SPORTS LABOR MARKETS Statistics Labor supply and demand Human capital Monopsony and free agency Superstars Tournaments When to turn pro HISTORY OF ATHLETE SALARIES Why so much now Why so little earlier Not quite up to date Football low and basketball high 5 0 4 5 4 0 3 5 3 0 Average salaries millions of 2004 dollars MLB NFL NHL NBA BOX PLOTS 30 millions year All highly skewed minimum 3rd quartile 1st quartile minimum 25 20 NFL s blue collar workers Daniel Gross 15 2 5 10 2 0 Demand driven 1 5 1 0 Effects of hard and soft caps 5 0 5 0 0 1970 0 1980 1990 2000 NFL 2009 NBA 2007 NHL 2008 MLB 2007 MLS 2009 DISTRIBUTION OF MLB SALARIES 2007 JAZZ 2012 13 MILLIONS 450 All 3 1 1 0 4 2 0 39 400 Mean Median Standard deviation Minimum 350 300 250 200 Veteran hitters 4 1 1 9 4 9 0 39 150 100 19 20 20 plus 18 19 16 17 17 18 15 16 13 14 11 12 12 13 10 11 8 9 9 10 6 7 7 8 4 5 5 6 0 14 15 salary millions 50 2 3 2 5 2 2 2 0 1 8 1 4 0 9 0 5 3 4 Randy Foye Alec Burks Earl Watson Jeremy Evans Jamaal Tinsley DeMarre Carroll Kevin Murphy 0 1 15 0 8 5 8 3 7 2 4 8 4 4 3 5 2 7 1 2 Al Jefferson Maurice Williams Marvin Williams Paul Millsap Derrick Favors Enes Kanter Raja Bell Gordon Hayward ILLUSTRATING INEQUALITY 2008 1 00 Lorenz Curve rank by salary plot cumulative salaries absolute equality is diagonal QUANTIFING INEQUALITY fraction of money 0 90 MLB 0 80 MLS NFL 1 00 Gini Coefficient ratio of two areas NHL NBA 0 70 0 60 G A A B equality 0 50 fraction of money 0 80 0 70 0 60 0 50 0 40 0 40 G 0 85 for NFL 0 30 0 40 all US households in 2000 0 20 0 10 0 00 0 00 0 90 0 40 0 60 0 80 0 20 B 0 10 0 00 0 00 fraction of players 0 20 A 0 30 0 20 0 40 20 15 Labor demand curve wage Shifts up when workers become more productive Shifts up when output becomes more valuable 5 Competitive Labor Market demand for players MRPL MR MPL 10 W consumer owner surplus producer player surplus Cost is the wage w 0 number of players ne rb de ac fe k ns iv de e fe e nd ns iv et ac kl e lin eb a ck of er fe ns iv el in pl e ac ek ic k er qu ar te rb ac ru k nn in g ba ck sa fe ty tig ht w en id d er ec ei ve r co r BASEBALL AND THE RESERVE CLAUSE w Initially league run by players Demand should set wage But got a 30 million salary D MRPL LeBron drafted in 1999 for 4 million Market failure in both cases L Under perfect competition market equilibrium at w MRPL 40 million MRPL Gate revenue up 5 3M in Cleveland Sponsorship revenue up 17 Local TV ratings up 265 Regional TV ratings up 231 supply of players Labor supply curve MRPL OF A SUPERSTAR Fixed Supply Michael Jordan 1 00 LABOR MARKET EQUILIBRIUM Employers weigh marginal costs and benefits Benefit is the Marginal Revenue Product of Labor 25 0 80 fraction of players 1 00 FOOTBALL POSITIONS 2009 0 60 S L National Association of Professional Base Ball Players Early years marked by thievery Pittsburgh Pirates William Hulbert owner of White Stockings steals 5 players from other clubs in 1875 then calls for end to thievery founds the National League of Baseball Clubs Formalized as National League in 1887 Each team can reserve 5 players All players reserved after 1889 SEEMINGLY INNOCENT CLAUSE If no contract then club shall have right to renew for the period of one year FREE AGENCY Reserve Clause is now history First free agents Reserves for length of contract plus one year Players not allowed to play without a contract Recursive system keeps players stuck Other leagues copy often verbatim The owners have monopsony power Catfish Hunter MLB in 1976 Oscar Robinson NBA in 1976 Limits on Free Agency differ NHL has many classes of free agency NFL allows teams to keep franchise player at a price Salary cap and draft also limit player freedom single buyer faces a competitive supply of players Economic theory of monopsony lower wages than competitive market for players lower employment too MONOPSONY POWER HUMAN CAPITAL Can invest in people as well equipment why you are in college workers General vs specific skills wage supply MRPL demand 0 0 9 Worker pays for general skills 1 1 8 2 2 7 3 3 6 4 4 5 5 5 4 6 6 3 7 7 2 team cannot recoup investment Teams pay for specific skills team can recoup investment Rationale for the reserve clause FILLING IN THE TABLE CALCULATING PROFIT workers wage supply MRPL demand 0 0 9 1 1 8 2 2 7 3 3 6 4 4 5 5 5 4 6 6 3 7 7 2 wage revenue expenditure profit workers wage supply MRPL demand wage revenue expenditure 0 0 9 0 0 1 1 8 1 8 7 2 2 7 4 15 11 3 3 6 9 21 12 4 4 5 16 26 10 5 5 4 25 30 5 6 6 3 36 33 3 7 7 2 49 35 14 profit 0 REVENUE IS APPROXIMATELY THE AREA UNDER CURVE ME MRPL RULE workers wage Revenue is 15 8 7 9 Area under curve adds two little triangles 5 7 0 1 2 3 4 5 6 7 supply 8 ME MRPL wage 6 4 3 2 1 workers 0 0 1 2 3 4 5 6 7 8 profit maximum pink ME MRPL find wage offer below on supply curve Lower wages wage Labor Market for Professional Athletes demand for players halfway MRPL 1 3 5 7 9 11 13 0 5 1 5 2 5 3 5 4 5 5 5 6 5 8 7 6 5 4 3 2 Pay and performance in MLB AER 74 Gerald Scully ME Average hitter was paid 19 of MRP in 1968 w2 w1 supply of players low player surplus yellow Lower employment Deadweight loss triangle green measures inefficiency ME SCULLY S STUDY OF EXPLOITATION MONOPSONY Upside down monopoly 0 1 2 3 4 5 6 7 wage expenditure 0 1 4 9 16 25 36 49 L1 L2 2 regression equations Win f SlugAve ERA number of players Rev g Win Pop Black OTHER STUDIES Anthony Krautman What s Wrong with Scully s Estimates of a Player s MRP 1999 David Berri et al Wages of Wins 2006 WinScore PTS REB STL BLK AST FGA TO FTA PF MillerMetric PTS REB STL BLK AST FGA TO PF RONALD COASE AND THE …