Sports Economics:Sports Economics:Resource MarketResource Market

By: Matt GoldsteinBy: Matt Goldstein

Employment of PlayersEmployment of Players

Each of the major professional Each of the major professional leagues (MLB, NFL, NBA, and NHL) leagues (MLB, NFL, NBA, and NHL) have strict methods by which teams have strict methods by which teams hire and fire playershire and fire players

All of the leagues have basically two All of the leagues have basically two ways to hire a professional athlete.ways to hire a professional athlete.– The DraftThe Draft– Free AgencyFree Agency

Overview of a DraftOverview of a DraftWhat is the Draft?What is the Draft?

– An annual event in which teams from a sport An annual event in which teams from a sport gather to take turns selecting athletes just gather to take turns selecting athletes just entering the league.entering the league.

Why Draft?Why Draft?1.1. To promote a competitive playing balance To promote a competitive playing balance

among teams, sometimes referred to as among teams, sometimes referred to as parity.parity.

2.2. To prevent any single club from hoarding all To prevent any single club from hoarding all the top prospects entering the league each the top prospects entering the league each year.year.

The DraftThe DraftUnder league rules once a player is drafted by a Under league rules once a player is drafted by a team, that team has team, that team has EXCLUSIVE RIGHTSEXCLUSIVE RIGHTS to that to that player.player.No club can hire this player unless the team that No club can hire this player unless the team that drafted him first sells or trades away his rights.drafted him first sells or trades away his rights.Thus, new players become the “property” of their Thus, new players become the “property” of their employing club.employing club.Due to exclusive rights athletes had to either Due to exclusive rights athletes had to either accept any contract offered by the club that accept any contract offered by the club that drafted him or sit out.drafted him or sit out.Players had little, if any, real bargaining power Players had little, if any, real bargaining power and provided owners the opportunity to pay their and provided owners the opportunity to pay their players low wages.players low wages.

MonopsonyMonopsonyMonopsony-Monopsony-A market with only one A market with only one buyer or employer.buyer or employer.When league rules allow clubs to own When league rules allow clubs to own the property rights to new player the property rights to new player contracts, an imperfect factor market contracts, an imperfect factor market is formed or a monopsonyis formed or a monopsony– Ex:Ex: When only one club has the right to When only one club has the right to

contract with a specific player, that club contract with a specific player, that club becomes a pure monopsony from a becomes a pure monopsony from a player perspectiveplayer perspective

Two major factors that create Two major factors that create Monopsony power for pro sport teamsMonopsony power for pro sport teams

1.1. The immobility of new The immobility of new players who have been players who have been drafteddrafted

New draftees who wish to New draftees who wish to play are required to sign play are required to sign contracts that bind them to a contracts that bind them to a team for a specific time team for a specific time periodperiodPlayers never have chance to Players never have chance to sell services to highest sell services to highest bidder.bidder.New players become locked New players become locked in to the team that drafted in to the team that drafted him.him.Because they are locked in Because they are locked in the employing club becomes the employing club becomes the only potential buyer of the only potential buyer of the players talentsthe players talents

2.2. The highly specialized The highly specialized athletic talents and athletic talents and skills possessed by the skills possessed by the playersplayers

Most athletes specialize in Most athletes specialize in one sport and train just for one sport and train just for that sport.that sport.Skills are very specific and Skills are very specific and not transferable to other not transferable to other employmentemploymentAthletes face limited Athletes face limited opportunities for opportunities for employment.employment.Therefore they must accept Therefore they must accept sub par contract offers by sub par contract offers by there standards.there standards.

Few DefinitionsFew DefinitionsMarginal cost of labor (MCLMarginal cost of labor (MCL)-The )-The change that occurs in a firms total labor change that occurs in a firms total labor costs due to hiring and additional worker, costs due to hiring and additional worker, per unit of time.per unit of time.Monopsonistic Profit-Monopsonistic Profit- The difference The difference between the workers contributions to a between the workers contributions to a monopsonistic firms’ receipts and their monopsonistic firms’ receipts and their wages.wages.Marginal Revenue Product(MRP)-Marginal Revenue Product(MRP)- The The change in revenue experienced by a firm change in revenue experienced by a firm when it employs an additional worker.when it employs an additional worker.

Wages and Employment in a MonopsonyWages and Employment in a MonopsonyA monopsony has a + slope supply cureA monopsony has a + slope supply cureSo in order to attract additional workers it must increase its wage offer. This is seen So in order to attract additional workers it must increase its wage offer. This is seen in column two of the tablein column two of the tableBecause wages rise with each additional worker, so does the total cost of labor. Because wages rise with each additional worker, so does the total cost of labor. Indicated in columns 2 and 3.Indicated in columns 2 and 3.The change in total labor cost due to hiring one more worker is known as the MCL. The change in total labor cost due to hiring one more worker is known as the MCL. Column 4Column 4The MRP falls as more pitchers are hired. Meaning each additional pitcher brings in The MRP falls as more pitchers are hired. Meaning each additional pitcher brings in less and less revenue. Column 5less and less revenue. Column 5How many pitchers will they hire? They will continue to hire until MCL=MRP. So four How many pitchers will they hire? They will continue to hire until MCL=MRP. So four pitchers.pitchers.

NOTE: All wages and costs are 1000’s. So when wage reads 300 its really 300,000

Graph of Wages and Employment of a Graph of Wages and Employment of a Monopsony (from previous table)Monopsony (from previous table)

Line SS represents columns 1(# of Line SS represents columns 1(# of players) and 2 (wage)players) and 2 (wage)The MCL curve is plotted using The MCL curve is plotted using numbers form columns 1(# of players) numbers form columns 1(# of players) and 4(MCL)and 4(MCL)The MRP (column 5) plots pitchers The MRP (column 5) plots pitchers hired vs. revenue brought in.hired vs. revenue brought in.Point A represents where MCL=MRP. Point A represents where MCL=MRP. The optimum quantity.The optimum quantity.Point B represent how much the 4 Point B represent how much the 4 workers are paid.workers are paid.So when four pitchers are hired the So when four pitchers are hired the MRP is 900 and the wage per pitcher is MRP is 900 and the wage per pitcher is 600. The difference b/w A and B is 600. The difference b/w A and B is known as known as MONOPSONISTIC PROFIT.MONOPSONISTIC PROFIT.The difference is 300,000 x 4(pitchers The difference is 300,000 x 4(pitchers hired)=1,200,000 total profithired)=1,200,000 total profitRecall that in a Recall that in a competitive laborcompetitive labor market, additional workers are hired market, additional workers are hired until MRP=Wage. This is point Cuntil MRP=Wage. This is point CIf it was competitive mkt, we would If it was competitive mkt, we would hire five pitchershire five pitchers

The cause of monopsony power The cause of monopsony power in MLBin MLB

As we said earlier since players had As we said earlier since players had no choice of who to play for they no choice of who to play for they were asked to sign a basic playing were asked to sign a basic playing contract by their franchise once contract by their franchise once drafted.drafted.It became known as the It became known as the RESERVE RESERVE CLAUSECLAUSEThe Reserve Clause gave clubs the The Reserve Clause gave clubs the exclusive rights.exclusive rights.

Players answer to the Reserve Players answer to the Reserve ClauseClause

In 1975, players organized and fought the In 1975, players organized and fought the owners in antitrust court.owners in antitrust court.They realized the reserve clause gave owners They realized the reserve clause gave owners monopsony power and kept salaries below what monopsony power and kept salaries below what they could get if it were a competitive market.they could get if it were a competitive market.The arbitrator overturned the reserve clause in The arbitrator overturned the reserve clause in MLB and the players/ owners eventually MLB and the players/ owners eventually reached a compromise.reached a compromise.The compromise said the employing clubs could The compromise said the employing clubs could hold exclusive rights to a players contract for a hold exclusive rights to a players contract for a specified amount of time after which the player specified amount of time after which the player could file for could file for FREE AGENCY.FREE AGENCY.

FREE AGENCYFREE AGENCY

A free agent is a player A free agent is a player whose contract is no longer whose contract is no longer held exclusively by one held exclusively by one team.team.This means that once they This means that once they become a free agent they become a free agent they can sell there services to the can sell there services to the highest bidder.highest bidder.The impact of Free agency The impact of Free agency on a players salary for MLB on a players salary for MLB can be seen in the figure 9.3can be seen in the figure 9.3The other sports soon The other sports soon followed MLB and instituted followed MLB and instituted Free Agency.Free Agency.Free Agency clearly reduced Free Agency clearly reduced the amount of monopsonistic the amount of monopsonistic exploitation in sportsexploitation in sports

Free Agency was just starting in 1976. Most players were still ran by a monopsony power.

So Do Professional Athletes So Do Professional Athletes Earn Their Pay?Earn Their Pay?

Most athletes earn millions of dollars while the average Most athletes earn millions of dollars while the average households income is $42,000.households income is $42,000.People often argue that athletes are overpaid.People often argue that athletes are overpaid.However, economically, as long as an employer However, economically, as long as an employer experiences an increase in revenue that is greater than the experiences an increase in revenue that is greater than the increase in costs due to hiring an additional worker, the increase in costs due to hiring an additional worker, the employer can increase profits with a new hire.employer can increase profits with a new hire.So a club can make a profit and pay its players millions of So a club can make a profit and pay its players millions of dollars if those players generate even more millions of dollars if those players generate even more millions of dollars in revenues.dollars in revenues.ExampleExample:: In 1988 the Los Angeles Kings(NHL) paid $15 In 1988 the Los Angeles Kings(NHL) paid $15 million to the Edmonton Oilers for the right to hire Wayne million to the Edmonton Oilers for the right to hire Wayne Gretzky. The Kings then signed Gretzky to an 8yr/$20 Gretzky. The Kings then signed Gretzky to an 8yr/$20 million contract. They paid a total of $35 million to get him million contract. They paid a total of $35 million to get him but it was estimated that Gretzky increased revenue over but it was estimated that Gretzky increased revenue over the eight years by as much as $52.1 million. So they the eight years by as much as $52.1 million. So they profited more than $17 million. So in this case it would be profited more than $17 million. So in this case it would be looked at as Gretzky earned his pay. looked at as Gretzky earned his pay.

Labor DisputesLabor DisputesPlayers in all four major sports formed labor Players in all four major sports formed labor unions to help fight monopolistic team owners.unions to help fight monopolistic team owners.LABOR UNION-LABOR UNION- A formal organization of workers A formal organization of workers that bargains on behalf of its members over the that bargains on behalf of its members over the terms and condition of employment.terms and condition of employment.Pretty much player unions negotiate with team Pretty much player unions negotiate with team owners to determine the standards that are owners to determine the standards that are applied to all player contracts.applied to all player contracts.When owners and player unions cant come to an When owners and player unions cant come to an agreement it leads to labor disputes: either a agreement it leads to labor disputes: either a strike or a lockout.strike or a lockout.

Strikes and LockoutsStrikes and LockoutsStrikeStrike

A strike is a work A strike is a work stoppage initiated by stoppage initiated by labor (the players).labor (the players).

Ex. Ex. In 1994, the In 1994, the players union in MLB players union in MLB called a strike that called a strike that forced the cancellation forced the cancellation of hundreds of games.of hundreds of games.

LockoutLockoutA lockout is a work A lockout is a work stoppage initiated by stoppage initiated by management.management.

Ex. Ex. In 1994, NHL In 1994, NHL owners canceled half owners canceled half the season forbidding the season forbidding the players from the players from returning.returning.

In both cases the major points of disagreement concerned the mechanics of how players would be paid and the conditions necessary for players to become free agents.