1. Economics of Sports
Unit 7: Labor Markets

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

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

11. 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

12. 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%

13. 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

14. 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

15. 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)

16. 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

17. 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

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

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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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