The labor market for players

Labor markets are central to the understanding of sporting activity. It is product demand that determines the demand for labor. The chapter begins by outlining the perfectly competitive model of the demand for labor, but emphasizes the fact that the market for athletes is more complex than this model implies. Contracts need to be specified in such a way that they induce maximum effort from the players with elements of both bonuses and long-term contracts. The market for sports stars is then monopsonistic, given a shortage of players with star quality and restrictions on mobility of players. Conditions of bilateral monopoly may apply with the probability of the wage diverging from the marginal revenue product. The reader should by the end of the chapter have some understanding of the nature of the player contract and how to ascertain the economic value of individual performance, which may be influenced in team sports by the dispersion of pay within a team. Historically, the reserve clause in North America and the retain and transfer system in Europe were the main mechanisms for achieving an acceptable degree of competitive balance, but have been weakened through key legal judgments such as in the Bosman case. Some economists have argued that they were in fact bound to fail, through the implications of the invariance thesis of the Coase theorem, and the actual impact of such restrictions is a matter of some debate. Other controversial issues are whether more equal gate-sharing will increase competitive balance and what are the likely results of the implementation of salary caps. Reference back to Chapter 2 suggests that these policies will be influenced by the goals of the club owners.