Chapter 10: Labor Market Imperfections

Use what you have learned in this chapter to explain why "journeymen" in MLB earn 86 percent of their MRP while "apprentices" earn only 19 percent.

"Journeymen" athletes in most professional sports have typically earned a free agency which allows them the right to bargain with multiple buyers of their services. "Apprentices" are subject to the reserve clause which binds them for a number of years. Teams exploit their monopsony power by underpaying rookies.

Monopsony labor market

-upside down monopoly -supply curve is the market supply curve -ME is the added expenditure from adding one more player if all players are paid the same wage -Profit is maximized when ME=MB=D -pays lower wages and employs fewer workers so causes DWL

The Reserve Clause

A clause in a player's standard contract that gives a team the option to renew the player for the following season. Basically binds players to team in perpetuity and gave clubs the right to set wages with no competition for players, team reduced salaries enough to just keep players in the sport players had little countervailing power--> unions

Would a craft union or an industrial union be more inclined to argue against the designated hitter? Why?

A craft union would be more likely to argue against the designated hitter, as the craft union works to increase wages through exclusivity-- reducing the size of the labor pool. The designated hitter rule expands the pool of players capable of playing in MLB.

MLB has adopted final offer arbitration because it fears that regular binding arbitration is addictive. In what way can binding arbitration be addictive? Why isn't FOA addictive?

Binding arbitration can be addictive because the arbitrator has a tendency to split the difference between the two offers, so as not to show preference. This incentivizes both parties to come to arbitration with more extreme offers and discourages cooperation. FOA isn't addictive because the arbitrator simply picks one of the two offers brought to him without making a change. Both parties know that the arbitrator will pick one of their offers, which incentivizes them to make their offer as reasonable as possible. This gives both sides the incentive to moderate their positions rather than hold to extremes.

free agency

In professional sports, an athlete's ability to renegotiate his/her contract with his/her existing team or with another team

Rozelle Rule

Must compensate team when signing their free agent Free agent trade teams had no control of what player would be traded

Why has labor conflict been much more common in hockey in recent years than in baseball?

One likely explanation is that the two opposing sides in hockey are much less sure about each other's bargaining positions in hockey than in baseball. Given uncertainty, both sides are in a position to believe, perhaps incorrectly, that they can improve their situation by taking a hard line. It is also possible that both sides have unrealistically high expectations for revenue generation. Seeing skyrocketing salaries and revenues in other sports such as basketball, owners and players both expect similar returns in hockey. However, given the smaller overall revenues, particularly the lack of a large national television contract, these inflated expectations leave no overlapping contract zone for the players and the owners.

Give an economic interpretation of the deadweight loss that accompanies monopsony. What would eliminate this inefficiency?

The DWL is the lost value of the trades that do not occur due to the monopsonist reducing equilibrium quantity. The DWL represents the potential economic value if trades that would have occurred under perfect competition but were prevented by a monopsony employer. The firm purchases a lower quantity than would have been purchased under perfect competition.

How did the Rozelle Rule subvert free agency in the NFL?

The Rozelle Rule allowed for free agency but also required the team that acquired a free agent to compensate the team losing a free agent with the amount of payment being determined by the league commissioner. The rule turned signing a free agent into a trade in which the team had no control over the players it would lose. This subverted free agency because any level of payment would serve as a deterrent for hiring free agents, led alone a trade of players that they had no say over. The rule became functionally the same as the reserve clause.

Use supply and demand curves to show how the ATP and the WTA increased the prize money offered on the men's and women's professional tennis tours.

The WTA and ATP closely resemble craft unions, define who is and who is not a qualified employee WTA and ATP establish the reward structure for tournaments and provide players of specific levels depending on the tournament status. The tennis associations restricted supply of labor, raising prices as in figure 9.2a. Coupled with an increasing demand for professional sports in general, and tennis in particular, this has led to significantly increased wages for both male and female professional tennis players.

Suppose that Congress repeals MLB's exemption from the antitrust laws. How might this affect the contract zone between MLB and the MLBPA?

The repeal of the antitrust laws would reduce the MLB's bargaining power, shifting the contract zone toward the union (higher wages). This should lead to higher wages for players.

In what way are sports unions like craft unions? In what way are they like industrial unions? In what way do they differ from both?

They represent players with special skills like craft union. Because players work for a particular employer, they bargain like industrial unions. They are unlike any other union because they don't bargain over specific pay, rather the framework within which individuals bargain. Athletes practice the same craft, so in this sense they are similar to craft unions. Unlike typical craft unions, they do not increase wages by limiting access to the union and instead leave hiring decisions up to the employer. Professional sports have very harsh working conditions. Athletes have short careers and are prone to serious and potentially career-ending injuries. Sports unions, like industrial unions, are a response to these difficult working conditions. Sports unions typically leave significantly more power to negotiate salaries to the individual workers than do most industrial or craft unions where wages are typically negotiated for all employees at the union level.

Monopsony

a market structure in which there is only a single buyer of a good, service, or resource

bilateral monopoly

a market with only a single seller and a single buyer monopsony buyer (teams) and monopoly seller (unions) pay depends on each sides bargaining power, threat value-- John Nash

Explain how each of the following would affect the NHLPA's bargaining position. (a) A new professional league is formed in Russia. (b) A change in the tax laws increases the profitability of owning stock and decreases the profitability of owning a sports franchise.

a) the formation of a new league in Russia is likely to increase the bargaining power of the NHLPA since the additional league would reduce the monopsony power of the NHL. b) A change in the tax laws is likely to reduce the bargaining power of the NHLPA. The reduced profitability of owning a sports franchise causes the owner to have a lower range of acceptable agreements.

unions can justify higher pay if...

employers find a way to increase the MRPL providing a voice to workers decreases worker discontent, thus increasing MRPL

lockout

occurs when the management of the firm does not permit the labor input to operate

Craft Unions

organized along skill lines power in exclusivity keep prices high by limiting the labor supply, prevent non members from practicing same craft

strike

when workers act together to remove the labor input from the production process

Industrial Unions

workers act like a monopoly push wages up via collective bargaining and threat of strike reduce employment in the industry

contract zone

· The contract zone is the range of wages or salaries that is acceptable to both sides