Economics of Sports Unit 7: Labor Markets

Monopsony and Baseball Initially players controlled the game Governing body: National Assn of Professional Base Ball Players It could not keep players from jumping contracts Pittsburgh Pirates named for piracy of players from other teams William Hulbert – a unique thief Financial backer of the Chicago White Stockings In 1875, he signs 5 players under contract with other clubs THEN calls for a new system that will end thievery Forms the National League of Baseball Clubs Key: Teams reserve 5 players (number is no coincidence!) Reservation eventually extended to all player contracts Becomes the Reserve Clause - part of the standard contract

The Reserve Clause Seems Innocent Bound players for length of contract plus one year The key to binding players: Players were not allowed to play without a contract All took came to interpret this as a lifetime contract Other sports leagues copy – often verbatim

Free Agency No major sport still has a reserve clause Free agency came to NFL, NBA, and NHL through the courts NFL could have had free agency in 1950s Courts finally awarded it in 1991 WHA sued NHL in an effort to sign away players Players sued the NBA when it tried to merge with ABA MLB players had the toughest path MLB was exempt from antitrust laws Union outsmarted owners at the bargaining table Got owners to agree to arbitration panel Panel overturned the reserve clause

Unrestricted Agency Can sign with any team Eligibility MLB: After 6 years NBA: After 4 years if a 1st round draft pick Otherwise no restriction NFL: After 4 years if contract has expired NHL: Has a complex formula Depends on age, position, and number of games played

Restricted Free Agency Player’s original team has right of first refusal It can retain the player by matching an offer Eligibility MLB does not have restricted free agency NBA: After 3 years if a 1st round draft pick Otherwise does not exist NFL: After 3 years if contract has expired NHL: Has a complex formula

Salary Arbitration A way to deal with disputes Mediators play the middleman Make proposals that neither side will No role in imposing settlement Arbitrators play the judge Binding: sides pre-commit to judgment Non-binding: only indirect pressure to accept Exists in NHL and MLB

Salary Arbitration in NHL Team and player submit proposals to panel The panel may choose either offer or impose its own ruling The panel has 48 hours to make its ruling A recent study shows that the rulings have closely tracked what econometric studies show the players are worth

Salary Arbitration in MLB Uses Final Offer Arbitration (FOA) FOA is designed to prevent addiction to arbitration

Final Offer Arbitration Each side makes one offer Arbitrator must choose one Cannot impose/propose independent solution Restores incentive to compromise

Winning by Losing Players have lost more than half the arbitration cases But it still has had a huge impact on salaries 111 player filed for free agency in 2009 Only 3 actually went through arbitration The average salary increase for the 111 players was 143% Players’ union has said that FOA has had a bigger impact on salaries than free agency

Salary Caps and Payrolls in the NBA Payrolls limited to 51% of qualifying revenue Individual salary scale based on experience Escrow tax on all salaries 9% of all salaries are held in escrow by the NBA Escrow tax applies if total salaries exceed 57% of eligible revenue Cap + 6% Regardless of exceptions and exemptions Escrow goes to league until reach 57%

Salary Caps and Payrolls in the NHL Payrolls limited to 54% of qualifying revenue Rises to 57% if league revenue exceeds $2.7B No individual can receive over 20% of the team’s allowable payroll Players put 13.5% in an escrow account similar to the NBA’s

Salary Caps and Payrolls in the NFL Players receive 62.24% of qualifying revenue Percentage is higher than other leagues Base is lower (not as much qualifies) The NFL has no individual limits Bonuses are a complicating factor Counted if the bonus is easily obtained (e.g., signing bonus) Bonus is prorated over the life of the player’s contract Bonuses that are not likely to be obtained (e.g., setting a career record for sacks) do not count against the cap

The Impact of Salary Caps Caps have significantly reduced payrolls Caps have significantly leveled payrolls Payrolls are less even in baseball than in other sports (even accounting for the Yankees)

The Impact of Rival Leagues Undermines monopsony power Salaries rise with serious challenges NFL salaries doubled between 1982 and 1986 because of the USFL Between 1970 and 1976 salaries in the NHL more than tripled because of the WHA

What Kind of Unions are Sports Unions? Two basic forms Craft unions descended from medieval guilds Organized along skill lines Industrial unions originated in 19th century Industrial revolution led to rise of large firms Unions sought to offset power of large employers Sports are a hybrid Players have special skills like craft unions Work for particular employer like industrial unions Unlike other unions – do not bargain over specific pay

How Craft Unions Affect Pay Some restrict access to skills Some restrict access to jobs Raise pay by restricting labor supply

How Industrial Unions Affect Pay Workers act on pay directly Push up with collective bargaining

Unions Versus Monopsony Until 1970s, owners dominated players Unions were weak or non-existent The reserve clause bound players to their teams Sports unions begin to rise in power in 1970s Replace monopsony with bilateral monopoly Monopsony employer tries to lower pay Monopoly union tries to increase pay Pay increases dramatically in all leagues

Labor Conflict: A Paradox Conflict consists of strikes and lockouts Strikes occur when workers refuse to work Lockouts occur when employers refuse to let them work Both strikes and lockouts are irrational Impose costs on both parties (like war) Why not skip right to resolution? Economics presumes rational behavior Rational people do not needlessly impose costs on themselves How to reconcile labor conflict and economics? Run the exercise from Manual

The Reason for Labor Conflict Again, like war In 1861, North and South expected a quick victory Both could not be right Conflict – wars or strikes – is a mistake Neither side might want it, BUT Neither side is willing to make the needed concessions

Some Reasons for Mistakes MLB owners were often divided Could not present coherent stance Led to uncertainty by players Players knew big-city owners wanted to settle NHL players felt betrayed by own leader Alan Eagleson conspired with owners He told players that revenues from Canada Cup series would benefit pension fund In fact the owners and Eagleson kept the revenues Players lost faith in the owners

Why Don’t NFL Players Make More Money? The NFL has the highest profits Shouldn’t that bring highest pay Union faces structural disadvantages Owners have always been very united Large squads make coordination difficult Star system favors some positions over others Union has made missteps Allowed the NFL to restore the Rozelle rule after court struck it down Allowed NFL to install salary cap after court imposed free agency As a result, until recently, NFL players have had the lowest pay of the 4 major leagues

A Different Kind of Union: Professional Tennis Men and women have separate unions Association of Tennis Professionals (Men) Sony Ericsson Women’s Tennis Assn (Women) Both restrict supply by defining who qualifies The unions provide labor to tournaments Thus, they resemble typical craft unions