Chapter 8 Labor Relations in Pro Sports

1. Chapter 8Labor Relations in Pro Sports To Accompany Sports Economics Rodney Fort (PrenticeHall, 2003) • Players say that owners are stupid, owners say the players are greedy, and both sides are right; they make on pine for simpler days when the owners were greedy and the players were stupid. • -Richard Corliss, Time magazine, 1994.

2. Overview • The major elements of, and participants in, the modern pro sports labor relations process. • Union motivation and organization obstacles. • The “look forward and work back” logic of bargaining. • Work stoppages, strikes and lockouts. • The history of labor relations and the current status of all pro sports leagues.

3. Introduction The 1981 MLBPA strike lasted long enough to cause MLB to devise a split-season playoff system wherein the first-half winners met the second-half winners to determine post-season play. The “mother of all strikes” in 1994 precluded that season’s playoffs and World Series and spilled over into the subsequent 1995 season.

4. Modern Sports Labor Relations The National Labor Relations Act (1935) governs the relationship between owners and players in pro sports.

5. The Outcome:Collective Bargaining Agreements A league “CBA” specifies all rights and obligations of owners and players: CBA duration. Re-opening clauses. The draft rules. Pay issues common to all players, such as the rules of free agency. Player trade issues, especially for veterans. Channels for addressing grievances.

6. Special Topic: Arbitration When owners and players cannot reach a contract agreement, arbitration is available in the NHL and in MLB. Final offer salary arbitration (FOSA) means that either the player’s demand or the owner’s offer must be chosen by the arbitrator. *The point is to get owners and players to bargain sincerely individually.

7. FOSA Outcomes Players always enjoy a salary increase as a result of arbitration. If the player wins the arbitration, they get their demand (clearly more than they used to make and usually at the top of their position). If the owner wins, the player still gets a raise since the owner typically offers more than the player’s current salary.

8. MRP - Salary MRP Union Goals Unions seek to reduce salary exploitation: Salary Exploitation = *The total value of forming a union will be the sum of these values across all players.

9. Obstacles to Union Organization Quite a few obstacles confront the formation of any cooperative voluntary organization. Player unions are no exception. Education costs. Free riding. Owner retaliation. Political sentiment. Illegal league behavior.

10. What to Expect from Union Governance Unions are just small democracies. As such, we should expect the same type of outcomes as we find in all democracies: Based on the existence of rational ignorance, the logic of collective action suggests that union leadership will produce concentrated benefits and dispersed costs.

11. Concentrated Benefits/Dispersed Costs Union leaders cater to politically powerful union members at the expense of the rank-and-file members.

12. Basic Bargaining We know why unions exist and what to expect, but bargaining is the nuts and bolts of what they actually do. The simplest bargaining outcome. Differential alternatives. The simplest strategy. *None of these basic “look forward and work back” outcomes are consistent with work stoppages. Later, we’ll have to investigate that as a separate topic.

13. Simplest Outcome: The 50-50 Split If owners and players have equal next best alternatives, the simplest outcome is that both sides realize before negotiations that a 50-50 split is the best they can hope to achieve, and the sooner the better so that none of the value of a complete season is lost. Table 8-1:

14. Unequal Splits If owners and players have unequal next best alternatives, the side with the best alternatives gets a larger split, and the sooner the better so that none of the value of a complete season is lost. Table 8-3:

15. The Simplest Strategy So far, not much real strategy; each side realizes the equal or unequal outcome is the best they can accomplish and agree without dispute. But suppose one side can take an action to reduce the other side’s alternative? What is the value of doing so? Half of the potential reduction! So, one side will spend up to and including half of the value of the potential reduction in the other side’s alternatives to make the reduction happen. See p. 277 in the text.

16. Work Stoppages? None of these “look forward, work back” examples leaves any room for work stoppages. Both sides recognize the best they can do and agree before the season starts. So, we need more for either a strike (by players) or a lockout (by owners). Information problems. Profitable work stoppages.

17. Information Problems Even if both sides sincerely do not wish any stoppage to occur, it can happen anyway. Only each separate side really knows some of the information essential to the simplest bargaining outcome! Asymmetric information means that one side can make a poor estimate of values (on the table, alternatives) and make an offer that cannot be accepted by the other side. Further, since the split depends on what the other side believes to be next best alternatives, strategic misrepresentation has a value. But such a strategy can backfire!

18. The Expected Value of a Stoppage Either side can consider the discounted net expected value of a work stoppage, EVS: EVS=P(A-M+G-F)+(1-P)[A-(M+F)] P = subjective probability of a successful stoppage. A = value of the next best alternative earned during the stoppage. M = money cost lost during the stoppage. G = the gain enjoyed in the event the stoppage is successful, enjoyed after the stoppage. F = the costs of fan ire borne after the stoppage.

19. Value Determinants EVS=P(A-M+G-F)+(1-P)[A-(M+F)] Important observations: EVS depends on benefits and costs of a stoppage. If P increases, so does EVS. EVS is negatively related to both the length of the stoppage and the interest rate. The breakeven probability, where EVS=0, determines the smallest probability of winning that can be considered by a side attempting a work stoppage.

20. Status of Labor Relations One can review the historical and current status of labor relations in each of the four major leagues along the following elements: Free agency. Salary caps and rookie pay restrictions. College drafts. Work stoppages. Special labor circumstances like arbitration in MLB and the NHL or decertification in the NFL. (This is done for you in your text.)

21. Summary • The major elements of, and participants in, the modern pro sports labor relations process. • Union motivation and organization obstacles. • The “look forward and work back” logic of bargaining. • Work stoppages, strikes and lockouts. • The history of labor relations and the current status of all pro sports leagues.