Chapter 7

Labor Markets

– Resource Markets• Demand

» Marginal Revenue Product (MRP): Demand curve for a resource

» MRP = MP X MR = Chg in TR/Change resource quantity

» MP = Marginal Product = Chg in Total Product/Change in Resource

» MR = Marginal Revenue = Change in Total Revenue/Change in Resource

– Determinants of Resource Demand» Changes in Product demand» Changes in Productivity» Changes in prices of other resources» Substitutes» Complements

– Marginal Resource Costs (MRC)= Marginal Factor Costs (MFC) = Chg in Resource costs/Chg resource quantity = Price of the Resource (Pr)

– Profit Maximizing Equilibrium– Hire when MRP > MRC– Hire until MRP = MRC

• Labor Market– Terms

• Labor– Physical and Mental services of people– Blue and white collar workers– Professionals– Small business owners

• Wages - All compensation to Labor– Components

• Salaries• Bonuses• Royalties• Benefits• Repair costs• Commissions

– Types• Nominal wage – is the amount you make• Real Wage is the amount you can buy

– Adjusted for inflation

– Differentials• Ability• Education and training• Compensating differences

– Risk– Work conditions

• Market imperfections– Minimum wage

• Unions – organizations of workers– Unions – improve income, safety and job security of its members– Types

• Craft: skill• Industrial

– Goals• Increase demand• Supply restriction• Job protection

– Collective Bargaining - firm management meets with union management to work out a contract

• Bilateral Monopoly – collective bargaining– Monopsony – Single buyer of labor– Monopoly – Single seller

• Strategies– Strike by union– Boycott by the union – urge consumers not to buy the product– Lockout by firm

• Strengths– Firm – has inventory– Union – has a strike fund

• Mediation– Mediator – impartial observer– Binding arbitration – outsider decides

• Geographic immobility• Discrimination –hurts those who discriminate

– Types• Wage• Employment

– Model– Results

• Winners– Black owners– White workers

• Losers– Black workers– White Owners

– Economic rent– excessive pay with no increase in productivity (Quasi-rent)» Pro sports stars» Rock stars» Movie and TV stars» Supermodels

• Uses of Time– Market work– Non-market work– Leisure

• Psychic income – Non monetary benefits of work (friendships, power, prestige etc.)

• Sports Labor Market– Types

• General Manager• Coaches• Players• Trainers• Managers

– Value of Sports Talent: Value of Athletes: Not as much as other entertainers• Salaries

– Increased over the years– Ranking: NBA, NHL, MLB, NFL– Salaries rise because fans willingness to pay increases

• Endorsements• Athletes invest in themselves (Human Capital)

– Trainers– Foregone earnings– Give up social activities– Equipment– Agents and lawyers

» Negotiate contracts» Invest» Analyze business deals and endorsements» Clothing etc

• Payoff– Earnings from winning– Clothing lines– Speaking engagements– Prestige

– Marginal Revenue Product• MRP = MP X MR

– MRP = Winning percentage– MP = Marginal Product (players contribution to winning

percentage– MR = Marginal Revenue

• In a competitive talent market the player will get MRP = Wage– For a time period– Then they become free agents to the highest bidder

» Teams want long term contracts

• Large market teams pay more• Experience- Earnings Relationship: MRP improves over

time

– Other issues• International Competition

– Canada teams pay with a weaker dollar• Overvalued rookies

– MRP?• Free Agents create bidding wars• Fans will pay for winners• Trading players benefits both teams• Player costs are 60% of operating expenses• Discrimination: based on race, gender, religion

– Pay» Discrimination in pay is all but gone» Variations due to» Innate ability» Training » Experience

– Fan discrimination: likes and dislikes of the fans» Better players are forced out if fans discriminate

– Hiring discrimination still exists

• Labor Relations in Pro Sports– Modern Sports Labor Relations

• Labor relations – interactions of organized labor (players union) and management (owners) concerning employment, pay and negotiations

• Originally owners kept salaries below MRP with tactics such as the reserve clause which allowed owners to pay the player the same pay only by telling them that they were going to do so– Players formed unions

• McNally - Messersmith decision (1975)– Established free agency

• Curt Flood (1969)– Challenged the reserve clause

• National Labor Relations Acts (1935)– Right of labor to form unions

– Right of labor to bargain collectively

– Right of labor to use strikes and picketing

– Formed National Labor Relations Board

» Bargaining in good faith

» Actors

» Owners, Leagues and Commissioner

» Players, Unions and Agents

• Collective Bargaining Agreement– Contract Essentials

» Capacity – Parties in the contract» Subject matter – is it legal» Consideration – money, benefits etc» Mutual agreement» Absence of Fraud» Mutual right to Remedy» Duration of the agreement (3 years)

– Negotiating Principles» Trade off – give and take» Who has the power» Player not the agent» Common Sense» Fair and Balanced» Better safe than sorry – have contract reviewed

– Reopening Clause – when to start negotiating again– Rules and procedures governing the draft– Pay issues

» Free agency» Minimum salaries» Meal money» Playoff money» Sharing percentages under salary caps» Retirement funds

– Player location issues– Grievance, arbitration and mediation procedures

• NBA and NFL tie labor costs to revenues• Individual Bargaining rights

– Salaries

– Trade and sell issues

» Right of refusal

• Final Offer Salary Arbitration (FOSA): Arbitrator must choose of the offers not somewhere in between the owner’s offer and player request– Player always gets more than previous contract

– Owner’s usually offer substantial increases

• Union Decertification – players vote to “cancel” the union– Players can then use antitrust laws

– Union Goals, Problems and Governance• Goal: MRP = Salary

– Salary Exploitation = (MRP – Salary)/ MRP• Obstacles

– Education costs: Educating players about the benefits of unions

– Free Riding – Nonmembers get union benefits» Consequences: Errant fastball, missed blocks, flagrant

fouls, hockey sticks– Owner retaliation

» Blacklisting» Denying career development» Trading

– Hostile Political environment– Illegal owner actions

• Governance– Small democracy (elected leaders)– Members are rationally ignorant and this allows leaders

to act in the interest of a few

– Bargaining: Game Theory• Strike funds and alternative opportunities for

Players Union• Owner’s have replacement players, loans, strike

insurance, lines of credit• Usually 50-50 agreement

– Salary Cap and Luxury Tax• Salary Cap: The maximum a team can spend on player’s wages

(U.S. dollars)– Per player– Per team

• Difference between the Cap and Actual is called pay roll room• There is also a minimum salary• Bonuses are classified as

– likely to be earned which counts– not likely to be earned which doesn’t

• NBA has a “soft cap” which can be exceeded if it is to retain the rights of a player– Larry Bird Exception

• Luxury Tax (MLB)– Money is divided among less affluent teams

– Drafts: used to get new and young players• Worst goes first• Lottery: NBA• Teams trade draft picks

– Work Stoppages• Owners have lockouts and players have strikes

– Strikes» NHL: 1992, 2005» NFL: 1974, 1982 and 1987» MLB: 1969, 1972, 1981, 1985 and 1994» NBA: None

– Lockouts» NHL: 1994 and 2004» NFL: 1968 and 1970» MLB: 1976 and 1990» NBA: 1998

– Labor Relations• MLB

– Arbitration» FOSA: final offer salary arbitration

– Free Agency– Draft– Luxury Tax

• NFL– Free Agency

» Rozelle Rule: Losing teams are compensated– Decertification– Salary Cap and rookie pay restrictions– College drafts

• NBA– Free Agency– Decertification– Salary Cap and rookie pay restrictions– College drafts

• NHL– Free Agency– Rookie pay restrictions– College drafts– FOSA

• Labor Market in Music– Unionized which affects costs of production,

recording and licensing• The American Federation of Television and Radio Artists

(AFTRA) is a national labor union representing over 70,000 performers, journalists and other artists working in the entertainment and news media

• AFM :Founded in 1896, the American Federation of Musicians is an international union organized in the United States and Canada with its international headquarters in Toronto.

– Contract terms• Royalties• Minimum sales levels• Advances

– Types• Artist

– Group ; usually a partnership

• A&R (artist and repertoire)• Producers

– Recording: responsible for all artistic aspects of a recording

• Managers– Handle artists career

• Sound engineers– Recording: Operate the equipment

– Mix: combine the tracks

– Master: Final musical selection

• So you want to be a rock star? Note: must sell 300,000 albums before you start collecting royalties

– Have talent drive and vision– Hire a manager (15% of everything)– Hire a lawyer ($300 per hour)– Publicize your product ($4000 per month)– Go on tour (your expense at $10,000 per week)– Deal with a record company (12% of retail)– Choose a producer (4%)– Make a video ($150,000)

• Artists Revenues– Royalties on album sales– Concerts– Souvenirs– Ads and endorsements– TV and MTV appearances– Video sales

• Property Rights: to own use and benefit from a property

– Protection• Patents on inventions

– DVD players

• Trademarks such as brand names and logos– Rolling Stones and Tongue

• Copyrights on music and words

– Rights can be bought and sold• Beatles to Northern Songs to Michael Jackson

• Labor in Movies– Types

• Producer: Turns idea into a picture– Finances– Hires– Supervises

• Executive producer:: Represents the financing studio or distributor• Associate producer: anyone else who helps• Screenwriters: adapts original ideas or previous written work to motion pictures• Director: determines the style of the movie

– Assistant director• Unit Production Manager: Financing and hiring the crew members and locations

– Crew• Casting Director hires the actors• Actors• Director of Photography• Production designers: set designs, clothing• Editor

– Film and Sound editors– Production sound mixer

– Unions• American Federation of Television and Radio

Arts (AFTRA)• Director’s Guild• International Alliance of Theatrical and Stage

Employees• Producers Guild• Screen Actors Guild• Writers Guild

• Fashion Unions• UNITE HERE is a labor union with more than

450,000 active members in the United States and Canada, predominantly in the hotel, food service, apparel and textile manufacturing, laundry, warehouse, and casino gaming industries. The union was formed in 2004 by the merger of UNITE (formerly the Union of Needletrades, Industrial, and Textile Employees) and HERE (Hotel Employees and Restaurant Employees International Union).