The Economics of Sports FIFTH EDITION Chapter An Introduction to Labor Markets in Professional Sports MICHAEL A LEEDS | PETER VON ALLMEN Incentives and Labor Supply • Joe Louis and Oscar de la Hoya are two of the greatest boxers ever • Both fought longer than they should have – Louis fought because he had so little money – De la Hoya fought because he was offered so much • Both Louis’s and de la Hoya’s actions can be linked to labor supply Copyright ©2014 Pearson Education, Inc All rights reserved 8-2 Learning Objectives • Understand the basic model of wage determination in labor markets • Be able to describe why the salaries of superstars are much higher than the salaries of average players • Analyze the labor markets for individual sports, such as golf and tennis • Explain why players use performance-enhancing drugs despite knowing their harmful effects Copyright ©2014 Pearson Education, Inc All rights reserved 8-3 8.1 Labor Supply and Demand • Figure 8.1 shows that in the last 20 years alone, the average salary of a Major League Baseball player has almost quadrupled – From about $850,000 to over $3.3 million • To put this in perspective, the average MLB salary was approximately – 36 times per capita GDP in 1991 – 65 times per capital GDP in 2011 • Salaries have risen similarly in other professional sports, both in the US and abroad Copyright ©2014 Pearson Education, Inc All rights reserved 8-4 Figure 8.1 Copyright ©2014 Pearson Education, Inc All rights reserved 8-5 Labor Supply • The supply curve has a slightly different character from the typical supply curve • We usually see the price of a product on the vertical axis and the quantity of a product on the horizontal axis • In labor markets, the price is the wage rate and the quantity is the number of hours a worker chooses to work • The upward-sloping labor supply curve thus indicates that a worker responds to higher wages by offering more work time to employers – See Figure 8.2a Copyright ©2014 Pearson Education, Inc All rights reserved 8-6 Figure 8.2a Copyright ©2014 Pearson Education, Inc All rights reserved 8-7 Sports Application • One can analyze team sports markets in several ways • To analyze career length • Players have no say over work hours • The axes become salary per season and the number of seasons • To analyze the number of players hired in a season • The axes become salary per season and the number of players willing to work at a given salary See Figure 8.2b Copyright â2014 Pearson Education, Inc All rights reserved 8-8 Figure 8.2b Copyright ©2014 Pearson Education, Inc All rights reserved 8-9 Boxing Application – Fighters can choose how many fights they engage in • The axes become reward per fight and number of fights • The boxing example in Figure 8.2b shows that a boxer is induced to take on more fights as his pay increases – The player moves from point A to point B – This was the case for Oscar de la Hoya • The supply for Joe Louis shifted because his savings/wealth was lower due to tax problems – He moved from point A to point A’ Copyright ©2014 Pearson Education, Inc All rights reserved 8-10 Payment to Celebrities • Superstars get most of the reward see Table 8.1 • The effect of success lingers – Michael Jordan was among the highest earners long after he retired • Athletes earn relatively little – Tiger Woods – the highest-ranked athlete—was 14th – The highest-paid female athlete, Maria Sharapova, was 72nd • Executives are paid like celebrities – The salary of a top executive in a large corporation is likely to be at least twice that of his or her nearest rival – Output of executives is hard to measure Copyright ©2014 Pearson Education, Inc All rights reserved 8-38 Table 8.1 Copyright ©2014 Pearson Education, Inc All rights reserved 8-39 8.3 Tournaments and Cheating • Is trying hard the only way to win? • Teamwork can be harmed – Players can try to harm others’ performance – Shoot first, pass second • Competitors might try to sabotage the performance of others Copyright ©2014 Pearson Education, Inc All rights reserved 8-40 The Case of NASCAR • NASCAR doesn’t want drivers to be too aggressive • It fears the negative externalities of dangerous driving • Too many accidents can reduce viewership and harm the sport • Peter von Allmen notes a much flatter reward structure – Figure 8.10 – Frick and Humphreys confirm that NASCAR times improve as the prize spread increases Copyright ©2014 Pearson Education, Inc All rights reserved 8-41 Figure 8.8 Copyright ©2014 Pearson Education, Inc All rights reserved 8-42 Figure 8.9 Copyright ©2014 Pearson Education, Inc All rights reserved 8-43 Figure 8.10 Copyright ©2014 Pearson Education, Inc All rights reserved 8-44 Too Much of a Good Thing • High rewards put pressure on athletes and their coaches to succeed • Children leave their families to train and may be abused • Children are prohibited from working but not training • Many young female athletes have very delayed puberty – They eat too little and work out too much – They endanger their bone structure later in life • In some cases, the effort to lose weight has proven fatal Copyright ©2014 Pearson Education, Inc All rights reserved 8-45 Performance-Enhancing Drugs (PEDs) • We celebrate the athletes who use innovations – Experimental surgery that extends a career – New strokes and new suits that make them swim faster – New techniques that allow them to clear a higher high bar • PEDs seem different from the above – Many PEDs are dangerous, controlled substances – We not know who is taking them – First known PED fatality was a bicyclist in 1879 – In 1980s East German girls were given “vitamins” • They were actually steroids and male hormones • Birth defects and medical & sexual side-effects resulted Copyright ©2014 Pearson Education, Inc All rights reserved 8-46 A Study of PEDs • Humphreys and Ruseski find that 5.4% of high school boys used PEDs in 1991-2005 • This was roughly twice the rate of usage by girls • Humphreys and Ruseski found distinct patterns to usage – Greater for multisport athletes – Less for youths with better-educated, wealthier parents – Greater for those using other, non-enhancing drugs Copyright ©2014 Pearson Education, Inc All rights reserved 8-47 Doping as a Prisoner’s Dilemma • Doping is the dominant strategy • Doping leads to a suboptimal outcome • Consider the outcome payoff matrix below Mark doesn’t use PEDs Mark uses PEDs Sam doesn’t Use PEDs No advantage No harm Mark wins Sam loses Sam uses PEDs Mark loses Sam wins No advantage Harm done Copyright ©2014 Pearson Education, Inc All rights reserved 8-48 PEDs Have Tarnished Entire Sports • Baseball has been particularly affected • The following news items have stood out – Barry Bonds’ tainted home run title in 2007 – Ryan Braun’s tainted MVP award in 2011 – Melky Cabrera’s tainted batting title in 2012 • Track and Field has seen regular forfeits of gold medals – Marion Jones went from the podium to prison Copyright ©2014 Pearson Education, Inc All rights reserved 8-49 PEDs and the Tour de France • Cycling has been more affected than most sports • Since 1998 doping has been linked to – 37% of all top 10 finishers – 80% of all winners • Lance Armstrong has been stripped of his titles Copyright ©2014 Pearson Education, Inc All rights reserved 8-50 The Distribution of Income • This is another application of the Lorenz Curve • Top performers are paid disproportionately – Again, a slight edge leads to much greater pay • Consider the 2011 WTA women’s tennis tour – The top 10 players won over 42% of the prize money – Players ranked 91-100 received less than 3% – See Figure 8.11 Copyright ©2014 Pearson Education, Inc All rights reserved 8-51 Figure 8.11 Copyright ©2014 Pearson Education, Inc All rights reserved 8-52 ... Understand the basic model of wage determination in labor markets • Be able to describe why the salaries of superstars are much higher than the salaries of average players • Analyze the labor markets... reserved 8-3 8.1 Labor Supply and Demand • Figure 8.1 shows that in the last 20 years alone, the average salary of a Major League Baseball player has almost quadrupled – From about $850,000 to... several ways • To analyze career length • Players have no say over work hours • The axes become salary per season and the number of seasons • To analyze the number of players hired in a season • The