Presentation on theme: "Labor Markets in Professional Sports. An Overview Labor Markets Human Capital Monopsony and Free Agency Salary Arbitration Superstars and Winner-take-all."— Presentation transcript:
Labor Markets in Professional Sports
An Overview Labor Markets Human Capital Monopsony and Free Agency Salary Arbitration Superstars and Winner-take-all When to turn pro?
What would Babe Ruth earn today? Ruth earned $80,000 for the 1930 New York Yankees 1930 CPI = CPI = Ruth’s 1930 salary in 2012 dollars is: (80,000)( /16.7) = $1,077,552 “I know, but I had a better year than Hoover.” - Reported reply when a reporter objected that the salary Ruth was demanding ($80,000) was more than that of President Herbert Hoover's ($75,000)
Labor Demand Profit-max decision by employers Hiring Rule: hire until MRP = w MRP Labor $ w2w2 w1w1 L1L1 L2L2 MRP = MP* MR MP = ∆Q/ ∆L MR = ∆TR/ ∆Q = P Reflects DMR
Estimating a Player’s MRP Scully (1974): two-step model using data PCTWIN = f(PRODUCTIVITY) REV = g(PCTWIN)
Scully’s Results PCTWIN = TSA TSW – NL CONT – OUT REV = -1,735, ,330 PCTWIN + 494,585 SMSA MARGA + 580,913 NL - 762,248 STD – 58,523 BBPCT TSA = Team Slugging Average TSW = Team Strikeout – Walk Ratio NL = National League CONT = Contender OUT = Out of contention SMSA = Market Population MARGA = Differences in Fan Interest STD = Stadium Age BBPCT = % Black Players 1 point increase in TSA raises PCTWIN by point increase in PCTWIN raises REV by $10,330 MRP per point = MP x MR = (0.92)(10,300) = $9,504 Avg Hitter:.340 1/12 of team’s offense MRP = ($9,504)(340)(1/12) = $270,000
Results Scully (1974): Players paid 10-20% of MRP Krautman (1999) Apprentice: 27% of MRP Journeyman: 85% of MRP Free agents Alternative Explanation: Low salaries of younger players may reflect general training
Example: The Mark McGwire Show During McGwire’s record- breaking run at the home run record in 1998, attendance in St. Louis increased by 1.5 million. Even if McGwire was only half of the reason, just the gate portion of his MRP that year was around $15 million! McGwire earned $8.9 million that year. Wins Score Approach: #2 and #3
Applications Decrease in television revenues due to fan preference for drama shows Increase in the number of players available A minimum salary set above the equilibrium wage
Human Capital Theory General Training Increases MP to all employers Specific Training Increases MP to specific firm Human CapitalProductivityEarnings
Cost Who Pays for Training? time $ MRP 1 MRP 2 t1t1 MRP 1 = untrained worker MRP 2 = trained worker MRP 1 - T MRP 1 – T = trainee’s net productivity Hiring Rule: MRP = w Benefit GT: worker pays in form of lower training wage ST: worker and firm share costs Training period
Minor Leagues Baseball First Contract Season: Single A: $1100/month AAA: $2500/month Open to negotiation after that Meal money: $20 per day
Economics of Superstars Forbes Top 100 Celebrities and CEOsCelebritiesCEOs
Economics of Superstars Rank order tournaments: golf, tennis, auto racing difficult to measure absolute effort (MRP) when many factors are involved relative productivity matters rather than absolute Effort $ MC E1E1 MR 1 MR 2 MR 1 ′ Increasing MC of effort requires large difference between first and second place for optimal effort. MC ′ E2E2
Which of the following achievements would please you more? a) You win fortune without fame: you make enough money through successful business dealings so that you can live very comfortably for the rest of your life. b) You win fame without fortune: for example you win a medal at the Olympics or you become a respected journalist or scholar.
You are offered a banned performance-enhancing substance that comes with two guarantees: 1. You will not be caught. 2. You will win every competition you enter for the next five years, and then you will die from the side effects of the substances. Would you take it? a) Yes b) No Prisoner’s Dilemma?
1 million high-school football players - roughly 150 will make it to the NFL Odds of a high-school player going professional in football - approximately 1 in 6,000 About 500,000 high-school basketball players - roughly 50 to the NBA Less than 3% of all college seniors will play one year in professional basketball Odds of a high-school player going professional in basketball - approximately 1 in 10,000 When to Turn Pro?
Why would a player choose to leave early? Must compare the marginal cost and marginal benefit of staying in school versus leaving. Marginal Benefit of waiting the extra year is: MB = (1 + g)S 0 [where S 0 is the pro salary and g is the growth rate in the salary] Marginal Cost of waiting is the foregone salary plus the sacrifice on the use of that salary: MC = (1 + r)S 0 [where r is the interest rate] When to Turn Pro?
As usual, the player is best off when MB = MC Player should stay in school as long as g > r Player should turn pro when r > g (1 + g)S 0 = (1 + r)S 0 When to Turn Pro?
Suppose a junior could earn a salary of $750,000 by declaring himself eligible for the draft. If he waits until his senior year he can make $900,000. If the interest rate is 4% should he stay the extra year? Now consider that the player has a 12% chance of having a career ending injury in his senior year and thus having a median income of $40,000 per year. Would he consider going pro or not? Sample Problem Assume the pro league plans to institute a rookie salary cap of $750,000 at the end of the player’s senior year. Should the player play his senior year? g = (900,000 – 750,000)/750,000 = 0.20 or 20% g = (750,000 – 750,000)/750,000 = 0.00 or 0% g = (796,800 – 750,000)/750,000 = or 6.2%
Reserve Clause & Free Agency MLB: 1976 After 6 years of service NBA: 1983 After 5 years of service NHL: 1993 After 4 years of service NFL: 1994 After 4 years of service Restrictions: Right of First Refusal Compensation requirements Salary caps
Coase Theorem Revisited Reserve Clause vs. Free Agency Initial assignment of property rights does not affect efficiency of resource allocation Only difference is who gets larger share of pie
Final Offer Arbitration MLB 1972 Arbitrator must select either team’s or player’s final offer—No compromise! must base decisions on info regarding player performance and salaries of comparable players can not consider financial condition of team Overpaying a player leads to further overpaying down the road : Owners-291, Players-214 Wage WTWT WPWP WAWA
Salary Caps NBA “soft cap” Percentage of league revenues (51%) $58.68m in NFL Hard cap Percentage of league revenues (65%) $116m for 2008 $127m for 2009 No cap for 2010 Minimum Team Salaries = 86% of cap Maximum Player Salaries Minimum Player Salaries
Monoposony Sole buyer of labor Enables employer to exert market power by paying lower wages Monopsonist hires until MRP = ME and sets wage off S curve L m < L c w m < w c < MRP m D = MRP Labor $ S ME LmLm LcLc wmwm wcwc MRP m Worksheet Example
Player Drafts Allocation of new players by reverse order finish NBA: 7 2 rounds NFL: 12 7 rounds Coase Theorem applies
Labor Unions and Labor Relations
Economics of Labor Unions Free Market: w N, L N Union Outcome: w U, L U Unemployment Inefficiency (DWL) D SNSN SUSU LULU LNLN Labor wUwU wNwN DWL unemployment $
Bilateral Monopoly Union behaves as monopolist: Sets employment where MR = S Sets wage off D curve W U, L U Employer behaves as monopsonist: Sets employment where D = ME Sets wage off S curve W M, L M D S LULU LMLM Labor wUwU wMwM ME MR $ W U – W M = Range of Indeterminacy
Bargaining and Strikes Each of major sports had a work stoppage during 1990s (when overall labor strife was pretty tame) Why resort to a strike/lockout? Irrational behavior? Excessive optimism? Excessive uncertainty? Political gamesmanship?
Contract Zone High WagesLow Wages Acceptable to Union Acceptable to Employer Contract Zone W E = employer threat point Union threat point = W U Strike fund Alternative jobs Strike insurance Replacement workers
Baseball’s First Strike 1912 Detroit Tigers Ty Cobb vs Ban Johnson
1972 Baseball Strike Main issue was player pension and health benefits Uncertainty Owners were over-optimistic (believed players' threat point was lower than it was) MLBPA was optimistic due to Commissioner’s behavior Strike lasted 13 days (including 9 days at the start of the season) Owners lost $5m in revenues Players lost salaries but won on pension demands Arbitration was added to CBA : a strike/lockout preceded every CBA
1987 NFL Strike Main issue: free agency Uncertainty: Gene Upshaw and demise of USFL Strike lasted 4 weeks (weeks 3 – 6) Replacement players cost $1000 per game; teams profits rose by more than $100k per game Players lost $80m in salary 1988 NFLPA Decertification
Hockey: The Lost Season Lockout Whole season canceled Main issues: cost certainty (linking salaries to league revenues) Uncertainty: league losses Outcome: $39m salary cap; salaries at no less than 54% league revenues; maximum player salary at 20% of cap; salaries rolled back by 24% Revenue sharing; luxury tax; 5% pay cut Revenue sharing; luxury tax; 24% pay cut $52m salary cap linked to league revenues$40m salary cap linked to league revenues $42.5m salary cap linked to league revenues$49m salary cap linked to league revenues Gary BettmanBob Goodenow Season Canceled!
NBA Lockout Main issue: hard salary cap; revenue sharing Uncertainties: lackluster attendance; turmoil within NBPA; rising power of agents (stars vs benchers) 191 day lockout Outcome: Individual player salary cap; players guaranteed 55% of BRI; limit on raises for “Larry Bird” free agents NBA would be paid TV contract money even though games weren’t played. Arbitrator ruled NBA did not have to pay Players with guaranteed contracts 50 game season
Discrimination in Sports
Jackie Robinson 1947 Brooklyn Dodgers Larry Doby 1947 Cleveland Indians Earl Lloyd 1950 Washington Nationals Willie O’Ree 1958 Boston Bruins Kenny Washington and Woody Strode 1946 Los Angeles Rams
Labor Market Discrimination Becker “rational choice” model Source of prejudice: Employers Employees Customers Gary Becker Nobel Prize (1992)
Employer Discrimination Hiring Rule: w = MRP Workers with same MRP will be paid same wage Assume: MRP B = MRP W d = discrimination coefficient Perceived wage of black player: w* B = (1+d)w “Psychic cost” Example: w = $20 d = 0.20 w* B = (1.20)(20) = $24
MRP B = MRP W Players $ w = $20 w* B = $24 LWLW LBLB w B = $16.67 Employment if blacks are paid same wage as whites: w = $20 Black wage if firm hires same number of black works as white workers In a picture… Note: > Owners must pay for the right to discriminate in the form of lower profits. > Competitive markets force discriminators out of the market. Black wage as perceived by discriminating firm
Monopoly Power Baseball has legal cartel Bill Veeck foiled in 1943 Dodgers/Indians reintegrated in 1947 Integrated teams tended to dominate Dodgers, Giants, Indians, & Braves Red Sox & Phillies last to integrate Great Celtic teams built on integration Moses “Fleetwood” Walker 1880s A.A. Bill Veeck and Larry Doby 1947 contract signing Jackie Robinson and Branch Rickey 1947 contract signing
Employee Discrimination Early whites didn’t want to work with blacks Feel psychic cost Demand higher pay to work with blacks What would employer do? Segregation vs Discrimination Dodgers protested Robinson’s presence Bud Fowler 1885
Customer Discrimination Employer punished for tolerance Celtics of the 1980s? George Preston Marshall & NFL’s Redskins Last NFL team to integrate: 1962 “Burgundy, Gold, and Caucasian” Southern focus Forced by U.S. government Facility on government land Nardinelli and Simon (1990) Examined baseball card prices for black and white players P B < P W by about 10% "We'll start signing Negroes when the Harlem Globetrotters start signing whites."
Measuring Discrimination Slugging Average $ Black Wage Function White Wage Function SA w SA B $200 = W B $500 = W w $260 = W* B W w – W B = observed wage gap W* B – W B = explained wage gap W w – W* B = unexplained wage gap = 500 – 200 = 300 = 260 – 200 = 60 = 500 – 260 = 240 W w = $500 W B = $200 How much of the wage gap, if any, is due to discrimination?
Statistical Discrimination The use of group averages to judge individual productivity levels Profit-maximizing strategy to reduce cost of hiring French-speaking Canadian players English-speaking Canadian players MRP F MRP E productivity EF
Economic Findings on Pay Discrimination There is evidence that pay discrimination existed in pro team sports in the past. But by the mid-1990s, pay discrimination is pretty much gone. Only a negligible premium for the very best white players in the NBA appears to remain. Interestingly, in the NHL, there appears to be pay discrimination against French-speaking players.
Role Discrimination? NFL 2009 PositionWhiteBlack Quarterback81%16% Wide Receiver11%87% Source: 2010 Racial and Gender Report Card
Purses in Golf’s Majors (in millions): 2011 for PGA, 2010 for LPGA MenWomen Masters$7.5Kraft Nabisco$2.0 US Open 7.5US Open 3.25 British Open 7.3British Open 2.5 PGA 7.5LPGA 2.25 Source: PGATour.com and LPGA.com
Gender Discrimination Harder to measure Men & Women seldom in same venue Often don’t play same sport Even same sports may vary Tennis, figure skating, & basketball Direct competition? Jockeys & auto racing & golf Are women always victims?
Title IX Part of 1972 Education Amendments to Civil Rights Act Mandated equal access & opportunities for women in federally funded education programs 3 ways to comply Funding proportional to enrollment Show history of expansion Interests of students accommodated Few programs in compliance But NCAA certifies all Marietta CollegeRoster Slots Male Enrollment %Male Athletic Participation % Female Enrollment %Female Athletic Participation % Total %486100%
Impacts of Title IX Good Spurred rapid growth in women’s sports Though most of growth early on Gave grounds to seek remediation Bad What happened to women coaches? Was ~80% of women’s programs - now ~ 44% Women’s programs lose money Can meet in many ways – Cut men’s programs rather than expanding women’s
Amateurism and College Sports
Overview College sports is similar in many economic ways to pro sports, but the relationship between the athletics department and the university deserves careful attention Conferences and the NCAA play an important role in limiting competition, negotiating TV broadcasts, and managing competitive balance. NCAA player rules have dramatic impacts on the economic welfare of college athletes. Colleges enjoy special tax and antitrust status for much the same reason as pro owners.
Amateurism & the Olympic Ideal Ancient Olympics (776 BC-393 AD) Even central myth hypocritical Winners well rewarded by home cities Modern Olympics (1896-present) “mens sana in corpore sano” Amateurism reflected class snobbery Laborers not considered amateurs
American College Sports Commercialism & Corruption always present 1 st competition: 1852 Harvard v. Yale in crew Sponsored at a resort by a railroad company 2 nd competition brought first eligibility scandal Harvard’s coxswain had already graduated! Second sport: Football Rutgers v. Princeton (1869): First academic scandal 4 Rutgers players were flunking math University of Michigan (1894) 7 of 11 starters were not registered students
NCAA as “Incidental Cartel” Restricts movement Prevents “tramp athletes” Monopsony power Players have little mobility Drives down pay
OSU HighLow UM High Low NCAA Recruiting Game Dominant Strategy? Competitive Equilibrium? Cooperative Optimum?
Athletic Scholarships NCAA forbade them until 1956 NCAA rules often ignored “Seven Sinners” Citadel UVA VMI VPI UMD Villanova Boston College
The “Student Athlete” “Student athlete” is a legal term Disavows desire for pay Colleges do not have to provide workmen’s compensation Stars worth more than tuition (Brown 1993; 1994) In football >$500k/yr In basketball >$800k/yr
The Value of an Education An athlete who…graduates is overpaid” Joe Paterno Do athletes get an education? On average athletes graduate at the same rate as non-athletes Handout Long and Caudill (1991) Male college athletes earn more than non-athletes
Why do Some Sports do Worse? Some athletes less prepared Lower SATs, HS rank, HS GPA True for basketball & football Not so for softball or golf Is dropping out a rational investment?
Academic Standards Preserve academic integrity Don’t recruit students who cannot read Creates barrier to entry Established powers keep out new entrants Competitors cannot pay athletes more Now cannot take weaker students either
History of Standards Nothing uniform until Rule To play needed projected GPA 1973: Replaced with 2.00 rule Ostensibly higher standards Actually needed C+ average in high school Could take any courses Worst abuses came under this rule The sad case of Chris Washburn 470 out of 1600 on SAT
Proposition 48 (1983) Provisions Needed SAT=700 & GPA=2.00 in 11 core courses If not: no scholarship in 1st year & cannot play Was Prop 48 Racist? Disproportionately affected black athletes SATs for blacks average 200 points lower Are SATs a valid predictor of college performance? Still – graduation rates rose for whites and blacks A concession: Partial Qualifiers Could receive aid if pass one criterion
Proposition 42 (1989) Meant to eliminate partial qualifiers Loophole restored – and then some Under Prop 48 scholarship “counted” Under 42 doesn’t count against limit
Proposition 16 (1992) Created sliding scale Lower GPA permitted if SATs higher & vice versa Clearinghouse evaluated individual courses Allows partial qualifiers to practice Challenged in court Students claimed disparate racial impact Won initial case Verdict overturned on technicality NCAA does not disburse federal funds
Latest Revision (2003) Eases initial restrictions 14 core courses (up from 13) Sliding scale 2.0 core GPA requires 1010 SAT 3.55 core GPA requires 400 SAT No Partial Qualifier status Stiffens progress requirements Need 40% of degree requirement after 2 nd year Need 60% of degree requirement after 3 rd year Need 80 % of degree requirement after 4 th year
Academic Progress Rates (APR) School scored for student progress 1 point if athlete stays enrolled 1 point for staying academically eligible Computes % of total possible points Consider Big State U’s basketball team 52 possible points (13 players *2 points*2 semesters) If one player is ineligible in spring – lose 1 point APR=100*(51/52)=981 If its score falls below 925, BSU could lose scholarships
Entry Barrier or Academic Standards? Small schools May be unable to compete with larger schools Faculty fear Greater pressure to pass Proliferation of garbage classes
Profitability of Specific Programs at Division I-A Schools (measured in $1000s) Sport All Men’s Sports3,3004,0004,9006,100 Football3,2003,7004,7005,920 Men’s Basketball1,600 2,020 Women’s Basketball All Women’s Sports-2,300-2,400-3,200-3,600 Source: Table 11.8, Leeds and Von Allmen, 2008 NCAA Financial Database Football Coaches Salary Database
March Madness NNCAA has 14-year, $10.8 billion contract: CBS & Turner Sports TTourney revenue now $810 million/year $770m in TV rights $40m from ticket sales, etc. ~~60% goes to Division I conferences & schools $167m distributed according to program size NNumber of sports offered NNumber of athletes on scholarship. $167m distributed according to performance CConference gets 1 "unit" per member game EEach unit worth ~$222,000.
Non-Profit vs Profit Seeking Principle-agent problem Growing payroll costs for sports programs
A college player should stay in school when: a) staying in college another year increases his earnings. b) staying in college another year increases his earnings above the interest rate. c) staying in college another year increases his earnings below the interest rate. d) staying in college another year reduces his earnings.
Salaries have risen dramatically in the NBA because of the dramatic rise in a) the quality of the players b) the opportunity cost faced by players c) the market value of the product the players produce d) the strength of the Players’ Association
According to the Coase Theorem, free agency should leave the distribution of talent a) more equal than before b) less equal than before c) exactly equal among all teams d) the same as it always was
Free agency came to MLB and the NFL in different ways because a) the football owners practiced collusion while the baseball owners did not b) the MLBPA had to rely on the courts c) the NFLPA had to rely on the courts d) the NFL had a limited exemption from antitrust laws, and baseball did not
In November 1989, the NFL Players Association, the union for NFL players, disbanded. Why? a) The union was bankrupt due to failed strikes in 1982 and b) The players were upset with the union’s lack of ability to gain full free agency for its members and wanted to bring in new leadership. c) The union wanted to remove the NFL’s non-statutory labor exemption and pursue an antitrust claim against the league. This could only be done by decertifying the union. d) The court had declared in Powell v. NFL (1987) that the union was guilty of conspiring against the NFL in order to raise wages.
Most mainstream economists view discrimination as a) a taste. b) overstated. c) a mistake due to the misperception of people’s true skills. d) a way for capitalists to keep the working class from uniting.
Integration was much faster in football than in baseball because a) of the competition provided by a rival league b) the owners in the NFL were less discriminatory than the owners in MLB c) football fans are far less discriminatory than baseball fans d) football had to get the approval of liberal-minded colleges and universities
a) women have brought far fewer discrimination suits b) women seldom compete with men in the same event c) women aren’t as good at sports as men d) it is difficult to separate out racial effects from gender effects It is difficult to determine whether women are victims of discrimination in professional sports because
The notion of a “student-athlete” was developed in order to a) assert the primacy of education b) eliminate under-the-table payments to athletes c) keep athletes from filing for workman’s compensation d) prevent gambling scandals
The University of Michigan’s Athletic Department cannot break even because a) it is very poorly run. b) its costs rise as quickly as its revenues rises. c) it gives much of what it makes to the academic side of the university. d) NCAA rules prohibit Athletic Departments from making a profit.
The shift to “two-platoon football” was a way for a) professional teams to turn profits into losses b) colleges to exploit “student- athletes” c) the NFL to exert monopsony power over its players d) colleges to spend increasing revenues
a) The prisoner’s dilemma b) The winner’s curse c) The outlawing of the reserve clause d) The entry of new schools into the NCAA The monopoly power that the NCAA held over TV networks fell apart due to