Economics of Sports

1. Economics of Sports Unit 7: Labor Markets

2. Monopsony and Baseball • Initially players controlled the game • Governing body: National Assn of Professional Base Ball Players • It could not keep players from jumping contracts • Pittsburgh Pirates named for piracy of players from other teams • William Hulbert – a unique thief • Financial backer of the Chicago White Stockings • In 1875, he signs 5 players under contract with other clubs • THEN calls for a new system that will end thievery • Forms the National League of Baseball Clubs • Key: Teams reserve 5 players (number is no coincidence!) • Reservation eventually extended to all player contracts • Becomes the Reserve Clause - part of the standard contract

3. The Reserve Clause Seems Innocent • Bound players for length of contract plus one year • The key to binding players: • Players were not allowed to play without a contract • All took came to interpret this as a lifetime contract • Other sports leagues copy – often verbatim

4. Free Agency • No major sport still has a reserve clause • Free agency came to NFL, NBA, and NHL through the courts • NFL could have had free agency in 1950s • Courts finally awarded it in 1991 • WHA sued NHL in an effort to sign away players • Players sued the NBA when it tried to merge with ABA • MLB players had the toughest path • MLB was exempt from antitrust laws • Union outsmarted owners at the bargaining table • Got owners to agree to arbitration panel • Panel overturned the reserve clause

5. Unrestricted Agency • Can sign with any team • Eligibility • MLB: After 6 years • NBA: After 4 years if a 1st round draft pick • Otherwise no restriction • NFL: After 4 years if contract has expired • NHL: Has a complex formula • Depends on age, position, and number of games played

6. Restricted Free Agency • Player’s original team has right of first refusal • It can retain the player by matching an offer • Eligibility • MLB does not have restricted free agency • NBA: After 3 years if a 1st round draft pick • Otherwise does not exist • NFL: After 3 years if contract has expired • NHL: Has a complex formula

7. Salary Arbitration • A way to deal with disputes • Mediators play the middleman • Make proposals that neither side will • No role in imposing settlement • Arbitrators play the judge • Binding: sides pre-commit to judgment • Non-binding: only indirect pressure to accept • Exists in NHL and MLB

8. Salary Arbitration in NHL • Team and player submit proposals to panel • The panel may choose either offer or impose its own ruling • The panel has 48 hours to make its ruling • A recent study shows that the rulings have closely tracked what econometric studies show the players are worth

9. Salary Arbitration in MLB • Uses Final Offer Arbitration (FOA) • FOA is designed to prevent addiction to arbitration

10. Final Offer Arbitration • Each side makes one offer • Arbitrator must choose one • Cannot impose/propose independent solution • Restores incentive to compromise

11. Winning by Losing • Players have lost more than half the arbitration cases • But it still has had a huge impact on salaries • 111 player filed for free agency in 2009 • Only 3 actually went through arbitration • The average salary increase for the 111 players was 143% • Players’ union has said that FOA has had a bigger impact on salaries than free agency

12. Salary Caps and Payrolls in the NBA • Payrolls limited to 51% of qualifying revenue • Individual salary scale based on experience • Escrow tax on all salaries • 9% of all salaries are held in escrow by the NBA • Escrow tax applies if total salaries exceed 57% of eligible revenue • Cap + 6% • Regardless of exceptions and exemptions • Escrow goes to league until reach 57%

13. Salary Caps and Payrolls in the NHL • Payrolls limited to 54% of qualifying revenue • Rises to 57% if league revenue exceeds $2.7B • No individual can receive over 20% of the team’s allowable payroll • Players put 13.5% in an escrow account similar to the NBA’s

14. Salary Caps and Payrolls in the NFL • Players receive 62.24% of qualifying revenue • Percentage is higher than other leagues • Base is lower (not as much qualifies) • The NFL has no individual limits • Bonuses are a complicating factor • Counted if the bonus is easily obtained (e.g., signing bonus) • Bonus is prorated over the life of the player’s contract • Bonuses that are not likely to be obtained (e.g., setting a career record for sacks) do not count against the cap

15. The Impact of Salary Caps • Caps have significantly reduced payrolls • Caps have significantly leveled payrolls • Payrolls are less even in baseball than in other sports (even accounting for the Yankees)

16. The Impact of Rival Leagues • Undermines monopsony power • Salaries rise with serious challenges • NFL salaries doubled between 1982 and 1986 because of the USFL • Between 1970 and 1976 salaries in the NHL more than tripled because of the WHA

17. What Kind of Unions are Sports Unions? • Two basic forms • Craft unions descended from medieval guilds • Organized along skill lines • Industrial unions originated in 19th century • Industrial revolution led to rise of large firms • Unions sought to offset power of large employers • Sports are a hybrid • Players have special skills like craft unions • Work for particular employer like industrial unions • Unlike other unions – do not bargain over specific pay

18. How Craft Unions Affect Pay • Some restrict access to skills • Some restrict access to jobs • Raise pay by restricting labor supply

19. Unions Versus Monopsony • Until 1970s, owners dominated players • Unions were weak or non-existent • The reserve clause bound players to their teams • Sports unions begin to rise in power in 1970s • Replace monopsony with bilateral monopoly • Monopsony employer tries to lower pay • Monopoly union tries to increase pay • Pay increases dramatically in all leagues

20. Some Reasons for Labor Strife • MLB owners were often divided • Could not present coherent stance • Led to uncertainty by players • Players knew big-city owners wanted to settle • NHL players felt betrayed by own leader • Alan Eagleson conspired with owners • He told players that revenues from Canada Cup series would benefit pension fund • In fact the owners and Eagleson kept the revenues • Players lost faith in the owners

21. Why Don’t NFL Players Make More Money? • The NFL has the highest profits • Shouldn’t that bring highest pay • Union faces structural disadvantages • Owners have always been very united • Large squads make coordination difficult • Star system favors some positions over others • Union has made missteps • Allowed the NFL to restore the Rozelle rule after court struck it down • Allowed NFL to install salary cap after court imposed free agency • As a result, until recently, NFL players have had the lowest pay of the 4 major leagues

22. A Different Kind of Union: Professional Tennis • Men and women have separate unions • Association of Tennis Professionals (Men) • Sony Ericsson Women’s Tennis Assn (Women) • Both restrict supply by defining who qualifies • The unions provide labor to tournaments • Thus, they resemble typical craft unions