Labour markets in sports and other industries

“TO WHAT EXTENT ARE LABOUR MARKETS IN SPORT DIFFERENT FROM LABOUR MARKETS IN OTHER INDUSTRIES”?

Rottenberg (1956) suggests that “Professional sports are intrinsically different from other businesses”. Neale (1964) states “A sports league is similar to a multi-plant firm. Individual teams are ‘plants’, subject to decisions taken and implemented collectively by the ‘firm’, at league level”. “Labor issues in sports seem distant from the rest of the economy” (Kahn 2000), this discussion will focus upon the similarities/differences that exist between labour markets in professional sports and other industries.

Sloman (2005) defines labour as “all forms of human input, both physical and mental in to production.” A Labour market refers to a market where interaction exists between potential employees and employers. Neale (1964) comments “that a single team cannot supply the whole market because if it did it would not have an opponent”. He explained that in economic sense the league is seen as the firm as it controls the entry/exit of teams, competition rules and matches.

In some industries the demand for labour depends on demand for the product, and the consumer only observes the end product (Sloane 2004). Rosen and Allen (2001), “Economic output includes direct valuation of inputs themselves” in sports the input (labour) has separate value; consumers “pay to observe the process” (Cairns 1986). This can also be seen in the entertainment industry where viewers watch/pay to see a theatre production/concert.

In other industries labour productivity output Q is a function of capital and labour however in sports it is player talent only.

Other industries: Q = f(K,T) where Q = output, K = capital and T = labour

Sports industry: Q = f(T) where Q = output, T = talent

Michael Spence (1979) put forward the idea of labour market signalling, in other industries it is common to find potential employees sending out signals to potential employers about their skills. The MRP of each player can be assessed in sport markets, “information about performance statistics is commonly available and has been said to be more detailed than other data samples such as the census” (Kahn 2000), unlike other industries such as acting where it is difficult to measure performance, however productivity can be measured by firms using piece rate systems.

The perfect competition model states profits are maximised when MRP (the increase in total revenue attributable to employing one more unit) is equal to its MFC cost (the cost of adding one more unit). The PC market has homogeneous products and free entry/exit into the industry. This is not the case in sports due to the high risks associated with new players and the high entry barriers (Rottenberg 2004). Transactions in the perfect market are costless, however in sports owners have to pay for the transferring of players under the age of 23 (UEFA regulations).

The PC model implies the quality and effort of labour is known to the firm, sports teams usually have longer contracts leading to uncertainty about the ultimate quality of the player. It is difficult to measure effort as it would require constant monitoring of performance and training sessions. Teamwork is not an important factor in the PC model (Sandy, Sloane, and Rosentraub 2004) but in sports it can be seen that it is essential, players must be able to assess each other’s strengths/weaknesses in order play strategically. In other industries workers can be hired for short periods of time as there is nothing to learn, Rosentraub (2004) argues that “most real labour markets require some worker training, have monitoring effort costs and have some pay off for teamwork”. In sports clubs have to make long term decisions and players are signed for 5-10 year contracts, meaning that more players can be hired to what the perfect supply model suggests. Career durations in sport are short, “6 years for a tennis player” (Geyer 2000), compared to employees in other industries who start work from 16 years (UK) and end when they reach retirement age.

It is important for each sport team “that it does not become too strong relative to competitors, by buying up the best players”, (Rottenberg 1956) otherwise diminishing returns would occur as more inputs are used the amount of extra output produced will start to decrease and profits may decline, in the diagram MC equals MRP at points A and B, however profits are only maximised at point B.

Source – The Economics of Sport Sloane, Sandy, Rosentraub 2004. p. 67)

ARP = Average Revenue Product

MRP = Marginal Revenue Product which is equal to marginal revenue multiplied by marginal physical product of labour

SL – Marginal Wage Cost

In sports individual clubs/players can be seen as monopolies (one seller and many buyers), Sloman (2003) describes this would be the ideal case for firms in other industries to earn high revenues. David Beckham can be seen as a monopoly, he has unique talent and there are no substitutes. A complete monopoly in sports is not ideal as competition is needed to provide the “output” for spectators.

Monopsony describes a situation where there is only one buyer & few sellers. The labour market in a number of industries has been said to lead to the monopolistic exploitation as workers receive salaries below their MRP (Rosen 2001). The table below shows reported salaries and estimated MRP figures for basketball players in 1980-81.

Source – Frank, A & Scott, JR % Somppi, K (1985), Salary Vs Marginal Revenue Product Under Monopsony and Competition; The Case of Professional Basketball. Atlantic Economic Journal. 13 (3), 50-59

In the perfect market, profit maximisation occurs at W0, E0 the equilibrium, the monopsony firm maximises profit at combination W2, E2 therefore under monopsony MRPL > W2 showing the exploitation of players.

PC combination

Monopsony

combination

Source – The Economics of Sport: Theory, Policy & Evidence (Downward, Dawson, Dejonghe. 2009. p. 313)

A1-A2 – demand for labour for a perfectly competitive firm (MRPL)

A1-A3 the MRPL of the monopolist

B1 – B2 the supply of price taking firms in the labour market

B1-B3 is the marginal cost of labour for the monopolist

“The strong evidence for monopsony in sports has some parallels to a similar effect that has been found among groups such as public school teachers, nurses and university professors” (Ehrenberg 2000) this suggests that the power of employer monopsony is more widespread than what economists think.

Bilateral monopoly exists in sport labour markets, both clubs and players have market power, as one seller faces one potential buyer (US draft system). The players union is the only supply of labor for the sports league (e.g.) it is a monopoly. The sports league is the dominant buyer of the players’ services, so it is a monopsonist. The wage falls into an indeterminate range between the monopoly and monopsony wage and depends on negotiating abilities. As Dejonghe (2009) states “the bargained outcome will maximise the product of the incremental utilities of all parties”, rather than that of a particular person.

Sports unions and other industry unions represent workers with similar and distinct skills and engage in collective bargaining with employers (Tan 2008). Sport unions do not directly engage in negotiation over specific wages, they restrict themselves to bargaining.

Sloane & Sandy (2004) found unions in sport markets rely upon individual agents to negotiate player salaries; this is different from other industries where there is usually a common play scale that determines pay by job title and experience. They still however discuss issues such as pensions and working conditions.

A competitive player market will lead to a concentration of all playing talents in richer clubs, leading to ” low uncertainty of outcome” (Kesenne 2007). Many rules/regulations regarding player transfers were introduced in sport, the rule of giving teams exclusive ownership rights to labour is non existent in other industries (Rosen and Sanderson 2004).

In 1879 the reserve clause was introduced, known as the retain and transfer system in Europe, it stated that players were owned by a club for the length of their career (Kesenne 2007) until they were traded, sold or released, this restricted the mobility. Rottenberg (1956) argues the reserve clause did nothing to prevent the migration of big teams. This was the main principle of the Coase theorem which suggests “that changing property rights for a player’s labor should not affect the distribution of player talent if transaction costs are low” (Surdam 2006) .

Source – The Economics of Professional Team Sports(Downward, Dawson, 2000. p. 59)

MRA & MRB = demand for talent

E = Player Market Equilibrium

B =Small Team

A = Big Team

C = Equilibrium salary level

Y

E

If actual distribution was “y” MRA > MRB, both teams could trade players until the difference in MR move right to point E the final outcome would be the same as the free market condition. The only difference in sports would be in the distribution of rent rising from player abilities. This is known as the invariance thesis.

The European system was abolished in 1995 by the Bosman Case when he could move not from the Belgium team to the French team as the French team refused to pay the full transfer fee, as a consequence the Belgium team did not let him go and reduced his wages. A legal decision was made by the ECJ in 1995, it gave EU players the right to a free transfer to another EU team after contracts had expired. Footballers are now free to move worldwide after the FIFA -EU agreement in 2001 (Kesenne 2007). The reserve clause ended in 1976 after challenges by Dave McNally in 1981, in the NLB players with over 6 years of playing are eligible for free agency (Vrooman 2000)

In US leagues the Rookie draft system allows the lowest ranked team in the previous season to select a college player first, allowing the financially poorer teams to compete with rich team for talent to improve competitive balance (Kahane 2006). In other industries workers are free to leave when they want and no transfer fees are charged.

MR = Marginal Revenue

C = Price

E = Win percentage.

Source – The Economics of Sport: Theory, Policy & Evidence (Downward, Dawson, Dejonghe. 2009. p. 246)

Gate revenue sharing involves clubs distributing their earnings with other clubs with the assumption of profit maximisation. In other industries for example supermarkets, Tesco would not share earnings with other supermarkets as they would lose market share. Rockerbie (2009) argues that “Revenue sharing arrangements in professional leagues tend to discriminate against small market clubs: baseball 67-33 home-visitor split”. Downward (2009) states sharing has no effect on competitive balance as the winning percentages stay the same and the MR of each club falls by the same amount, the only difference is reduction in price.

“Players salaries went up dramatically” (Kesenne 2007) after the abolishment of the reserve system leading to the introduction of hard salary caps in N.America giving clubs a maximum amount of money to spend on salaries. After 1989 salaries outpaced the cap, showing the rapid growth of average salaries (Noll 1991).

In some sports soft caps are imposed meaning clubs that pay more to their players than the value of the cap have to pay a tax. Van de Burg and Prince (2005) show luxury tax improves the distribution of talent because if the tax is only levied on top clubs whose payroll exceeds the cap then they will lower their demand for talent.

Any rules that are introduced into other industries that restrict competition between firms would be seen as unethical and acting against the public interest (Bougheas 2003).

“Total revenue generated by a typical American baseball team is about the same as that of a

Moderate sized department store” (Noll, 1974). Hauseman and Leonard (1998) suggest `Star quality’ is hard to quantify, but fans recognise it. The average salary for a premiership footballer is £676000 (Harris 2006) compared to £42000 for a lecturer (BBC News 2007). Mayer (1960) explains the difference occurs because of the “`personal scale of operations’ effect, the unit value per student in teaching is high but the scale of business is constrained, whereas in sports the unit values are small but there is a higher amount of exposure to the public that is generated through sponsorships and advertisements in addition to playing.

The sports labour market differs from those in other industries even though there are some “close links” (Cairns 1986). The major difference is in relation to the restrictions placed in sports to achieve competitive balance and the effect of “star players”. It would be interesting to look further into how the current recession has affected factors relating to sports and other industry labour markets and whether new transfer restrictions will be introduced in the future.