OLET1145 Sports economics Module 1 Are professional athletes paid too much? highest-paid athletes . . .
1 Rank Athlete Sport On-field
earnings Off-field
earnings Total
earnings 1 Cristiano Ronaldo Football 46.0 90.0 136.0 2 Lionel Messi Football 65.0 65.0 130.0 3 Kylian Mbappé Football 100.0 20.0 120.0 4 LeBron James Basketball 44.5 75.0 119.5 5 Canelo Álvarez Boxing 100.0 10.0 110.0 6 Dustin Johnson Golf 102.0 5.0 107.0 7 Phil Mickelson Golf 104.0 2.0 106.0 8 Stephen Curry Basketball 48.4 52.0 100.4 9 Roger Federer Tennis 0.1 95.0 95.1 10 Kevin Durant Basketball 44.1 45.0 89.1 Millions of US dollars. Source: The World's Highest-Paid Athletes, May 16, 2023, Forbes
. . . what about entertainers? Rank Entertainer Total
earnings 1 Phil Collins, Tony Banks, and Mike Rutherford 230.0 2 Sting 210.0 3 Tyler Perry 175.0 4 Matt Stone and Trey Parker (South Park) 160.0 5 Matt Groening and James L. Brooks (The Simpsons) 105.0 6 Brad Pitt 100.0 7 Mick Jagger, Keith Richards, and Ronnie Wood 98.0 8 James Cameron 95.0 9 Taylor Swift 92.0 10 Bad Bunny 88.0 Millions of US dollars. Source: The World’s 10 Highest-Paid Entertainers, February
13, 2023, Forbes
2 . . . compared to the rest 3 how much is “too much”? • depends on your perspective • what does economics tell us about worker pay? • look at the basic hiring decision of any business • how many workers to hire and how much to pay them 4 economics of worker pay • what are the costs and benefits of hiring a worker? • incremental cost – extra payroll the worker generates • salary or wage () • incremental benefit – extra revenue the worker generates • called the marginal revenue product () • the objective of hiring is to maximize profit 5 the hiring rule hire workers as long as
≥
• if
> , hiring increases revenue more than cost, so profit increases • e.g.,
= 100 and
= 90 → hiring increases profit by 10 → hire the worker • if
< , hiring increases revenue less than cost, so profit decreases • e.g.,
= 45 and
= 50 → hiring decreases profit by 5 → don’t hire the worker 6 • apply the same logic to sports teams • team owner will hire a player as long as
≥
• upper limit for salary negotiation is the athlete’s
• lower limit is the athlete’s outside offer 0 • if
< 0 the athlete will move to another team (or quit the sport, e.g., Joseph Sua'ali'i)
0 athlete’s preference owner’s preference
contract zone 7 •
is important – so how is it measured?
is a combination of two things . . . 1. the extra output the worker produces: marginal product,
2. the extra revenue per unit of output: marginal revenue,
=
× • e.g., if an accountant completes one $400 tax return every two days, their daily
=0.5 × $400 = $200 per day • how does this translate to sports? • what is the meaning of ‘output’?
• number of games? match attendance? TV audience? merchandise sales? . . .
• since the objective is winning, the number of wins is the obvious choice 8 9• e.g., if a player increases the number of wins by 2 and each win is worth $2m,
the team would be willing to pay the player up to $4m • explains why pitchers (or midfielders) are paid more than catchers (or goalkeepers) • a player’s
is determined using lots (and lots) of data • recent example: Ferguson, P., and Pinnuck, D. (2022) “Superstar productivity
and pay: Evidence from the Australian Football League,” Economic Record,
98(321): 166-190. player’s impact on number of wins impact of a win on team revenue = × =
×
10 • focus on ‘superstars’ – top 5% based on AFL player ratings system • how do the authors determine a superstar’s impact on wins?
• superstars don’t play every game due to injury or suspension • compare a team’s win-loss record with and without their superstars • difference estimates superstars’ impact on wins • use game-level data from 1,133 regular season games from 2013 to 2018 superstar’s impact on number of wins impact of a win on team revenue =
× • find that superstars increase the probability of an away win by 15% • with 11 away games per year →
= 0.15 × 11 = 1.65 • ‘average’
= $1.132m superstar
= 1.65 × $1.132m = $1.868m • given a base of $250,000 superstar
= $0.25m + $1.868m = $. • maximum AFL salary in 2018 is $1.5m • superstar
is 30% below the wage predicted by the
formula • conclusion: AFL superstars are underpaid 11 12 • 2022, AFL player share is 28%, for NRL 26% • (Peter V’landys has claimed NRL players receive 41% of league revenue) • compare to • NFL, NBA, NHL all have revenue-sharing agreements where players get ≈ 50% • player share in European football: EPL 67%, La Liga 72%, Ligue 1 90% (skewed by PSG) possible reasons Australian pro athletes get a low share 1. leagues are a monopsony 2. the salary cap 3. low bargaining power of player unions 4. lack of outside opportunity 13 1. monopsony • a monopsony is a market with a single buyer • some sports leagues represent a monopsony, especially for new players • this is because teams have exclusive right to renew contracts with new players • NBA 3-4 years, NFL 4 years, MLB 6 years, NHL 7 years, AFL 8 years • only when a contract expires after this period is the player free to sign with other clubs • no such restriction in European football • since Bosman ruling (1995) end-of-contract players can leave club without a transfer fee • European football is not a monopsony because there are many leagues • how does monopsony affect wages? 14 • supply of available players to a monopsony sports league • the league must pay higher wages to attract more players players
supply of players 15
initial payroll = 50 × 100,000 = 5,000,000 payroll with 1 extra player = 51 × 101,000 = 5,151,000 incremental cost = 151,000= 101,000 + 50,000=
+ 100,000 50
= 101,000 51 the monopsony league • basic hiring rule from earlier:
hire players as long as
≥
•
is the upper limit to pay • monopsony hiring rule hire players as long as
≥
+
•
−
is the upper limit to pay • monopsony results in a lower limit • monopsony reduces the wages of new players 16 Krautmann et al. study (2009) • apprentices (inexperienced players) are paid much less than
• consistent with monopsony • most journeymen (experienced players) are free agents and can shop around • paid closer to their
as a result • for comparison, 2009 minimum wages:
MLB $400,000, AFL $62,700, NRL $55,000 17 plenty of evidence new players have lower wages League / Apprentices Journeymen NBA 66% NFL 50% 77% MLB 19% 86% 2. salary cap • team owners face a problem: competing for talent bids up wages • individual owner efforts to succeed drives up payroll costs for everyone • owners need a way to control themselves • two solutions 1. impose a limit on team payroll – salary cap • e.g., 2023 ‘hard’ salary cap is $224.8m for NFL, $17.9m for IPL, and $1.1m for AFLW 2. penalize teams with payroll that exceeds a certain threshold – luxury tax • e.g., 2023 MLB teams pay a tax of 20% on payroll exceeding $233m • tax revenue may be distributed to non-violators (NBA) or special projects (MLB) • UEFA Financial Fair Play Regulations act like a luxury tax 18 19 Source: Team salary cap/payroll trackers available at https://www.spotrac.com $m Lions Mets Athletics Eagles PistonsMaple Leafs Ducks Warriors 2023 U.S. major league team payroll (ordered from highest to lowest) Leagues with a salary cap so why are Australian athletes relatively underpaid? • monopsony and salary cap explanations apply to many leagues • (exception is world football) • neither can be a strong explanation for relatively lower pay in Australia • low bargaining power of player unions • AFL and NRL players have never gone on strike • NFL, MLB, NBA, NHL have all had major labour disputes • lack of outside opportunity • reinforces the monopsony power of Australian leagues • especially true for AFL players • NRL players can move to rugby union (e.g., Joseph Sua'ali'i)
20 21 • 2022, AFL player share is 28%, for NRL 26% • (Peter V’landys has claimed NRL players receive 41% of league revenue) • compare to • NFL, NBA, NHL all have revenue-sharing agreements where players get ≈ 50% • player share in European football: EPL 67%, La Liga 72%, Ligue 1 90% (skewed by PSG) possible reasons Australian pro athletes get a low share 1. leagues are a monopsony 2. the salary cap 3. low bargaining power of player unions 4. lack of outside opportunity 22 1. monopsony • a monopsony is a market with a single buyer • some sports leagues represent a monopsony, especially for new players • this is because teams have exclusive right to renew contracts with new players • NBA 3-4 years, NFL 4 years, MLB 6 years, NHL 7 years, AFL 8 years • only when a contract expires after this period is the player free to sign with other clubs • no such restriction in European football • since Bosman ruling (1995) end-of-contract players can leave club without a transfer fee • European football is not a monopsony because there are many leagues • how does monopsony affect wages? 23 • supply of available players to a monopsony sports league • the league must pay higher wages to attract more players players
supply of players 24
initial payroll = 50 × 100,000 = 5,000,000 payroll with 1 extra player = 51 × 101,000 = 5,151,000 incremental cost = 151,000= 101,000 + 50,000=
+ 100,000 50
= 101,000 51 the monopsony league • basic hiring rule from earlier:
hire players as long as
≥
•
is the upper limit to pay • monopsony hiring rule hire players as long as
≥
+
•
−
is the upper limit to pay • monopsony results in a lower limit • monopsony reduces the wages of new players 25 Krautmann et al. study (2009) • apprentices (inexperienced players) are paid much less than
• consistent with monopsony • most journeymen (experienced players) are free agents and can shop around • paid closer to their
as a result • for comparison, 2009 minimum wages:
MLB $400,000, AFL $62,700, NRL $55,000 26 plenty of evidence new players have lower wages League / Apprentices Journeymen NBA 66% NFL 50% 77% MLB 19% 86% 2. salary cap • team owners face a problem: competing for talent bids up wages • individual owner efforts to succeed drives up payroll costs for everyone • owners need a way to control themselves • two solutions 1. impose a limit on team payroll – salary cap • e.g., 2023 ‘hard’ salary cap is $224.8m for NFL, $17.9m for IPL, and $1.1m for AFLW 2. penalize teams with payroll that exceeds a certain threshold – luxury tax • e.g., 2023 MLB teams pay a tax of 20% on payroll exceeding $233m • tax revenue may be distributed to non-violators (NBA) or special projects (MLB) • UEFA Financial Fair Play Regulations act like a luxury tax 27 28 Source: Team salary cap/payroll trackers available at https://www.spotrac.com $m Lions Mets Athletics Eagles PistonsMaple Leafs Ducks Warriors 2023 U.S. major league team payroll (ordered from highest to lowest) Leagues with a salary cap so why are Australian athletes relatively underpaid? • monopsony and salary cap explanations apply to many leagues • (exception is world football) • neither can be a strong explanation for relatively lower pay in Australia • low bargaining power of player unions • AFL and NRL players have never gone on strike • NFL, MLB, NBA, NHL have all had major labour disputes • lack of outside opportunity • reinforces the monopsony power of Australian leagues • especially true for AFL players • NRL players can move to rugby union (e.g., Joseph Sua'ali'i)
29 Module 1 summary • AFL and NRL players get a relatively low share of league revenue • what explains these low shares? • monopsony, salary cap exist in many leagues • player bargaining power and lack of outside opportunities may be important • next time: competitive balance • related to athlete pay and salary cap 30 Module 1 summary • economic theory of worker pay • a player’s value to their team () is an upper bound to their salary • AFL study finds wages 30% less than
→ players are ‘underpaid’ • AFL and NRL players get a relatively low share of league revenue • what explains these low shares? • monopsony, salary cap exist in many leagues • player bargaining power and lack of outside opportunities may be important • next time: competitive balance • related to athlete pay and salary cap 31 51作业君版权所有
