Economics of Sports
Unit 7: Labor Markets
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Summer 2013
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
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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
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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
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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
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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
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Summer 2013
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
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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
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Salary Arbitration in MLB
• Uses Final Offer Arbitration (FOA)
• FOA is designed to prevent addiction to
arbitration
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Final Offer Arbitration
• Each side makes one offer
– Arbitrator must choose one
– Cannot impose/propose independent solution
• Restores incentive to compromise
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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
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Summer 2013
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%
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Summer 2013
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
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Summer 2013
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
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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)
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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
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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
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How Craft Unions Affect Pay
• Some restrict access to skills
• Some restrict access to jobs
• Raise pay by restricting labor
supply
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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
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Summer 2013
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
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Summer 2013
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
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Summer 2013
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
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