2 An Overview Labor Markets Human Capital Monopsony and Free Agency Salary ArbitrationSuperstars and Winner-take-allWhen to turn pro?
3 What would Babe Ruth earn today? Ruth earned $80,000 for the 1930 New York Yankees1930 CPI = 16.72011 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)
4 Average Salaries in Pro Sports (Nominal $) MLBNFLNHLNBA197029,30341,00025,000197234,09245,000197440,83956,00065,000197651,50178,00086,000197899,876100,00092,000139,0001980143,756117,000108,000170,0001982241,497157,000120,000212,0001984329,408279,000118,000275,0001986412,520288,000144,000375,0001988438,729307,000172,000510,0001990597,537430,000211,000750,00019921,082,667551,000368,0001,100,00019941,168,263674,000562,0001,441,00019961,119,981807,000892,0001,979,00019981,398,8311,000,0001,167,7132,818,00020001,895,6301,116,1001,642,5902,901,59520022,295,6941,300,0001,790,0003,893,80120042,486,6091,333,3331,830,0003,748,65920062,866,5441,947,8981,751,8454,176,24120083,154,8452,205,7922,234,2255,365,000
8 Labor Demand Profit-max decision by employers Hiring Rule: hire until MRP = wReflects DMRMRP = MP* MRMP = ∆Q/ ∆LMR = ∆TR/ ∆Q = P$w1w2MRPL1L2Labor
9 Estimating a Player’s MRP Scully (1974): two-step model using dataPCTWIN = f(PRODUCTIVITY)REV = g(PCTWIN)
10 TSA = Team Slugging Average TSW = Team Strikeout – Walk RatioNL = National LeagueCONT = ContenderOUT = Out of contentionSMSA = Market PopulationMARGA = Differences in Fan InterestSTD = Stadium AgeBBPCT = % Black PlayersScully’s ResultsPCTWIN = TSA TSW – NL CONT – OUTREV = -1,735, ,330 PCTWIN + 494,585 SMSA MARGA +580,913 NL - 762,248 STD – 58,523 BBPCT1 point increase in TSA raises PCTWIN by 0.921 point increase in PCTWIN raises REV by $10,330MRP per point = MP x MR = (0.92)(10,300) = $9,504Avg Hitter: .3401/12 of team’s offenseMRP = ($9,504)(340)(1/12) = $270,000
11 Results Scully (1974): Players paid 10-20% of MRP Krautman (1999) Apprentice: 27% of MRPJourneyman: 85% of MRPFree agentsAlternative Explanation: Low salaries of younger players mayreflect general training
12 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
13 ApplicationsDecrease in television revenues due to fan preference for drama showsIncrease in the number of players availableA minimum salary set above the equilibrium wage
14 Human Capital Theory General Training Specific Training ProductivityEarningsGeneral TrainingIncreases MP to all employersSpecific TrainingIncreases MP to specific firm
15 Who Pays for Training? Hiring Rule: MRP = w $ MRP1 = untrained worker MRP1 – T = trainee’s net productivityMRP2MRP2 = trained workerBenefitMRP1CostMRP1 - TTraining periodHiring Rule: MRP = wt1timeGT: worker pays in form of lower training wageST: worker and firm share costs
16 Minor Leagues Baseball First Contract Season: Single A: $1100/monthAAA: $2500/monthOpen to negotiation after thatMeal money: $20 per day
17 Economics of Superstars Forbes Top 100 Celebrities and CEOs
18 Economics of Superstars Rank order tournaments: golf, tennis, auto racingdifficult to measure absolute effort (MRP) when many factors are involvedrelative productivity matters rather than absolute$MCMR1Increasing MC of effort requireslarge difference between first andsecond place for optimal effort.MC′MR1′MR2E2E1Effort
19 Which of the following achievements would please you more? 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.You win fame without fortune: for example you win a medal at the Olympics or you become a respected journalist or scholar.
20 You are offered a banned performance-enhancing substance that comes with two guarantees: 1. You will not be caught 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?YesNoPrisoner’s Dilemma?
21 When to Turn Pro?1 million high-school football players - roughly 150 will make it to the NFLOdds of a high-school player going professional in football - approximately 1 in 6,000About 500,000 high-school basketball players - roughly 50 to the NBALess than 3% of all college seniors will play one year in professional basketballOdds of a high-school player going professional in basketball - approximately 1 in 10,000
22 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)S0[where S0 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)S0[where r is the interest rate]
23 When to Turn Pro? As usual, the player is best off when MB = MC Player should stay in school as long as g > rPlayer should turn pro when r > g(1 + g)S0 = (1 + r)S0
24 Sample ProblemSuppose 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?g = (900,000 – 750,000)/750,000 = 0.20 or 20%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 = (750,000 – 750,000)/750,000 = 0.00 or 0%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?g = (796,800 – 750,000)/750,000 = or 6.2%
26 Reserve Clause & Free Agency MLB: 1976After 6 years of serviceNBA: 1983After 5 years of serviceNHL: 1993After 4 years of serviceNFL: 1994Restrictions:Right of First RefusalCompensation requirementsSalary caps
27 Coase Theorem Revisited Reserve Clause vs. Free AgencyInitial assignment of property rights does not affect efficiency of resource allocationOnly difference is who gets larger share of pie
28 Final Offer Arbitration MLB 1972Arbitrator must select either team’s or player’s final offer—No compromise!must base decisions on info regarding player performance and salaries of comparable playerscan not consider financial condition of teamOverpaying a player leads to further overpaying down the road: Owners-291, Players-214WageWTWAWP
30 Salary Caps NBA NFL “soft cap” Percentage of league revenues (51%) $58.68m inNFLHard capPercentage of league revenues (65%)$116m for 2008$127m for 2009No cap for 2010Maximum Player SalariesMinimum Player SalariesMinimum Team Salaries = 86% of cap
31 Monoposony Worksheet Example Sole buyer of labor Enables employer to exert market power by paying lower wagesMonopsonist hires until MRP = ME and sets wage off S curveLm < Lcwm < wc < MRPm$MESMRPmwcwmD = MRPLmLcLabor
32 Player Drafts Allocation of new players by reverse order finish NBA: 7 2 roundsNFL: 12 7 roundsCoase Theorem applies
35 Bilateral Monopoly Union behaves as monopolist: Sets employment where MR = SSets wage off D curveWU, LUEmployer behaves as monopsonist:Sets employment where D = MESets wage off S curveWM, LM$MESwUwMMRDLULMLaborWU – WM = Range of Indeterminacy
36 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?
37 Contract Zone Strike fund Alternative jobs Union threat point = WU Acceptable to UnionContractLow WagesHigh WagesZoneAcceptable to EmployerWE = employer threat pointStrike insuranceReplacement workers
38 Baseball’s First Strike 1912 Detroit TigersTy Cobb vs Ban Johnson
39 1972 Baseball Strike Main issue was player pension and health benefits UncertaintyOwners were over-optimistic (believed players' threat point was lower than it was)MLBPA was optimistic due to Commissioner’s behaviorStrike lasted 13 days (including 9 days at the start of the season)Owners lost $5m in revenuesPlayers lost salaries but won on pension demandsArbitration was added to CBA: a strike/lockout preceded every CBA
40 1987 NFL Strike Main issue: free agency Uncertainty: Gene Upshaw and demise of USFLStrike lasted 4 weeks (weeks 3 – 6)Replacement players cost $1000 per game; teams profits rose by more than $100k per gamePlayers lost $80m in salary1988 NFLPA Decertification
41 Hockey: The Lost Season LockoutWhole season canceledMain issues: cost certainty (linking salaries to league revenues)Uncertainty: league lossesOutcome: $39m salary cap; salaries at no less than 54% league revenues; maximum player salary at 20% of cap; salaries rolled back by 24%Bob GoodenowGary BettmanRevenue sharing; luxury tax; 5% pay cutRevenue sharing; luxury tax; 24% pay cut$40m salary cap linked to league revenues$52m salary cap linked to league revenues$42.5m salary cap linked to league revenues$49m salary cap linked to league revenuesSeason Canceled!
42 1998-99 NBA Lockout Main issue: hard salary cap; revenue sharing Uncertainties: lackluster attendance; turmoil within NBPA; rising power of agents (stars vs benchers)191 day lockoutOutcome: Individual player salary cap; players guaranteed 55% of BRI; limit on raises for “Larry Bird” free agents 50 game seasonNBA would be paid TV contract moneyeven though games weren’t played.Arbitrator ruled NBA did not have to payPlayers with guaranteed contracts
46 Employer Discrimination Hiring Rule: w = MRPWorkers with same MRP will be paid same wageAssume:MRPB = MRPWd = discrimination coefficientPerceived wage of black player: w*B = (1+d)w“Psychic cost”Example:w = $20d = 0.20w*B = (1.20)(20) = $24
47 In a picture… $ LB LW Note: Black wage as perceived bydiscriminating firmw*B = $24w = $20wB = $16.67MRPB = MRPWBlack wage if firm hires same numberof black works as white workersLBLWPlayersNote:> Owners must pay for the right to discriminatein the form of lower profits.> Competitive markets force discriminators outof the market.Employment if blacks are paidsame wage as whites: w = $20
48 Monopoly Power Baseball has legal cartel Jackie Robinson and Branch Rickey1947 contract signingMonopoly PowerBaseball has legal cartelBill Veeck foiled in 1943Dodgers/Indians reintegrated in 1947Integrated teams tended to dominateDodgers, Giants, Indians, & BravesRed Sox & Phillies last to integrateGreat Celtic teams built on integrationMoses “Fleetwood” Walker1880s A.A.Bill Veeck and Larry Doby1947 contract signing
49 Employee Discrimination Early whites didn’t want to work with blacksFeel psychic costDemand higher pay to work with blacksWhat would employer do?Segregation vs DiscriminationDodgers protested Robinson’s presenceBud Fowler 1885Read unexpurgated text of Durocher’s speech
50 Customer Discrimination Employer punished for toleranceCeltics of the 1980s?George Preston Marshall & NFL’s RedskinsLast NFL team to integrate: 1962“Burgundy, Gold, and Caucasian”Southern focusForced by U.S. governmentFacility on government landNardinelli and Simon (1990)Examined baseball card prices for black and white playersPB < PW by about 10%"We'll start signing Negroes when the Harlem Globetrotters start signing whites."
51 Measuring Discrimination WhiteWageFunctionWw = $500$WB = $200$500 = WwHow much of the wage gap, if any, is due to discrimination?BlackWageFunction$260 = W*B$200 = WBSABSAwSlugging AverageWw – WB = observed wage gap= 500 – 200 = 300W*B – WB = explained wage gap= 260 – 200 = 60Ww – W*B = unexplained wage gap= 500 – 260 = 240
52 Statistical Discrimination The use of group averages to judge individual productivity levelsProfit-maximizing strategy to reduce cost of hiringFrench-speakingCanadian playersEnglish-speakingCanadian playersFEMRPEMRPFproductivity
53 Economic Findings on Pay Discrimination There is evidence that pay discrimination existed in pro team sports in the past.But by the mid-1990s, pay discrimination is pretty much gone. Only a negligible premium for the very best white players in the NBA appears to remain.Interestingly, in the NHL, there appears to be pay discrimination against French-speaking players.
54 Role Discrimination? NFL 2009 Position White Black Quarterback 81% 16% Wide Receiver11%87%Source: 2010 Racial and Gender Report Card
55 Racial Composition of Athletes, 2010 RaceMLBNFLNBAWhite60%30%18%African American9%67%75%Latino28%1%3%Asian2%Other0%<1%Source: 2010 Racial and Gender Report Card
56 Racial Composition of Head Coaches, 2010 RaceMLBNFLNBAWhite68%81%70%African American14%19%27%Latino17%0%3%Asian<1%Source: 2010 Racial and Gender Report Card
57 Racial Composition of Division I Head Coaches (men’s teams), 2007-08 RaceBasketballFootballWhite76%94%African American23%5%Latino0.7%0.5%Asian0.0%Native American0.3%Source: 2009 Racial and Gender Report Card
58 Gender Discrimination Harder to measureMen & Women seldom in same sport/venueEven same sport may varyTennis, figure skating, & basketball
59 Top Money Winners: ATP vs WTA ATP Money LeadersWTA Money LeadersRankPlayerCountryEarnings1Novak DjokovicSerbia$ 3,323,881Victoria AzarenkaBelarus$ 4,008,0802Roger FedererSwitzerland$ 2,316,585Maria SharapovaRussia$ 2,083,3503Rafael NadalSpain$ 1,725,465Agnieszka RadwanskaPoland$ 1,650,4594Andy MurrayScotland$ 1,053,481Caroline WozniackiDenmark$ ,1885David Ferrer$ ,998Petra KvitovaCzech Rep$ ,6906Juan Martin del PotroArgentina$ ,238Kim ClijstersBelgium$ ,6917John IsnerUS$ ,701Sara ErraniItaly$ ,2658Tomas Berdych$ ,801Marion BartoliFrance$ ,3269Jo-Wilfried Tsonga$ ,678Julia GoergesGermany$ ,67010Radek Stepanek$ ,048Angelique Kerber$ ,20711Nicolas Almagro$ ,736Ana Ivanovic$ ,78412Milos RaonicCanada$ ,883Maria Kirilenko$ ,90313Jurgen MelzerAustria$ ,313Svetlana Kuznetsova$ ,03814Leander PaesIndia$ ,103Vera Zvonareva$ ,98315Kei NishikoriJapan$ ,245Samantha StosurAustralia$ ,344Source: tennis.com. As of April 16, 2012.
60 Purses in Golf’s Majors (in millions): 2011 for PGA, 2010 for LPGA MenWomenMasters$7.5Kraft Nabisco$2.0US Open7.53.25British Open7.32.5PGALPGA2.25Source: PGATour.com and LPGA.com
61 Gender Discrimination Harder to measureMen & Women seldom in same venueOften don’t play same sportEven same sports may varyTennis, figure skating, & basketballDirect competition?Jockeys & auto racing & golfAre women always victims?
62 Title IX Part of 1972 Education Amendments to Civil Rights Act Mandated equal access & opportunities for women in federally funded education programs3 ways to complyFunding proportional to enrollmentShow history of expansionInterests of students accommodatedFew programs in complianceBut NCAA certifies allTitle IX reads: “No Person in the United States shall, on the basis of sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any educational program or activity receiving federal financial assistance.”Marietta CollegeRoster SlotsMale Enrollment72651.2%Male Athletic Participation29861.3%Female Enrollment69248.8%Female Athletic Participation18838.6%Total1418100%486
63 Impacts of Title IX Good Bad Spurred rapid growth in women’s sports Though most of growth early onGave grounds to seek remediationBadWhat happened to women coaches?Was ~80% of women’s programs - now ~ 44%Women’s programs lose moneyCan meet in many ways –Cut men’s programs rather than expanding women’s
65 OverviewCollege sports is similar in many economic ways to pro sports, but the relationship between the athletics department and the university deserves careful attentionConferences 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.
66 Amateurism & the Olympic Ideal Ancient Olympics (776 BC-393 AD)Even central myth hypocriticalWinners well rewarded by home citiesModern Olympics (1896-present)“mens sana in corpore sano”Amateurism reflected class snobberyLaborers not considered amateurs
67 American College Sports Commercialism & Corruption always present1st competition: 1852 Harvard v. Yale in crewSponsored at a resort by a railroad company2nd competition brought first eligibility scandalHarvard’s coxswain had already graduated!Second sport: FootballRutgers v. Princeton (1869): First academic scandal4 Rutgers players were flunking mathUniversity of Michigan (1894)7 of 11 starters were not registered students
68 NCAA as “Incidental Cartel” Restricts movementPrevents “tramp athletes”Monopsony powerPlayers have little mobilityDrives down payIn the movie Horsefeathers Groucho Marx goes to a speakeasy find football players for Huxley University.
69 NCAA Recruiting Game OSU High Low UM 50 20 90 75 Dominant Strategy? Competitive Equilibrium?Cooperative Optimum?
70 Athletic Scholarships CitadelUVAVMIVPIUMDVillanovaBoston CollegeNCAA forbade them until 1956NCAA rules often ignored“Seven Sinners”Bear Bryant evaded scholarship limits by putting recruits on the track team
71 The “Student Athlete” “Student athlete” is a legal term Disavows desire for payColleges do not have to provide workmen’s compensationStars worth more than tuition (Brown 1993; 1994)In football >$500k/yrIn basketball >$800k/yr
72 The Value of an Education An athlete who…graduates is overpaid” Joe PaternoDo athletes get an education?On average athletes graduate at the same rate as non-athletesHandoutLong and Caudill (1991)Male college athletes earn more than non-athletes
73 Why do Some Sports do Worse? Some athletes less preparedLower SATs, HS rank, HS GPATrue for basketball & footballNot so for softball or golfIs dropping out a rational investment?Go to Florida State to get to NFL?Go to Harvard to become a physicist?
74 Academic Standards Preserve academic integrity Don’t recruit students who cannot readCreates barrier to entryEstablished powers keep out new entrantsCompetitors cannot pay athletes moreNow cannot take weaker students either
75 History of Standards Nothing uniform until 1965 1.600 RuleTo play needed projected GPA1973: Replaced with 2.00 ruleOstensibly higher standardsActually needed C+ average in high schoolCould take any coursesWorst abuses came under this ruleThe sad case of Chris Washburn470 out of 1600 on SAT
76 Proposition 48 (1983) Provisions Was Prop 48 Racist? Needed SAT=700 & GPA=2.00 in 11 core coursesIf not: no scholarship in 1st year & cannot playWas Prop 48 Racist?Disproportionately affected black athletesSATs for blacks average 200 points lowerAre SATs a valid predictor of college performance?Still – graduation rates rose for whites and blacksA concession: Partial QualifiersCould receive aid if pass one criterion
77 Proposition 42 (1989) Meant to eliminate partial qualifiers Loophole restored – and then someUnder Prop 48 scholarship “counted”Under 42 doesn’t count against limit
78 Proposition 16 (1992) Created sliding scale Lower GPA permitted if SATs higher & vice versaClearinghouse evaluated individual coursesAllows partial qualifiers to practiceChallenged in courtStudents claimed disparate racial impactWon initial caseVerdict overturned on technicalityNCAA does not disburse federal funds
79 Latest Revision (2003) Eases initial restrictions 14 core courses (up from 13)Sliding scale2.0 core GPA requires 1010 SAT3.55 core GPA requires 400 SATNo Partial Qualifier statusStiffens progress requirementsNeed 40% of degree requirement after 2nd yearNeed 60% of degree requirement after 3rd yearNeed 80 % of degree requirement after 4th year
80 Academic Progress Rates (APR) School scored for student progress1 point if athlete stays enrolled1 point for staying academically eligibleComputes % of total possible pointsConsider Big State U’s basketball team52 possible points (13 players *2 points*2 semesters)If one player is ineligible in spring – lose 1 pointAPR=100*(51/52)=981If its score falls below 925, BSU could lose scholarships
81 Entry Barrier or Academic Standards? Small schoolsMay be unable to compete with larger schoolsFaculty fearGreater pressure to passProliferation of garbage classes
82 Profitability of Specific Programs at Division I-A Schools (measured in $1000s) Sport1997199920012003All Men’s Sports3,3004,0004,9006,100Football3,2003,7004,7005,920Men’s Basketball1,6002,020Women’s Basketball- 500- 600- 700- 775All Women’s Sports-2,300-2,400-3,200-3,600Source: Table 11.8, Leeds and Von Allmen, 2008NCAA Financial DatabaseFootball Coaches Salary Database
83 March MadnessNCAA has 14-year, $10.8 billion contract: CBS & Turner SportsTourney 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 sizeNumber of sports offeredNumber of athletes on scholarship.$167m distributed according to performanceConference gets 1 "unit" per member gameEach unit worth ~$222,000.
84 Non-Profit vs Profit Seeking Principle-agent problemGrowing payroll costs for sports programs
86 A college player should stay in school when: staying in college another year increases his earnings.staying in college another year increases his earnings above the interest rate.staying in college another year increases his earnings below the interest rate.staying in college another year reduces his earnings.
87 Salaries have risen dramatically in the NBA because of the dramatic rise in the quality of the playersthe opportunity cost faced by playersthe market value of the product the players producethe strength of the Players’ Association
88 According to the Coase Theorem, free agency should leave the distribution of talent more equal than beforeless equal than beforeexactly equal among all teamsthe same as it always was
89 Free agency came to MLB and the NFL in different ways because the football owners practiced collusion while the baseball owners did notthe MLBPA had to rely on the courtsthe NFLPA had to rely on the courtsthe NFL had a limited exemption from antitrust laws, and baseball did not
90 In November 1989, the NFL Players Association, the union for NFL players, disbanded. Why? The union was bankrupt due to failed strikes in 1982 and 1987.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.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.The court had declared in Powell v. NFL (1987) that the union was guilty of conspiring against the NFL in order to raise wages.
91 Most mainstream economists view discrimination as a taste.overstated.a mistake due to the misperception of people’s true skills.a way for capitalists to keep the working class from uniting.
92 Integration was much faster in football than in baseball because of the competition provided by a rival leaguethe owners in the NFL were less discriminatory than the owners in MLBfootball fans are far less discriminatory than baseball fansfootball had to get the approval of liberal-minded colleges and universities
93 It is difficult to determine whether women are victims of discrimination in professional sports becausewomen have brought far fewer discrimination suitswomen seldom compete with men in the same eventwomen aren’t as good at sports as menit is difficult to separate out racial effects from gender effects
94 The notion of a “student-athlete” was developed in order to assert the primacy of educationeliminate under-the-table payments to athleteskeep athletes from filing for workman’s compensationprevent gambling scandals
95 The University of Michigan’s Athletic Department cannot break even because it is very poorly run.its costs rise as quickly as its revenues rises.it gives much of what it makes to the academic side of the university.NCAA rules prohibit Athletic Departments from making a profit.
96 The shift to “two-platoon football” was a way for professional teams to turn profits into lossescolleges to exploit “student-athletes”the NFL to exert monopsony power over its playerscolleges to spend increasing revenues
97 The monopoly power that the NCAA held over TV networks fell apart due to The prisoner’s dilemmaThe winner’s curseThe outlawing of the reserve clauseThe entry of new schools into the NCAA