In the big North American sports - baseball, basketball, American football and ice hockey -
restrictive agreements to ensure more competitive balance among teams also redistribute financial
resources from players to owners. In one way or another, they also punish franchises that have
achieved the most on-field success and reward weak teams. Writing in the latest issue of the
Economic Journal, Professors Sherwin Rosen and Allen Sanderson of the University of Chicago
note the stark contrast with the system of promotion and relegation in European football. Here,
excellence is rewarded by allowing successful teams to compete in the premier league and failure
is punished by re-assigning poorly performing ones to a lower level. It remains an interesting
economic question as to which system is better - to punish success or failure.
Rosen and Sanderson note that the distribution of playing talent and competitive balance among
teams are two long-standing problems for professional sports. Every sport and sports league has
had to confront the fundamental issue of creating and maintaining relative playing strengths
among competitors because, at least over the long run, fan interest would wane and industry
revenues would fall with contests only among poorly matched opponents where the outcome is
virtually certain.
A complementary struggle is between the two principal interest groups - owners and players - for
control of the labour market and the disposition of revenues. The researchers discuss historical and
contemporary aspects of sports labour markets in North America and Europe, including the
current debate over transfer system reforms in European football and collective bargaining in
American baseball. Rosen and Sanderson use both basic elements of supply and demand as well as
some theoretical complications that appear to be unique to the sports industry.
Mechanisms employed to address competitive balance over time have included reserve rules (or
'option clauses') and transfer fees, reverse-order player drafts and restrictions on foreign players,
revenue sharing and luxury taxes, payroll and salary caps, and promotion and relegation. All of
these evolved in part from the desire of owners to restrict player movement and to restrain
salaries. In turn, players, and in more recent times their associations (unions), have sought more
freedom to contract: free agency, salary arbitration, collective bargaining, and the threat of a strike
all serve to erode the monopsony (monopoly buying) power of owners.
Rosen and Sanderson's report discusses a variety of contemporary and controversial labour-market
issues in sport: explanations for the high level of pay and salary differences among players; wage
discrimination by race; the sources of, investments in, and the training of athletic talent; drug use
among athletes; and other restrictions on excessive competition, including responses to new
technologies.
ENDS
Note for Editors: 'Labour Markets in Professional Sports' by Sherwin Rosen and Allen Sanderson
is published in the February 2001 issue of the Economic Journal. The authors are in the
Department of Economics, University of Chicago, 1126 E. 59th St., Chicago, IL 60637.
For Further Information: contact RES Media Assistant Niall Flynn on 020-7878-2919 (email:
nflynn@cepr.org); Sherwin Rosen on 001-773-702-8166 (email: srosen@midway.uchicago.edu);
or Allen Sanderson on 001-773-702-9459 (email: arsx@midway.uchicago.edu).