Economic Analysis and Competition Policy Research

Home   •   About   •   Analytics   •   Videos

Follow The Money: Labor Market Restrictions Are All About Transferring Income from Athletes to Teams

In recent years, economists have become increasingly interested in the study of monopsony power. Such research has indicated that monopsony power does indeed exist. Furthermore, where it exists the gains to workers suffer.

Much of this research has ignored what sports economists have known for decades. The study of sports taught economists who were paying attention that enhancing the market power of labor clearly results in a larger share of the pie going from owners to workers. Conversely, reducing labor’s market power increases the gains of owners.

This should be well understood by anyone (i.e., both economists and non-economists) who takes the time to look at sports. What is less well understood is the role rules designed to ensure competitive balance play in this process.

To wit, The Economist recently asked whether Europeans or Americans had built the better sports business model. The European approach emphasizes the free market. There are no caps on player pay, no player drafts, and losers in each level are literally kicked out of the league. In contrast, American sports leagues restrict how much athletes can be paid. And not only do the losers stay in the league, but they are also rewarded with better draft picks.

So, which approach is best? The answer depends upon who you are in the business.

Consider the story of Brittney Griner. Perhaps the biggest sports story in the past year was Griner’s Russian imprisonment. For 294 days, Griner was, according to the U.S. State Department, wrongfully detained by Russian authorities. One question people asked when this story broke is why was an American basketball player in Russia in the first place?

Griner was not in Russia on vacation. She was there to work. For many years it has been quite common for WNBA players to take a second job in another league outside the United States. Historically this has happened because—as Griner has argued in the past —the WNBA doesn’t pay particularly well. . In contrast, annual pay in Russia for a players like Griner often exceeded $1 million.

To understand why Griner is paid so little by the WNBA, a little league history is in order. In 1997, David Stern and the NBA launched the WNBA. At that time, the NBA already had a player draft, a cap on team payroll, and a cap on rookie pay. Two years later, the NBA added a cap on individual player salaries. Today the WNBA—like its NBA partner but very much unlike its Russian counterpart—employs all of these institutions. However, the labor market design in the WNBA, as Griner and the other members of the WNBA have learned, is much more restrictive than the men’s NBA.

Consider the player draft. Fans of professional sports in North America are often quite interested and excited about the annual drafts that exist in many leagues. What is often lost in the excitement, though, is what this means for the individual athlete. Once a team selects a player, that player can only negotiate with that team. And the future of their career often depends crucially on whether or not they truly fit in with the organization that has chosen them. If the fit is poor, an athlete’s career can be seriously harmed.

In the NBA, this is the gamble that faces the 60 players selected. For the undrafted, draft night may not be a happy experience. But for them an opportunity now exists that isn’t available to the drafted. The undrafted player with multiple offers can choose the team that is the better fit. In sum, labor market choice benefits the worker.

The WNBA also has a player draft. But the structure of the WNBA limits the likelihood an undrafted player would ever find any employment at all. In the NBA there are 30 teams with 15 roster spots. So, the 60 drafted players each year enter a league with 450 potential positions. Or to put it another way, the drafted are 13 percent of the possible jobs. The WNBA has 12 teams with only 12 roster spots, leaving only 144 potential positions. The WNBA draft, though, has three rounds with 36 players selected. This means, the players drafted by the WNBA are 25 percent of all potential jobs. Consequently, in the WNBA, many drafted players do not end up with jobs. Obviously, the undrafted also likely end up unemployed as well.

For those who are lucky to find work in the WNBA, they discover that their pay is also quite restricted. The NBA contract is written so that the size of the various caps move with league revenue. The WNBA contract isn’t quite so generous. A recent Bloomberg article indicated that while WNBA revenue recently doubled from about $100 million to $200 million, player salaries didn’t really change. As a result, whereas NBA players are paid 50 percent of basketball-related-income (known as the “wage share” or “players’ share”), WNBA players only receive 10 percent of their league’s revenue.

Remember, the top players in the WNBA only get about $235,000 per year. If the WNBA shared half its revenue with its players, the top players would be getting $1 million or more per season. And that means, Griner in the WNBA would be paid like she is in Russia!

In European sports, the labor market institutions that reduce the pay of athletes like Griner don’t exist. Instead, the very best players, at least in theory, migrate to where they are paid the best. And teams that can’t pay to acquire such talent… well, they are expected to be less successful. In other words, the free competitive market supposedly rewards the winners and punishes the losers.

Why do sports leagues in North America tend to adopt institutions that limit the free market? The argument offered is that institutions that restrict player pay are required for leagues to survive. And this argument has a very long history. In 1879, the National League in baseball made the following statement:

The financial results of the past season prove that salaries must come down. We believe that players insisting on exorbitant prices are injuring their own interests by forcing out of existence of clubs which cannot be run and pay large salaries except at a personal loss.

To force salaries down, the National League began putting a clause in player contracts that said that even if a player’s contract had expired, they were not allowed to negotiate with other teams. In other words, the solution to higher salaries was to restrict market freedom for workers.

Students of economic history know that this was not an uncommon strategy in the latter-19th century. Business leaders at this time, who became known as “the Robber Barons,” often created institutions that would eliminate market competition. Here was how this was described by Jeremy Atack and Peter Passell

The discipline of the market posed a serious threat to the growing investment in increasingly specific capital goods and human capital. As a result, firms sought to maintain or increase profits and reduce risk by controlling prices and output — that is through monopolization. Increasingly competition was viewed as “ruinous” or “cutthroat”.

Or to put it another way, market competition is only fun when you win. If there is a chance you are going to lose, then it is far less entertaining.

The behavior of the Robber Barons inspired both the antitrust and labor movements. And these movements were intended to reduce the market power of firms in both output and labor markets. Sports, though, found some exceptions. The obvious one was the Supreme Court ruling in 1922 that exempted Major League Baseball from the Sherman Act. Less obvious is that a league and its labor union can create rules, such as player drafts and caps on pay, that give the teams an immense amount of power in labor market negotiations.

These institutions have been pitched to unions in the name of competitive balance. The story told by leagues is that if teams are allowed to spend as much money as they like, the richest teams will hire all the best talent. And if that happens, the richest teams will win all the games, the fans will eventually lose interest, and the league would die. Therefore, leagues need restrictions like drafts and limits on pay to protect competitive balance and save the league.

Lessons on Competitive Balance

Sports economists have studied the issue of competitive balance for decades. And that research indicates that the story American sports leagues tell is wrong on more than one level.

Let’s begin with the story that leagues can create rules to impact competitive balance. In the late 1980s, Gerald Scully and Roger Noll independently argued that balance in a league can be measured by a ratio of the actual dispersion of wins in the league relative to the dispersion that would exist if the league was ideally balanced; the smaller the ratio, the more competitive is the league. For example, this past season the standard deviation for winning percentage in the NFL was 0.184. According to the formula devised by Noll and Scully, if the NFL was ideally balanced this standard deviation would be 0.122. Therefore, the Noll-Scully competitive balance ratio is 1.51 (equal to 0.184 divided by 0.122).

Across the past ten years, the average Noll-Scully ratio for the NFL has been 1.55. In contrast, the average Noll Scully ratio for the American League in Major League Baseball has been 1.97, while the same ratio for the National League has been 1.92. These numbers tell us the NFL is more competitive than Major League Baseball.

Given the story the leagues tell, this makes sense. The NFL has both a draft and a cap on payrolls. That cap cannot be exceeded and therefore the richest teams in the NFL cannot buy the best talent. Major League Baseball has a draft. But because payroll is not capped, the richest teams—in New York and Los Angeles—frequently buy the best buy the best talent.

Therefore, the story the leagues tell is right. Limiting labor market freedom is good for the league!

Well, not quite.

People have argued that the NFL adding a cap on payrolls in 1994 improved competitive balance. But from 1970 (when the NFL merged with the AFL) until 1993, the average Noll-Scully ratio in the NFL was 1.54. In the years since the cap was put in place the average is also 1.54. In other words, the cap didn’t change the league’s average level of competitive balance.

The story in baseball also defies the story the American leagues tell. Prior to the 1970s, Major League Baseball players had no labor market freedom. Once you signed with a team, that team held your rights whether you actually had a contract or not. Given the story the leagues told, the inability of players to negotiate with multiple teams should have made baseball much more competitive. But prior to free agency being enacted in 1976, the average Noll-Scully ratio in the American League was 2.40. In the years since free agency was enacted, this average has been 1.88. A similar story can be told for the National League. Competitive balance in both leagues improved after workers gained more labor market freedom.

Then there is the story in the NBA. The NBA doesn’t just have a draft and a cap on team payrolls. The NBA also caps individual pay. So, labor market restrictions in the NBA are more extreme than they are in the NFL. But this past season, the Noll-Scully ratio for the NBA was 2.21, suggesting a relative lack of competitive balance. And that was the most balanced the NBA has been since the 1978-79 season. Across the last ten years, the Noll-Scully ratio in the NBA has averaged 2.65. That mark is quite consistent with what we have always seen in the NBA. In fact, it is also consistent with what we saw in the American Basketball Association fifty years ago.

What explain the pattern we see in the basketball and baseball? As noted in research I co-authored many years ago, competitive balance in a league is primarily about the size of the potential talent pool. Here is how I explained this story in the New York Times:

As the evolutionary biologist Stephen Jay Gould observed, when a population is relatively small, the difference between the very best and the average athlete will be quite large. In other words, when your population of athletes is small, your league will have less competitive balance.

Basketball relies on very tall athletic people, who are generally quite scarce in the population. Because the population is small, the supply of truly amazing athletes is also relatively small. This means, some teams get to hire LeBron James, Nikola Jokic, Giannis, Antetokounmpo, and Luka Doncic. And other teams… well, they have to fill out their rosters with lesser talents.

Gould’s story also explains why competitive balance in baseball improved across time. In the first half of the 20th century, Major League Baseball players were white males from the United States. Racial integration and a subsequent global search for baseball talent increased the pool of outstanding baseball players and hence made the game more competitive.

It is important to emphasize that this story has nothing to do with the institutions the American leagues adopt. Restricting the freedom of athletes to negotiate a better deal will not change the underlying population of talent a league employs.

All of this means these restrictions are not about making the league better for the fans. In fact, and this is perhaps the more important issue, it isn’t even clear fans really care about competitive balance. At least, academic studies often show fans are not quite as interested  in this issue as leagues contend.

Follow the Money

One doesn’t really need an academic study to see this point. Again, the NBA has never had competitive balance. Despite this, the NBA has become a global brand with fans all over the world.

So, if caps on pay and player drafts don’t create competitive balance and fans wouldn’t care much if they did, why do these institutions exist? This is easy to understand. Again, the NBA only pays 50 percent of basketball-related income to its players and the WNBA is only paying 10 percent of its revenue to its athletes. In contrast, the English Premier League—where labor market restrictions don’t exist—pays 70 percent of league revenue.

Those numbers make it clear: Labor market restrictions are all about transferring money from the athletes to teams. In other words, these institutions exist to give teams monopsony power, which allows the teams to pay the players less than they would get in a free market.

Consequently, the legendary Bob Gibson was exploited (i.e., paid a wage less than his economic value) when he played in Major League Baseball. And the legendary Oscar Robertson was also exploited when he played in the NBA.

Of course, the same story is told about the WNBA players. But because the labor market institutions are more restrictive, the level of exploitation is even worse. Consequently, Brittney Griner and other players risk their safety and health playing outside the WNBA.

The owners of the sports teams, like the Robber Barons from more than a century ago, would tell you that their restrictions on market power are necessary. But that story doesn’t stand up to scrutiny. Rules that enhance the market power of owners don’t make anyone better off. Except, of course, the owners that implement the rules!

So, which model is best? For the owners in America, the American sports model is best. At least, in the short-run. As I argued recently at Global Sports Matters, the WNBA is probably held back by the labor market institutions it has inherited from the men’s NBA. Just ask Brittney Griner. Again, she wasn’t in Russia on vacation. The WNBA’s salary restrictions forced her and other WNBA talents to find work elsewhere. It is not in the long-run interest of the WNBA for the talented players it employers to work second job. And that means, the American sports business model definitely isn’t working well for everyone.

David J. Berri is a sports economist and professor of economics at Southern Utah University. He the is the author of four books and more than eighty academic articles on sports economics. Included in this list is Sports Economics, a textbook published with Macmillan Learning.

Share this article:
Share this article:

Subscribe now to get email updates about The Sling

Related Articles

My musings on Twitter are mostly a stream of poking fun of corporatist takes in The New York Times or The Economist. Every once in a while, for reasons that are impossible to understand, a tweet takes off, like this one, which mocked a far-fetched inflation theory propagated in a guest essay for the Times... Read More
Image: That Rogoff continues to be treated as a credible voice on economic issues is a striking indictment of our media ecosystem. (Photograph: Mike Kemp/In Pictures via Getty Images)
Did you ever notice that the same neoliberal economists are quoted routinely by economics reporters in the mainstream press? Take Ken Rogoff. He guest authors pieces on public policy at Brookings, is a professor at Harvard, semi-frequently authors op-eds, and is widely quoted in the media. While not quite as high profile as his colleagues... Read More