or truck drivers, workers can test their worth. If firms secretly agree to hold back, the market is rigged.
The Silicon Valley case is especially revealing because these were some of the richest, most dynamic companies on earth, operating in an industry built on the mythology of merit and mobility. If wage‑fixing can flourish there, it can flourish elsewhere too.
Recent economic research on the case puts some numbers around the damage.
Using Glassdoor data and the timing of the US Department of Justice investigation, economist Matthew Gibson estimates that the Silicon Valley no‑poach agreements reduced salaries at colluding firms by 5.6 per cent on average.
Stock bonuses were hit too. Workers reported lower satisfaction with compensation and lower satisfaction with career opportunities.
The effect showed up for incumbents and newer workers alike, suggesting that the agreements depressed starting pay and pay growth over time.
That is the point worth underlining. Wage‑fixing is a drag on an entire labour market. A worker who never gets the call from a rival firm never sees the outside offer. Without the outside offer, the pay rise shrinks. The promotion slows. Over time, the loss compounds.
Gibson estimates that the Silicon Valley arrangements shifted at least US$3.1 billion from labour to other factors of production through salary effects alone.
The Silicon Valley no‑poach agreement was brought to light thanks to litigation by the US Department of Justice, which alleged a violation of the Sherman Act, and ultimately secured a US$435 million settlement.
Yet had it happened here, a similar case would likely have faced serious obstacles under Australia’s current competition law, because the Competition and Consumer Act has long contained an employment‑related exemption.
That is precisely why the federal government is moving to close the loophole, by banning no‑poach and wage‑fixing agreements. Stopping Australian businesses from making anti‑competitive arrangements capping pay and conditions is a basic market reform.
It says that if companies want to succeed, they should do so by building better products, adopting better technology, training better workers and managing better teams, not by secretly agreeing to suppress wages or restrict the movement of workers.
It is also a fairness reform. Workers cannot consent to secret restraints they have never seen. In the Silicon Valley case, employees were being fenced in without being told there was a fence.
For business, the reform should be seen in the same light as other competition measures. Our government is banning non‑compete clauses for workers earning less than $183,000. Preventing wage fixing is a natural companion reform.
Competitive markets reward firms that innovate, invest, train their staff and serve their customers. Cartels reward firms that pick up the phone and carve up the field. Australia should back the first model and bury the second.
There is an old habit in some debates of treating wage suppression as though it were an unfortunate by‑product of market forces. Yet the Silicon Valley case shows it’s like an old‑fashioned cartel: the result of decisions taken in boardrooms, enforced by senior executives, hidden from workers and dressed up as ordinary commercial practice.
Adam Smith would have recognised the pattern at once. So should we.
The government’s reform draws a clear line. Businesses can compete for customers, market share, capital and talent.
What they cannot do is secretly agree to rig the labour market against workers. Wages should be shaped by competition, not conspiracy.