Labor Economics II: Unions, Bargaining, and Strikes

Strikes: A Paradox Strikes are irrational Impose costs on both parties Like war Why not skip right to treaty? Economics presumes rational behavior How to reconcile strikes & economics? Awaiting NHLs ritual suicide

Key to Strikes: Uncertainty or Mistrust Again, like war What was true in 1861 & 1914? Everyone thought war would end soon Both sides expected quick victory Few want conflict But fear conceding too much Conflict a mistake

Illustrating Conflict Firm willing to accept Union willing to accept Contract Zone Both Union and Firm willing to settle within Contract Zone

Illustrating Conflict Firm willing to accept Union willing to accept Unions Perceived Contract Zone If union underestimates firm – may refuse offers in true zone Possible application to NHL?

Serfs vs Magnates Players had little power early on Recall Reserve Clause In NHL: Bobby Hull on negotiation list Property of Chicago Blackhawks WHEN HE WAS 11! Players often hostile to unions Baseballs origins linked to gentlemens clubs Players League (1890) used non-union labor Thats why theyre called players associations

Union Not Always Dominant Early unions always failed Led by zealots who worked part-time on union MLBPA formed in 1954 Sole objective: secure pension Carried to extreme in 1970s & 80s in NHLPA Larry Eagleson head of NHLPA Also agent for specific players Contracted with owners on Canada Cup Served time for mail fraud Sense of betrayal has made players mistrustful

Marvin Miller: The Man Who Changed Sports Was economist for United Steelworkers Lost position in mid 1960s cuz too conciliatory MLBPAs first full-time director Unlike previous union leaders Not lawyer who wanted revolution Wanted more & knew how to get it Made MLBPA the most powerful union in sports

Miller Engineers a Coup Came with 2 nd CBA 1 st CBA of little note except for existence Raised minimum salary from $6,000 to $10,000 Miller outmaneuvers Commissioner Bowie Kuhn Kuhn saw self as guardian of games integrity Unique among major sports Miller saw as owners lapdog Had been lawyer for NL before becoming commissioner Miller sees opening

A New Arbitration Process Kuhn had been sole judge of grievances Miller: Kuhns old job suggest possible bias Asks for panel to judge trivial financial matters Kuhn retains authority for big decisions Now have 3-member panel 1 chosen by players 1 by owners 1 by mutual consent

Consequences of Panel: The Case of the Catfish Oakland As renege on Catfish Hunters contract Star pitcher for championship team In 1974 signed one of few 2-year contracts As supposed to create annuity in 1 st year Owner Charlie Finley fails to do so –violates contract! Hunter claims contract invalidated Financial matter goes to 3-member panel 2 votes predictable Arbitrator only vote that matters Peter Seitz declares Hunter free agent

The End of the Reserve Clause Seitzs ruling applied only to Hunter But players like what they see $100,000 contract => $3 million contract 1975: A frontal assault on reserve clause Andy Messersmith refuses to sign contract Dodgers allow him to play Recall reserve clause applies for 1 year At end of season panel repeats performance Reserve clause formally struck down

Results of Free Agency Monopsony power broken Competitive market for players Winners curse Owners overbid for players Multi-year contracts become the norm Average salary rose > 700% Goes from < NFL to 2X NFL average

Why Did Football Fall Behind? Outside events say should do better NFL not exempt from anti-trust laws Became more popular than baseball Profits higher 2 rival leagues to drive up pay Union unable to exploit Often seemed to be part of the problem Failed to break Rozelle rule

Challenges to Rozelle Rule Joe Kapp sues NFL Ex-QB for Vikings (1969 MVP of NFL) Signs with Patriots after playing out option Wants no Rozelle Rule in new contract 1971: NFL insists Kapp reinsert Kapp refuses Never plays again Sues NFL

Result of Kapps Suit Judge calls Rozelle Rule patently unreasonable and illegal Jury Kapp had legal contract NFL wrongly disallowed Refuses to award damages!?!

Mackey Suit: 1972 John Mackey: star tight-end for Colts President of NFLPA Filed class action suit against NFL 1976: Ruling invalidates Rozelle Rule Reason: Not result of collective bargaining 1977: college draft disallowed Found to be in restraint of trade Stage set for massive free agency

NFLPA Goofs Uses free agency as bargaining chip for Higher payments to pension fund Higher minimum salary Check-off system for union dues payments Result: Rozelle Rule modified – not ended : free agents/yr Only 3 sign with new team 1981: No one wants Walter Payton!?! Only offer from Bears – his old team

NFLPAs Worst Mistake Rozelle Rule enshrined in CBA Courts uphold NFL One thing to impose Another thing to voluntarily have in CBA Union cannot change mind and sue Must now bargain it away

Football Strikes NFLPA decries revenue sharing Say teams lack incentive to sign free agents Theyre right – little financial gain from doing so Want revenue sharing to include players Want 55% of revenues Management scoffs at idea Ironically NFL now pays ~63% Strikes in 1982 & 1987 unsuccessful

Why Did NFL Strikes Fail? Relatively short careers in NFL Mentality of players No minor league Less individual sport Unlike MLBPA - leadership split players Ed Garvey:Union for guards & tackles – the QBs can take care of themselves. Garvey did not solicit positions – he imposed them Owners staged replacement games in 87 TV Contract called for games – not players Made money on strike

Lawyers Get What NFLPA Cant NFLPA sues NFL unsuccessfully Courts laud merits of case against NFL But cite CBA 1989:Union decertifies self No Union => No CBA => Players can sue!

NFLPA Goofs Again NFLPA re-forms Allows owners to install Salary Cap – Why? Again a bargaining chip Higher pensions Better medical benefits Assured that teams will collect union dues Embarrassed when Redskins players refuse to pay dues

Introduction to the Salary Cap Once a point of harmony Now a bone of contention What is a salary cap? See one at More accurately – a band Sets upper and lower limit to salary Take qualifying revenue of league Multiply by players share Divide by # of teams Add or subtract fudge factor (~20%)

The NBA and the Salary Cap Cap credited with saving NBA Early 1980s bad for basketball Bloody war with ABA just ended Low fan interest 1980 championship not shown live in Philadelphia Teams unstable Wandering Kings: From Cincy to KC to KC/Omaha to Sac Buffaloed Braves: From Buffalo to San Diego to LA Merger with ABA challenged by players League lacks power of MLB to ignore Lacks savvy of NFL to circumvent

The NBAs Era of Good Feeling Owners grant free agency Players drop objections to merger Owners fear bankruptcy will result Players grant salary cap Assures of % of defined revenue Initially 53% - now 48.04% What is defined becomes bone of contention Credited with saving the NBA

What Saved What? $-amount of cap is endogenous If league revenues rise – so does cap In early 1980s league at low ebb Generation of charismatic stars enters Larry Bird, Magic Johnson, Michael Jordan Adroit marketing by new commissioner Greater revenue allows cap to rise No reason for players to complain

Hard Caps and Soft Caps The Bird Rule Boston Celtics wanted to re-sign Larry Bird Feared could not do so under cap League gives Celtics an out Re-signing own player does not count against cap New kind of agreement arises Sign player to low 1-year contract Re-sign at high price

Sources of Tension Cap ineffective Virtually all teams over cap Owners sought hardening Maximum 7-year contract Had to spend 3-years for Bird to apply Players worry about cap growth What if revenues slow down?

Politics Takes a Hand Summer 1996: Owners lock out players Clever timing: No harm no foul Star players object to agreement Threaten to decertify union Stars take over leadership role Kevin Garnett $126M contract a last straw Owners exercise option to re-open contract NBPA leadership trapped by radical rhetoric

New Agreement Fall 1998: Lockout cancels ½ season Owners win what most unions crave Team caps retained – slightly higher Individual salaries also limited Salary scale rises with experience Garnett could not get ½ his old contract today

A Cap Paradox Designed to limit salaries BUT Greater financial pressure than ever Cannot offer higher contract overall Structure becomes important How many ways can you pay $35 million? The importance of signing bonuses A way to guarantee contracts Puts greater pressure on teams to raise revenue