The Economics of Sport. Specifics of the Sports Labour Market

Essay , 2016 , 11 Seiten , Note: 1,7

Sport - Sportökonomie, Sportmanagement

It is commonly known that some top-athletes tend to earn disproportionately high salaries.

According to the Forbes list 'The world's highest-paid athletes' the best-paid athlete in 2015 is the boxer Maywheather with a total pay of about $300 million (Forbes, 2015). However, he is not the only athlete with an enormous wage. The high salaries are not only restricted to one or two types of sport. There are a significant number of different sports, such as tennis, basketball or golf with athletes earning enormous wages (Forbes, 2015). This shows that the trend of high salaries for top-athletes is not restricted to some exceptions; it is rather a general pattern in the world of sport.

This essay will identify the factors that justify these high salaries for top-athletes. It will explain the structure of the sports labor market. After that, the economics of superstars will be discussed and tournament theory will be considered. Additionally, real-world examples will be provided. The research includes secondary information from journal articles, books and websites.

Introduction

It is commonly known that some top-athletes tend to earn disproportionately high salaries. According to the Forbes list 'The world's highest-paid athletes' the best-paid athlete in 2015 is the boxer Maywheather with a total pay of about $300 million (Forbes, 2015). However, he is not the only athlete with an enormous wage. The high salaries are not only restricted to one or two types of sport. There are a significant number of different sports, such as tennis, basketball or golf with athletes earning enormous wages (Forbes, 2015). This shows that the trend of high salaries for top-athletes is not restricted to some exceptions; it is rather a general pattern in the world of sport. This essay will identify the factors that justify these high salaries for top-athletes. It will explain the structure of the sports labor market. After that the economics of superstars will be discussed and tournament theory will be considered. Additionally, real-world examples will be provided. The research includes secondary information from journal articles, books and websites.

The sports labor market

Under perfect competition a firm hires labor until the wage equals the marginal revenue product (Downward, Dawson, Dejonghe, 2009, p.301). However, several factors (e.g. uncertainty about the quality of labor, teamwork) result in a more complicated sports labor market (Sandy, Sloane, Rosentraub, 2004, pp.67-68). Sandy, Sloane and Rosentraub (2004, p.68) state that labor should be measured in quality due to the scarcity of star-players. To hire additional quality the club has to pay a higher price resulting in an upward-sloping supply-curve which means that every firm increases the price when trying to hire more labor (Sandy, Sloane, Rosentraub, 2004, p.68). Further, this labor market is characterized by few buyers which can be described as a monopsony (Sandy, Sloane, Rosentraub, 2004, p.69). Under the transfer-system there is even only one buyer setting wages at a profit-maximizing level (Késenne, 2007, pp.87-88). In fact, situations where one buyer faces one seller tend to be common resulting in a bilateral monopoly (Sandy, Sloane, Rosentraub, 2004, p.69). The only seller may be a unique top-athlete (Downward, Dawson, 2000, p.188) or a player's union representing all players (Sandy, Sloane, Rosentraub, 2004, p.69).

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Figure 2: (BMAN31391 Lecture-slide, 'The Sports Labor Market', slide no. 22)

Figure 2 combines the league’s monopsonistic perspective with the union's monopolistic perspective. The league's profit-maximizing labor quality L1 can be found at the intersection of MFC (marginal factor costs) and MRP (marginal revenue product of additional quality) resulting in a wage of W1 (Késenne, 2007, p.87-88). For the union the profit-maximizing wage (W2) can be found at the intersection of MR (marginal revenue of one more employed member) and MC (union's marginal cost) (Sandy, Sloane, Rosentraub, 2004, p.70). As a result, there are two different wages. W1 is under the MRP of the players and thus tends to discriminate the players. W2 on the other side is profit-maximizing for the union and thus reflects a monopoly wage. The actual wage lies somewhere in this negotiation range. Downward and Dawson (2000, p.189) argue that the actual wage depends on the bargaining power of the two parties. A rise in the power of the players, for example through free-agency, may has led to a rise in wages in the direction of the monopoly wage. Top-athletes produce a high MRP, but with this additional negotiation power they can ask for an even higher salary resulting in enormous incomes for top-athletes.

Labor market restrictions try to maintain competitive balance, but they can also influence salaries (Szymanski, 2003, p.472). Rottenberg (1956) states that restrictions of the player's mobility will have no impact on the competitive balance because of the Coase theorem (Coase 1960). However, free-agency may be a reason for a stronger bargaining power of the players. Other restrictions tend to lower salaries, for example revenue sharing (Sandy, Sloane, Rosentraub, 2004, p.93) or salary caps (Késenne, 2007, p.128).

Further, it is important to explain, why some top-talents earn enormous salaries, while others get significant less. This uneven distribution can be explained by Rosen's (1981) economics of superstars. Rosen (1981, p.846) states that there is "imperfect substitution among different sellers" in the labor market. Therefore, a top-player cannot be properly substituted by several lesser talented players (Rosen, 1981, pp.846-852). This means that irreplaceable top-athletes can ask for higher salaries as the club has no chance to substitute their quality resulting in disproportionate high earnings for top-talents.

Moreover, Rosen (1981, p.847) mentions the scale economies in joint consumption. The athlete needs to put out roughly the same effort no matter how big the audience is, because the production costs are not closely related to the audience size (Rosen, 1981, p.847). Thus, scale economies allow a few performers to serve almost the entire market (Rosen, 1981, p.847). These few performers tend to be the top-athletes. They can reach a lot of people with their performance which tends to increase their MRP. Therefore, they can ask for higher wages. However, the threats of new entry may limit this market power (Rosen, 1981, p.852).

Further, there are reasons why not only one player dominates the market. External diseconomies account for the decline in quality as the audience size increases (Rosen, 1981, p.849). Internal diseconomies account for the "non-decreasing (marginal) costs of production" (Rosen, 1981, p.850). This means that the costs of playing one more game go up due to factors like tiredness or injuries. Moreover, the Louis-Smelling paradox which states that competition in sport is needed has to be considered (Neale, 1964, pp.1-2). However, the reasons mentioned by Rosen (1981) may lead to an uneven distribution of earnings in the sports labor market. The top-talents tend to earn abnormal high wages, because they have the power to demand a higher price for their services.

The rank-order-tournament-theory (Lazear, Rosen, 1981) applies to rank-order-tournaments and explains the high salaries in non-team sports. There are two forms of competition: match-play or play-against-the-field (Sandy, Sloane, Rosentraub, 2004, p.244). The promoter's decisions concerning the total money, the proportion of appearance and prize money and the spreads between ranks affect the incentives of the athletes (Sandy, Sloane, Rosentraub, 2004, p.244).

Figure 3 shows the responses of athletes with different talent (A1-A3) to different prize levels (D1-D3) (Sandy, Sloane, Rosentraub, 2004, p.253). Under the assumption that the entry depends on the prize level two effects are prevalent (Sandy, Sloane, Rosentraub, 2004, p.253). First, more talented athletes ask for higher prize levels (Sandy, Sloane, Rosentraub, 2004, p.253). Thus the top-talent (A1) only enters at a high prize level (D1). Second, a higher prize level may lead to higher effort (Sandy, Sloane, Rosentraub, 2004, p.253). This is indicated in the upward-sloping functions A1-A3. To attract a good field and encourage effort the promoter has to provide an optimal mix of appearance and prize money.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: (BMAN31391 Lecture-slides, 'Non-team Sports and Incentives', slide no. 7)

Based on this, the 'rank-order-tournament-theory' (Lazear, Rosen, 1981) helps to determine why the first ranks in a rank-order-tournament are so high paid. It is assumed that the rewards increase with rank and that the athlete's output is influenced by effort and random variables, which makes it difficult to measure the absolute productivity (Downward, Dawson, Dejonghe, 2009, p.187). Therefore, it is easier to refer to the relative productivity through ranking (Lazear, Rosen, 1981, p.842). However, as indicated in figure 4 the relationship of effort and MC is positive. This means that a player who increases his effort to reach a good rank also has higher costs. Further, the MC are increasing. Therefore, an organizer tends to provide a significant spread between ranks resulting in higher effort and increased revenues (Lazear, Rosen, 1981, p.844).

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E (quantity of effort)

Figure 4: (BMAN31391 Lecture-slides, 'Non-team Sports and Incentives', slide no. 12)

Finally, figure 5 proves that such a high spread in revenues (MR1) results in a high level of effort (E1), whereas a low spread (MR2) results in lower effort. Thus, to provide an incentive for high effort, the prize spread for the first ranks should be high. This provides an explanation for high salaries in non-team sports.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5: (BMAN31391 Lecture-slides, 'Non-team Sports and Incentives', slide no.14)

Application

The previous analysis discussed the theories explaining the high wages of top-athletes. In the following, these theories will be applied to real-world examples.

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• Hochschule: University of Manchester
• Note: 1,7
• Erscheinungsjahr: 2016
• Seiten: 11
• Katalognummer: V910234
• ISBN (eBook): 9783346212641
• Sprache: Englisch
• Schlagworte: Sport, Sports, Labour, Labor, Market, Economics