Economic Justification for High Salaries in Sport

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Justification of the huge salaries paid to some top athletes; an economic perspective.

Over the last century there has been much research into the area of Labour Economics, and hence the determinants of supply, demand and wages for labour. In this essay, I will be looking at the unique example of the Sports Labour Market with specific focus on the European Football Market, and use various economic models to justify the huge salaries currently offered to top athletes within this field. The wages of professional footballers have risen dramatically since the Bosman ruling in December 1995, in which EU football players were given the right to a free transfer at the end of their contracts, with the provision that they were transferring from a club within one EU Association to a club within another EU Association (European Commission, 2012).This has been supported by various studies, including (Simmons, 1997), who argued that the move towards a free agency had the consequent impact of increasing players’ salaries, as the forgone transfer fees translate into increased salaries, since the bargaining power is transferred to the player. This was reinforced by (Downward, 2000) who found that post-Bosman, the wages within the United Kingdom’s Premier League rose considerably. However, these findings conflict with other studies conducted, including (Szymanski, 1999), who argued that the new ruling only lead to increased wages for superstar players who have the greatest bargaining power, and that it did not affect the wages for the average player. During this essay I will first discuss the basic economic principles relating to the labour market, and subsequently introduce various models developed with specific focus on the sports labour market. Demand for labour is “derived demand” because it is dependent on the demand for the final product that the labour produces (R. Sandy, 2004). The conventional model used to analyse wage determinants states that the demand for labour is dependent on the Marginal Revenue Product of Labour (MRP) which is “the change in revenue that results from the addition of one extra unit (employee) when all other factors are kept equal” (Investopedia, 2012). In the field of sport, the industry is in a real sense selling its athletes, hence the demand for labour is dependent on the athletes “product” which could be viewed as his or her contribution towards the teams win column. The value of a win to the sports franchise is dependent on how the fans respond when the team wins more games. This value could be realised through the many revenue streams that sports franchises currently operate, perhaps most notably in the form of increased ticket sales, increased spending on merchandise and prize money. The “Standard Model” or “Perfect Competition Model” for wage determinants assumes that the sports franchise will operate at the profit maximising level of output, i.e. when the last unit of labour that is added adds as much to the firms revenues as to its costs → MRPL = MCL as shown in Figure 1.

Figure 1– PC Model
Revenue and cost

Marginal Wage Cost

ARP

MRP

Employment of labour

However, there are many limitations to this model, as the labour market for competitive athletes is far more complex. One basic argument against this model is that if in a perfectly competitive industry; firms earn abnormal profits, it assumes that more firms will enter the market and diminish these returns. Nonetheless, there are huge barriers to entry in the professional sports industry, and freedom of entry and exit does not exist. If we look at the Premier League for example, each club typically has a local monopoly, and due to the nature of the market, one firm may bid up the price of labour as it hires more units, hence in the sense it could be viewed as a monopsonistic market (R. Sandy, 2004). Furthermore, there is uncertainty over quality, as sports teams have uncertainty over both the new players they hire and...
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