Are unions good for sports leagues?

For you NBA fans out there, I have some bad news. There is a high probability that there will be no 2011-2012 NBA season. Recently the players union rep Derek Fisher has met with league officials, and he has recently stated that the only way to reach a new collective bargaining agreement is to remain strong as a union. During the 1998 lockout, remaining unified as a union lead to a resolution of the work stoppage.

The NFL took a different strategy in their collective bargaining conflict. The players voted to disband the union and pursue a resolution through lawsuits and the courts. They had success previously with lawsuits; that is how they gained free agency. Just like in 1987, this strategy worked and it is certain the union will recertify in a year or two.

In fact, in most major sports leagues the players have organized a union. Tennis players are now facing the issue of whether to unionize or not.

Dr. Ben Hansen, Assistant Professor of Economics at University of Oregon, wrote a very insightful piece for the Sports Illustrated Tennis Mailbag article (see link here)

Here is what he said:

"My discussion will concern the basic economics of unionization, and will not treat other more complex political issues.

Pro-union arguments

1. In some labor markets, a single employer often arises. For instance, a coal mine in a small town. As everyone works at the coal mine, the coal mine can underpay and underinvest in safety, exploiting monopsony (a single purchaser of a good) power. If tournaments didn't coordinate, they might compete by offering better pay, better conditions, etc. To the degree tournaments in the ATP can coordinate (which we might also call collude), they can pay less, provide worse conditions, etc.

2. Thus, to balance the effects of monopsony power, a union can encourage bargaining, which may arrive at outcomes that would naturally result were it not for the market power of tournaments.

3. Tennis players face in game theory what is known as the prisoner's dilemma when it comes to how often they play. They might all prefer a scenario where everyone plays for two fewer months in a year. But each individual's private incentives are to deviate from that outcome to amass additional ranking points. Relatively, no one has a higher ranking because everyone plays more, and thus everyone is worse off (except for the low-ranking players who benefit from simply another pay day).

Arguments against a union

1. Unions make entry difficult. Many professions that have associations or unions require absurd qualification tests. For instance, to become a hair stylist, individuals must work for free essentially in order to be qualified to cut hair. Is this to protect the hair stylists of the world? Many other professions have gradually increased requirements to keep bad apples from competing, but in actuality, it increases their own wages. Only recently have lawyers had to complete formal law school or undergraduate degrees. Previously, it was fine to teach yourself and pass the bar. To some extent, rankings and seeds (up to 32 at Grand Slams) have made it more difficult to enter the top tiers of the sport and easier for established pros to keep their ranking. Would unionization make entry for the next generation more difficult? No turning pro until one is 18? Other rules to initiate new players would limit entry and competition.

2. Wage compression often results in unions. Likely low-ranked individuals would end up being paid more (as they would have voting power in the union), even though the top stars generate all of the negotiating power. Determining voting power in the union is a difficult issue, because the masses (those ranking 100 and below) have different incentives from the stars. Do the stars really want those ranked 100 and below determining the negotiations via voting? Or are votes weighted based on ranking? And if you do that, no individual ranked 100 or below has a strong incentive to join the union.

3. Lockouts. Actual strikes are, of course, extremely costly to everyone, because there are huge gains from trade in tennis. We get tennis, everyone gets money, everyone is certainly much better off than the alternative, with no tennis. However, if the threat of a strike isn't credible, it hurts bargaining power. Tennis pioneers in the pre-Open Era were willing to make sacrifices to go pro, but also came at huge gains. I doubt that a strike could happen at a Grand Slam, but I could see one for the year-end championships. It would be most successful because fewer players are involved. At some point, I am sure those ranked 10-30 would be tempted to step in, although it's not clear much revenue would come from a final matchup between players of that caliber."

Dr. Hansen mentioned tournament conditions, and here is an example of tournament officials doing a poor job on dealing with inclement weather. Needless to say, Andy Roddick was not happy with the situation.

(See video link)

A critique of “The Price of Poverty in Big Time College Sport”

A recent study by Ramogi Hum (a former collegiate athlete at UCLA and current President of the National College Players Association) and Ellen Stauroskwy (Professor of Sport Management at Drexel University) received some attention in the news for addressing some of the issues dealing with pay to play for college athletes. After reading the article, this may be one of the times where poor research is worse than no research. Their study at four objectives, of which the paper uses 4 of the 33 pages to address and the other 29 pages are dedicated to “exposing” the evils of the NCAA. Here are the points they make and their findings:

1. What is the value of a “full” athletic scholarship compared to cost of attendance?

They answer this simply by using IPEDS data which reports administrative data on the costs of attending. This information is publically available, just check out this website (IPEDS). IPEDS lists the costs of college as tuition, books and supplies, room and board, and other expenses. Since a scholarship only includes tuition, books and supplies, and room and board, the shortfall of an athletic scholarship is the “other expenses” category. Other expenses are $3,222 on average per year.

First, it is important to note what the “other” category is. IPEDS website states that this category is an estimation from the financial aid office on the costs a student might face: such as laundry, transportation, and entertainment. Therefore you would think that attending different colleges in the same area should have the same “other” category expenses. But this is not always the case.

Next, students who have financial need can apply for a Federal Pell Grant. Last year the maximum pell grant award was $5,500. Therefore, the difference in cost of attendance and athletic scholarship can be covered with this financial assistance.

2. How does the value of a “full” athletic scholarship compare to head coach compensation for football and men’s basketball?

This is done by looking at the shortfall of one athletic scholarship and multiply that number by the number of football and basketball scholarships (85 and 13 respectively). This is termed as the team scholarship shortfall and compared to the annual coach’s salary. Team shortfalls range in the 100,000’s of dollars for college football while the coach’s salaries are between $1.1 and $6.0 million dollars. Basketball has team shortfalls nearer to $40,000 and coaches salaries often over $2 million.

I am still trying to see how this comparison is important. Are they trying to insinuate that a coach should subsidize the team shortfall? If so, state it. But they are comparing apples to oranges and asking for lemonade. It might be important to note that the schools shown in the results are some of the highest paying schools. The median annual salary of an FBS football coach is $1.1 million and $822,000 for basketball coaches.

3. How does the value of a “full” athletic scholarship compare to established federal poverty guidelines?

Using room and board as a measurement of the part of the athletic scholarship which can pay for basic necessities such as food, shelter, utilities, etc. Other forms of benefits that students receive (i.e. tuition, books, etc) are not used to meet the daily needs. This shows that 85% of students at FBS schools live in poverty.

I am sympathetic to this point, as I once had a job that paid me in room and board instead of wages. As such, my income from that job did not allow me to buy some essentials, like toilet paper. But that did not mean I lived in poverty. My board included steak dinners once a week, an open salad and sandwich bar for lunch, and unlimited chocolate milk. In fact, I would suggest that most college students live under the federal poverty limit, but businesses recognize that. That is why they practice third-degree price discrimination and charge student prices.

4. How would the value of revenue-producing college football and men’s basketball player be affect if revenue-sharing formulas used in labor negotiations for NFL and NBA were applied?

The study uses revenue sharing rules in the NBA and NFL to indicate what fraction of total revenue in college would go toward players’ salaries. In the current collective bargaining discussions, the NBA owners want to use 50% of league revenues to go towards players salaries. This is less than what was used last year, so this might be seen as a conservative estimate. The NFL dedicates 46.5% of league revenue towards players’ salaries. This method indicates that the fair value of a basketball player is approximately $121,048 and a football player is $265,027.

I think there are two major flaws to this estimation. The first flaw is clear and egregious. Why would the revenue sharing deal used in the NFL be anywhere near what is would be in college football. The structure of the NFL and NBA are very different. Different structure on media contracts, revenue sharing, and many many more aspects. Thus the difference between current percentage of league revenue in the NBA (58%) and the NFL (46.5%). Just because they play the same sport, there is reason to believe that the structure of the NCAA football is vastly different than the NFL. The NFL has 32 teams and there are almost ten times as many teams in Division I and twice as many teams in BCS conferences alone, just to name one difference.

The second major flaw is that schools often use money generating sports to subsidize other sports within the athletic department. Most athletic departments actually do not make an overall profit, that is, they lose more money on other sports than they earn on football and men’s basketball. In fact, in 2009 only 25 of the 119 FBS school athletic departments made a profit. This was an improvement from 19 in 2006. Even more startling, 68 percent of football programs and 67 percent of men’s basketball programs made a profit in 2009.

Most of the paper was directed at exposing how terrible the NCAA is, and not enough was given to develop the actual analysis of the four prong objective of the study. The results they derived were not supported with evidence or with sound logic.

Thus the challenge is out there, how to determine the value of a college student-athlete? I wish I was able to answer this. So the ball is in your court, can you answer this question?

Bull Durham in the NFL

One argument I hear often is that we should decouple students and athletes, that is get rid of the NCAA altogether and set up a minor league system in all sports. Let’s be honest, NCAA is big brother and they currently set the wages for college athletes; such as the number of scholarships per school, maximum compensation, forbid certain forms of compensation (i.e. you can give free bagels, but you cannot give free cream cheese, jelly, or any other spread to accompany said bagels), and oversee enforcement of this structure. Therefore, if we get rid extramural sports, rather than the iron fist of the NCAA, the invisible hand of the free market would determine how much players should be compensated.

In fact this is done in baseball. And the fact that baseball has a fully functional minor league system is often used as a reference point as to what the NFL can do instead of college football. On almost every measure, professional baseball players earn more money than professional football players. In 2009, the highest paid baseball player made 29% more than the highest paid football player. The average and median player’s salary was greater in baseball than in football. Thus it could be argued, that baseball’s salary structure might be an upper bound as to what football’s might be if they implement a minor league football system.

So how much did Crash Davis and Nuke LaLoosh make while traveling in the team bus to play games? Minor League baseball actually has maximum salaries for their players. Based on which level the player is at, from lowest to highest – A, AA, AAA, the maximum salary increases. First year salaries at Single-A ball for a full season has a maximum of $1,050 per month. Don’t worry; it really starts to pick up for Double-A, $1,500 per month. Triple-A players, the stars of tomorrow, can earn a maximum of $2,150 (or about the value as year’s tuition at Duke).

The NBA has also started a minor league system in basketball known as the Developmental League. According to the D-League website, currently 15% of NBA players are D-League alumni. The league is still young, but surely these players are making more than the poor minor league baseball players. Salaries range from $12,000 – 24,000 per year. That’s right, per year, putting these players at or below the federal poverty level. They do however get $30 per day for food when they are on the road (can you say super size that value meal!!)

So before too many proponents argue that proper compensation can be achieved by having a minor league football system instead of the college system, you might want to know what the invisible hand will deal you. Turns out 50,000+ are willing to watch really bad quality football (think Big East, Florida vs. Furman or any FBS-FCS matchup, The Apple Cup (Washington vs. Washington State), Idaho vs. Louisiana Tech) when it is their school or alma mater playing.

How much are student-athletes paid?

Most jobs that you will have will pay you money. But many jobs will also pay you in non-pecuniary benefits. In addition to an hourly wage or salary, your employer may provide you with health insurance, a company car, training, and more. These benefits, though not cash, do carry a value with them. And should be counted when determining total compensation that you receive for the work you do.

Thus, to answer the question of how much are student-athletes being paid, it is imperative to examine both cash compensation and other benefits that they receive. The USA Today had a very interesting article in which they broke down the value of a Division I men’s basketball scholarship. (link)

	FBS median	UConn	Kentucky	VCU	Includes	Does not include
Grant in aid	$27,923	$44,016	$32,703	$37,639	Tuition, fees, room, board and books, including summer school, tuition discounts and tuition waivers	Money athletes can receive through federal Pell Grant program, which is based on need; money athletes can receive from NCAA Assistance Fund, awards not based on need and can be used for array of purposes
Coaching	$70,000	$70,000	$70,000	$70,000	All coaches; team-specific support staff such as strength/conditioning coach, athletic trainer, videography; access to team facilities
General support	$11,607	$13,717	$18,292	$9,629
Equipment uniforms & supplies	$2,650	$546	$10,128	$2,669		Full value of goods that athletic department receives for free or at discounted prices
Medical	$970	$746	$940	$893	Expenses and insurance premiums
Game tickets		$1,596	$1,904	$602	70% of the cost of 4 season tickets for home games, reflecting expected use of the 4 complimentary admissions athletes may receive for each game	Donation to athletics department that may be needed for right to buy 4 home season tickets in comparable location; cost of tickets for away games, conference and NCAA tournament games (athletes may receive six admissions for conference and NCAA tournament sessions)
Future earnings impact	$6,500	$6,500	$6,500	$6,500	One year's impact on wages, based on attainment of some college education	Value of admissions preference based on athletics; impact on wages based on attainment of a bachelor's degree, or based on education toward or attainment of a master's or professional degree
Total	$119,650	$137,121	$140,467	$127,932

Here is a breakdown of their findings.There are other benefits that student-athletes receive that are not included here. For example, it is often argued that those who come from economically disadvantaged backgrounds are the ones suffering the most. Yet these individuals are eligible for federal pell grants, which can bring in an additional $5,500 in cash.

This information does not answer two rather important questions:

1. Are they being paid enough?

Do student-athletes value the non-pecuniary the same as ca

How much should student-athletes be paid? (This is a first part to a multipart series on paying NCAA athletes)

A recent article came out, which among many other things, attempts to estimate the fair market wage of the college athlete. Sidestepping the question, should student-athletes be paid, let’s just look at how much a student-athlete should be paid.

Labor economic theory sets a framework to determine what wages should be. The theory suggests that wages should be set to marginal revenue product of labor. Or to clarify, wages should be set to marginal revenue multiplied by marginal product of labor. Doesn’t clarify it? Let’s use an example.

Suppose you are a worker making footballs. Your job is to sit at a machine and handcraft a football all by yourself. In one day you make 10 footballs (that is your marginal product of labor). You then sell those footballs for $20 a piece (that is your marginal revenue). So how much should you be paid? Multiply the price you get for a football ($20) by the number of footballs you made ($10), and you earned $200. So your wage should be $200.

So let’s take this and apply it to college football. A college football player should be paid based on what he produces. College football player are put on the field to produce victories, so that is their marginal product. One way to find the marginal product is to have two teams play each other twice, and the only difference between the two games is that in one of the games, one player sits out. Then repeat this for all players on each team. Meaning that with 85 players on scholarship from each team you will need to play each other 340 times. It turns out this is a lot to ask from student-athletes. So often times, statistics are used to try to estimate how much a player contributes to a victory. This is also problematic since certain positions do not accumulate statistics that are easy to measure (i.e. offensive lineman or a corner back that covers so well that the opposing quarterback never throws the ball near him). It is also difficult to measure for back up players who help the starters prepare during the week, but does not play during the game. Needless to say, it is not easy to calculate how much one player contributes to a victory.

Some recent examples, how valuable is Tom Brady? Some might argue that he is very valuable, but in the 2008 season when he had a season ending knee injury in the first game, the team went 11-5. The next year with Tom Brady they went 10-6, this might mean that having Tom Brady as your starting quarterback actually costs your teams wins. And as such, he should not be paid to be your starting quarterback. (Although the previous year with Brady they were 16-0, so this example easily breaks down, but it still illustrates the point).

What about the 1987 1st Team All-American running back and Heisman Trophy candidate, Thurman Thomas? Thomas was the all-time leading rusher at Oklahoma State University history. He ran for nearly 4,600 yards in his career with 43 touchdowns. He led the Cowboys to a 9-2 record and was a major contributor to the 35-33 victory over West Virginia in the Sun Bowl. By the end of the year, OK State was ranked 11^th in the country. So how valuable was Thurman Thomas to his team? Suppose he didn’t play, then his back up would have had to play. Turns out that his back up was pretty good, you might have heard of him, Barry Sanders? (The next year as a senior, Sanders accumulated 3,248 total yards with 39 touchdowns. That was in just one season, and that doesn’t include the 222 yards and 5 touchdowns he scored in the three in the Holiday Bowl) So if Thomas is paid based on how he contributes to a victory, he might not contribute anything, because without him they may have won as many games if not more games, and as such would be paid nothing.

Even though we haven’t completed step 1, let’s go onto step 2. How much is a victory worth for each team (Marginal Revenue)? If you thought the first step would be difficult to estimate, this one is even more challenging. Alabama went 10-3 last year, how much more revenue would they have earned if they went 11-2? To be honest, there are so many different factors that come into play that I don’t even know where to begin. Ticket sales? Media Contract? Alumni donations? But suppose for a second that they were maxed out on all of that, and that an extra victory didn’t bring in any extra revenue. That would simply mean that college players should get paid 0 dollars. Because 0 times any number is 0.

So before we start referring to the NCAA with a “whiff of the plantation” reference, we need to reason out. Just because NCAA football makes tons of money (and men’s basketball as well), does not mean that student-athletes are underpaid and exploited workers. It very well may be the case that they are getting paid exactly what they are worth.

Most Popular Sport

Ever had the argument about which sport is the most popular? Don’t, ESPN just settled the discussion when it signed the new Monday Night Football deal with the NFL. The deal will bring in $1.9 billion each year for a mere seventeen nights of the year.

Let’s put this into perspective. The National Basketball Association earns roughly $930 million dollars per year from selling its broadcasting rights. CBS pays $771 million per year to broadcast March Madness. NASCAR brings in $686 million per year and Major League seems like a pastime with its poultry $428 million per year. I guess baseball can always look at the NHL to make itself feel better, NHL gets $65 million per year (a huge drop compared to the $120 million before the 2005 lockout). Add these all up, and you still don’t get what the NFL earns each year.

The current deal between the NFL and CBS to broadcast AFC games is worth $622.5 million. The NFC, although it has the same number of games on TV as the AFC, is worth $712.5 million. Why the difference between the two? Simple supply and demand, the demand for the NFC is greater. To see this, just look at what teams are in the Eastern Division of each league. The AFC has power houses like New England and the J-E-T-S, but it also has low demand teams like the Dolphins and the Bills. The NFC East is stacked with high demand teams. Forbes comes out each year with the most valuable sports franchises, and at the top of the list is the NFC East: Dallas Cowboys #1, Washington Redskins #2, New York Giants #4, and the Philadelphia Eagles #7. Supply is the same, but the demand for NFC is greater, and thus principles of microeconomics tell us revenues go up.

In addition to these contracts, the NFL has a contract with NBC for Sunday Night Football. This nets the NFL and additional $650 million per year. Last night’s Cowboys-Jets game earned a Nielson rating of 16.9. Not only is the rating up by 3 percent from last year’s Sunday night opener, but is the highest rated Sunday Night Football game ever (beating out last year’s Eagles –Giants last minute victory and Giants-Cowboys which was the opening game at the new Cowboy Stadium). Game 6 of the NBA finals where the Mavericks took down the evil empire from South Beach earned a rating of 15.42.

As an economist, I believe money can talk. And it is clearly shouting that Football is king.

This is the Big 10’s fault

This past spring, no one could stop talking about college football realignment. Could it be that long-time powerhouse was leaving the Big 12 for greener pastures in the Big 10 (which has had 11 schools since Penn State joined in 1990). The dominos began to fall. The Pac-10 was aggressive and went after the Red River schools: University of Texas and the University of Oklahoma, as well as their little brothers OK State and A&M. That didn’t work so they settled for Utah and Colorado. The Mountain West got Boise State, but then lost BYU and TCU. And I could go on, but needless to say the landscape of college football was on its way to “Super Conferences.” But why all this shaking and moving?

College football teams want weapons: quarterbacks with cannons, safeties that can blow up receivers, and half backs that can tank over any linebacker. This arms race has created an incentive to win the recruiting battles for the top talent throughout the nation. One battlefield that this arms race has occurred is the race to be on TV.

In 2006, the Big Ten partnered with FOX to create the Big Ten Network. As a result the Big Ten was able to broadcast more of their games than any other conference. 87 of the 88 football games the following season were nationally televised, not other conference had 70% of their games nationally televised. Only 8 of the 262 basketball games were not televised (97%), every other major conference had at least 48 games that were not televised. As a result, the Big Ten Network made millions of dollars for the conference; $242 million to be exact in 2009. That is three times more money than the Big 12 made with their media deal. The Big Ten attacked first in the arms race, but then came the retaliation.

The SEC signed a deal with ESPN in 2009 which would give the conference $2.25 billion dollars over a 15 year period. CBS came aboard and paid $825 million over 15 years just to broadcast the SEC Championship game. The newly formed PAC-12 was able to sign a deal for $2.7 billion over a 15 year period, or about $225 million per year. The Big 12 got involved and signed a deal that would bring Texas and Oklahoma $20 million per year (as well as Texas’ kid brother A&M) and all other schools $14 million per year. Conferences were getting rich, and things were settling down, that is until Texas pulled out their guns.

Texas joined with ESPN to create the Longhorn Network. This network would bring you the burnt orange 24 hours a day. So instead of dealing with insomnia, just turn it on and count the cows ‘til you fall asleep. This deal would bring Texas $11 million each year, money that they would not have to share with anyone else, most notably A&M. But what could A&M do, exactly what they are doing now.

A&M now wants to leave the Big 12, cut ties with its big brother UT, and venture to the real world know as the SEC. If they do, this may very well lead to a “Super Conference” world, which has its pros and cons (can you say playoff?). But one thing is for certain, money is the driving factor.

Football is back!!!

After a labor conflict in the NFL, the regular season of football is back. Fans are ecstatic. Bigger televisions are being purchased, calls are being made to cable companies to ensure that bills are paid and the NFL Network will come into their living room uninterrupted, and those that know they could do a better job than most league GM’s are starting their own fantasy leagues with the most creative team names possible (my personal favorite: Over Dwayne Bowe). Along with the great excitement that is the start of the football season, I feel it my duty to warn you that there are some downsides to the upcoming football season.

Many men are passionate about their teams. They go to extremes to show how big of a fan they really are. For some a jersey of their favorite player is not enough. These fans decal their cars, hang the team flag proudly from their front door, and buy the spiked shoulder pads to wear to work on Friday to let their coworkers know that they are a card carrying member of Raider Nation.

This passion leads men to celebrate when their team wins. They let their emotions get the better of them, like when they attempt a flying chest bump with their buddy, which ends up costing the host of the game a coffee table. But just as victory leads to elated shouts of joys, defeat can cause equally strong emotions.

A recent study by David Card and Gordon Dahl, two economists, showed that upset victories can have a significant impact on domestic violence. They test whether emotional cues can increase the risk of violence of men towards their wives or girlfriends. To do this they look at football games where a team was favored to win by at least 4 points, and find that at-home violence increases 10 percent when the favored teams loses. These incidents of violence occur shortly after the end of the game and are larger for more important games. They also look at games that we suppose to be closer, that is with a smaller predicted point spread. They find no evidence that the outcome of these games contributes to domestic violence.

So to those stalwart fans out there: wear the cheese on your head, waive your terrible towel, spell out your teams name, and scream like a maniac when your team wins. But if your team loses, take a breath, prepare for next week, and hope you didn’t start Peyton Manning in your fantasy league in week 1.

To read the study click here "Family Violence and Football: The Effect of Unexpected Emotional Cues on Violent Behavior"