Transcript Slide 1

Chapter 7
Labor Markets
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Resource Markets
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Demand
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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
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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
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Labor Market
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Terms
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Labor– Physical and Mental services of people
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Blue and white collar workers
Professionals
Small business owners
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Wages
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- All compensation to Labor
Components
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Salaries
Bonuses
Royalties
Benefits
Repair costs
Commissions
Types
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Nominal wage – is the amount you make
Real Wage is the amount you can buy
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Adjusted for inflation
Differentials
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Ability
Education and training
Compensating differences
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Risk
Work conditions
Market imperfections
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Minimum wage
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Unions – organizations of workers
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Unions – improve income, safety and job security of its members
Types
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Craft: skill
Industrial
Goals
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Increase demand
Supply restriction
Job protection
Collective Bargaining - firm management meets with union management to work out a
contract
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Bilateral Monopoly – collective bargaining
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Strategies
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Strike by union
Boycott by the union – urge consumers not to buy the product
Lockout by firm
Strengths
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Monopsony – Single buyer of labor
Monopoly – Single seller
Firm – has inventory
Union – has a strike fund
Mediation
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Mediator – impartial observer
Binding arbitration – outsider decides
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Geographic immobility
Discrimination –hurts those who discriminate
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Types
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Wage
Employment
Model
Results
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Winners
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Black owners
White workers
Losers
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Black workers
White Owners
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Economic rent– excessive pay with no increase in
productivity (Quasi-rent)
» Pro sports stars
» Rock stars
» Movie and TV stars
» Supermodels
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Uses of Time
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Market work
Non-market work
Leisure
Psychic income – Non monetary benefits of work
(friendships, power, prestige etc.)
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Sports Labor Market
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Types
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General Manager
Coaches
Players
Trainers
Managers
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Value of Sports Talent: Value of Athletes: Not as much as other entertainers
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Salaries
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Endorsements
Athletes invest in themselves (Human Capital)
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Increased over the years
Ranking: NBA, NHL, MLB, NFL
Salaries rise because fans willingness to pay increases
Trainers
Foregone earnings
Give up social activities
Equipment
Agents and lawyers
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Negotiate contracts
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Invest
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Analyze business deals and endorsements
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Clothing etc
Payoff
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Earnings from winning
Clothing lines
Speaking engagements
Prestige
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Marginal Revenue Product
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MRP = MP X MR
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In a competitive talent market the player will get MRP =
Wage
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MRP = Winning percentage
MP = Marginal Product (players contribution to winning
percentage
MR = Marginal Revenue
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
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Other issues
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International Competition
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Overvalued rookies
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Canada teams pay with a weaker dollar
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
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Pay
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Discrimination in pay is all but gone
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Variations due to
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Innate ability
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Training
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Experience
Fan discrimination: likes and dislikes of the fans
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Better players are forced out if fans discriminate
Hiring discrimination still exists
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Labor Relations in Pro Sports
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Modern Sports Labor Relations
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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
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Players formed unions
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McNally - Messersmith decision (1975)
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Curt Flood (1969)
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Established free agency
Challenged the reserve clause
National Labor Relations Acts (1935)
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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
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Collective Bargaining Agreement
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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)
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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
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NBA and NFL tie labor costs to revenues
Individual Bargaining rights
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Final Offer Salary Arbitration (FOSA): Arbitrator must
choose of the offers not somewhere in between the
owner’s offer and player request
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Salaries
Trade and sell issues
» Right of refusal
Player always gets more than previous contract
Owner’s usually offer substantial increases
Union Decertification – players vote to “cancel” the union
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Players can then use antitrust laws
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Union Goals, Problems and Governance
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Goal: MRP = Salary
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Salary Exploitation = (MRP – Salary)/ MRP
Obstacles
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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
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Governance
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Small democracy (elected leaders)
Members are rationally ignorant and this allows leaders
to act in the interest of a few
Bargaining: Game Theory
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Strike funds and alternative opportunities for
Players Union
Owner’s have replacement players, loans, strike
insurance, lines of credit
Usually 50-50 agreement
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Salary Cap and Luxury Tax
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Salary Cap: The maximum a team can spend on player’s wages
(U.S. dollars)
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Difference between the Cap and Actual is called pay roll room
There is also a minimum salary
Bonuses are classified as
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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
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Per player
Per team
Larry Bird Exception
Luxury Tax (MLB)
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Money is divided among less affluent teams
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Drafts: used to get new and young players
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Worst goes first
Lottery: NBA
Teams trade draft picks
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Work Stoppages
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Owners have lockouts and players have strikes
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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
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Labor Relations
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MLB
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NFL
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Free Agency
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Rozelle Rule: Losing teams are compensated
Decertification
Salary Cap and rookie pay restrictions
College drafts
NBA
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Arbitration
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FOSA: final offer salary arbitration
Free Agency
Draft
Luxury Tax
Free Agency
Decertification
Salary Cap and rookie pay restrictions
College drafts
NHL
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Free Agency
Rookie pay restrictions
College drafts
FOSA
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Labor Market in Music
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Unionized which affects costs of production,
recording and licensing
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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
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Royalties
Minimum sales levels
Advances
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Types
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Artist
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A&R (artist and repertoire)
Producers
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Recording: responsible for all artistic aspects of a recording
Managers
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Group ; usually a partnership
Handle artists career
Sound engineers
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Recording: Operate the equipment
Mix: combine the tracks
Master: Final musical selection
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So you want to be a rock star? Note: must sell
300,000 albums before you start collecting
royalties
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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)
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Artists Revenues
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Royalties on album sales
Concerts
Souvenirs
Ads and endorsements
TV and MTV appearances
Video sales
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Property Rights: to own use and benefit
from a property
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Protection
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Patents on inventions
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Trademarks such as brand names and logos
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DVD players
Rolling Stones and Tongue
Copyrights on music and words
Rights can be bought and sold
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Beatles to Northern Songs to Michael Jackson
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Labor in Movies
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Types
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Producer: Turns idea into a picture
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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
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Assistant director
Unit Production Manager: Financing and hiring the crew members and locations
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Crew
Casting Director hires the actors
Actors
Director of Photography
Production designers: set designs, clothing
Editor
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Film and Sound editors
Production sound mixer
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Unions
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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).