The Economics of Sports FIFTH EDITION Chapter Labor Market Imperfections MICHAEL A LEEDS | PETER VON ALLMEN Introduction • While salaries grew rapidly in all the major North American team sports, they grew more rapidly in some than others • The faster growth of salaries in baseball than in football is surprising since revenues in football have risen faster and baseball is exempt from antitrust laws • Baseball has a relatively stronger players’ association Copyright ©2014 Pearson Education, Inc All rights reserved 9-2 Learning Objectives • Understand how leagues exert monopsony power on players and the impact of monopsony on salaries • Describe how unions act as a countervailing force on teams’ monopsony power and how the player associations have increased player income • Describe how the most recently negotiated agreements in the NFL and NBA have changed the economic relationship between players and owners Copyright ©2014 Pearson Education, Inc All rights reserved 9-3 9.1 The Monopsony Power of Sports Leagues • No major sports league has a competitive labor market • In this section, we take a closer look at – The reserve clause – The advent of free agency in professional sports – The impact of monopsony power on players who are not free agents Copyright ©2014 Pearson Education, Inc All rights reserved 9-4 Monopsony • Monopsony is a market structure with a single buyer • In a monopsony labor market, workers can sell their services only to the monopsony employer • The impact of monopsony power is the mirror image of monopoly power • A monopsonist uses its market power to drive down the prices it pays producers Copyright ©2014 Pearson Education, Inc All rights reserved 9-5 The Monopsony Model • It is an upside down monopoly (Figure 9.1) – Pays lower wages, wm $ – Employs fewer workers, Lm – Causes a deadweight loss • The supply curve is the market wc supply curve – Marginal Expenditure (ME) is wm the added expenditure from hiring one more player if all are paid the same wage • Profit is maximized when ME = MB Copyright ©2014 Pearson Education, Inc All rights reserved ME S D L m Lc L 9-6 Figure 9.1 Copyright ©2014 Pearson Education, Inc All rights reserved 9-7 The Reserve Clause • Baseball set the pattern • Until the mid-1870s, players controlled the sport – The National Association of Professional Base Ball Players (NAPBBP) set the rules – Financial backers provided the money • The NAPBBP had a crucial weakness – It could not keep players from jumping contracts – The Pittsburgh Pirates got their name because they “pirated” players from other teams Copyright ©2014 Pearson Education, Inc All rights reserved 9-8 The Origins of the Reserve Clause • William Hulbert was many things – A financial backer of the Chicago White Stockings – A brazen thief – An unwitting founder of modern baseball • In 1875, he signed players – They were still under contract with other clubs – After signing them he called for a new system to end such practices – The new system allowed teams to “reserve” players – a gentlemen’s agreement Copyright ©2014 Pearson Education, Inc All rights reserved 9-9 The Reserve Clause • The text of the reserves clause is quite vague – [I]f, prior to March 1, the player and the club have not agreed upon the terms of such contract [for the next playing season], then on or before ten days after said March 1, the club shall have the right to renew this contract … except that the amount payable to the player shall be such as the club shall fix in said notice • Its interpretation was unambiguous – It bound players to teams in perpetuity – This gave the clubs the right to set wages Copyright ©2014 Pearson Education, Inc All rights reserved 9-10 Settlement in Contact Zone • If both labor and management know exactly how far they can push the other side, they can typically reach a settlement without conflict – Figure 9.8 illustrates how this might occur – They both settle in the contract zone • The contract zone is the range of wages or salaries that is acceptable both sides Copyright ©2014 Pearson Education, Inc All rights reserved 9-56 Illustrating Conflict (Figure 9.8) Union willing to accept Firm willing to accept Low Wage High Wage Contract Zone Both union and firm are willing to settle within the contract zone Copyright ©2014 Pearson Education, Inc All rights reserved 9-57 Conflict • The threat point for labor is the minimum acceptable wage • The threat point for management is the maximum offer • Conflict occurs if one side or the other misjudges this point and stays outside of the contract zone • This is illustrated in Figure 9.9c Copyright ©2014 Pearson Education, Inc All rights reserved 9-58 Illustrating Conflict (Figure 9.9c) Union willing to accept Firm willing to accept High Wage Low Wage Union’s Perceived Contract Zone If the union underestimates the firm, it will refuse offers in the actual contract zone Copyright ©2014 Pearson Education, Inc All rights reserved 9-59 Labor Conflict in Professional Sports • Unions in sports bargain over bigger issues than most unions • Most unions not bargain over basic entrepreneurial decisions • But issues like revenue sharing and league expansion or contraction are often at the heart of negotiations in professional sports Copyright ©2014 Pearson Education, Inc All rights reserved 9-60 Conflict in the MLB • MLB owners were often divided – Large market v small market • They could not present a coherent stance – This caused uncertainty by players over what owners wanted and mistrust of the owners – The players also knew that big-market owners wanted to settle and would eventually prevail over the smallmarket owners Copyright ©2014 Pearson Education, Inc All rights reserved 9-61 Conflict in the NHL • Alan Eagelson has left a legacy of ill-will – As executive director of the NHLPA (1967-92) he engaged in massive conflicts of interest – He was also an agent for many players – He had business dealings with NHL owners • As director of a foundation that oversaw international hockey exhibitions, he told players that revenues would benefit their pensions • But he told the owners to keep the revenues – Eagleson went to prison • Players lost faith in the owners Copyright ©2014 Pearson Education, Inc All rights reserved 9-62 Comparing 2011 NBA and NFL Negotiations • The NFL lockout marked its first work stoppage since 1987 • The NBA followed four months later • The circumstances were very different – The NFL was hugely profitable – The NBA was in some distress Copyright ©2014 Pearson Education, Inc All rights reserved 9-63 The 2011 NFL Lockout • Both sides had so much to lose that conflict seemed illogical • But the key was uncertainty and mistrust – Both the NFL and the NFLPA had relatively new leadership that had not previously negotiated a CBA – Each side mistrusted the other’s actions • The NFL negotiated a TV contract that would pay $4 billion even if it played no games • The NFLPA filed to decertify, opening the way for another antitrust lawsuit Copyright ©2014 Pearson Education, Inc All rights reserved 9-64 The NFL Agreement • Owners got – A percentage-point reduction in labor’s share of revenues – A rookie salary cap – Credit in revenue for stadium investment (reducing amount shared with players) • Players got – Commitment that teams would be at or close to the cap – Added funding for retirees and safety research – Restriction on preseason practices – No expansion of the season to 18 games Copyright ©2014 Pearson Education, Inc All rights reserved 9-65 The 2011 NBA Lockout • The NBA sought significant, basic changes – Lower percentage of revenue to players – A harder salary cap • Players threatened to play in Europe Copyright ©2014 Pearson Education, Inc All rights reserved 9-66 The NBA Agreement • The agreement is unusually long – 10 years • Owners got – The desired reduction in labor share – A much harder cap thanks to the escrow tax noted earlier • Players got relatively little – A promise that teams would come close to the maximum payroll established by the cap Copyright ©2014 Pearson Education, Inc All rights reserved 9-67 Professional Tennis Associations • In 1968, the first year of “open” tennis, the prize for winning the men’s singles at Wimbledon was only £2,000 – Both professionals and amateurs compete in an open tournament • By 2012, the prize rose to £1,150,000 – This is an increase of 57,400 percent • The prize for women went from £750 to £1,150,000 • The tennis associations helped Copyright ©2014 Pearson Education, Inc All rights reserved 9-68 Professional Tennis Associations (cont.) • Men and women have separate unions – The men’s Association of Tennis Professionals was formed in 1972 (ATP) – Sony Ericsson Women’s Tennis Association was formed in 1973 (WTA) • Both associations resemble craft unions – They restrict supply by defining who qualifies – They provide labor to tournaments Copyright ©2014 Pearson Education, Inc All rights reserved 9-69 A Different Kind of Union • The ATP and WTA not specify how much tournaments pay specific players • They establish the reward structure of the tournaments • They also negotiate all aspects of the “working conditions” – Example: Bathroom facilities in locker rooms • ATP and WTA not engage in negotiations with a single management group but with tour sponsors Copyright ©2014 Pearson Education, Inc All rights reserved 9-70 ... Basketball Association (ABA) and NBA sought to merge in the mid-1970s The NBA players blocked the merger  They did not want the “salary war” to end  The union brought an antitrust lawsuit  The ABA...Introduction • While salaries grew rapidly in all the major North American team sports, they grew more rapidly in some than others • The faster growth of salaries in baseball than in football is surprising... One each appointed by owners and the union • One mutually agreed upon – Previously the commissioner handled all appeals • In 1976, Andy Messersmith played a year without a contract – His appeal