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Exploiting the Laborers

October 10, 2010, 11:34 am

I hate blog posts that begin this way, but I will do it anyway:  Imagine that Wal-mart, Target and a hundred other major retailers all got together and agreed to an industry plan to hold down workers's wages.  Anyone involved with even rudimentary economics training would know that there would be enormous incentives for individual retailers to "cheat", ie offer wages above the agreed to levels to try to get a particular advantage hiring the best employees.  So imagine that the cartel actually forms an enforcement body, that goes around the country levying fines and punishments against any individual participant who breaks ranks and tries to share some of the largess with their workers.

Now imagine the NY Times rooting the enforcement body on, cheering it when it adopts a new get-tough stance on organizations that pay its workers too much.  Hard to imagine, but that is exactly the case in this article, where the Times writes about the NCAA's new efforts to get tough on what it calls "recruiting violations" but in any other industry would be called "trying to pay the workers more than the cartel allows."

NCAA division I sports are made up of a 100+ mostly public institutions that make a fortune off of their athletic programs, particularly men's football and basketball.  Large institutions like the University of Texas or Ohio State reap tens of millions each year in ticket sales, TV deals, merchandising sales, and Bowl/tournament winnings.  One of the reasons this is so profitable is that they basically pay the key workers who generate this income close to zero.  Sure, they give them a scholarship, but what is the marginal cost to, say, the University of Texas for providing a few hundred free educations on top of their 40,000 paid customers?  This is roughly equivalent to McDonald's paying its employees nothing more than a couple of happy meals each day.

While many of these university's athletes will make nothing after college playing sports, the ones involved in these "violations" are typically athletes who are offered millions, even tens of millions of dollars the moment they leave college.  In effect, these colleges are getting tens of millions of dollars of labor virtually for free, and so the incentives to cheat on their cartel deal are huge, which is why the cartel enforcers have to be so aggressive in stopping under-the-table payments to the grossly underpaid workers.

It is an ugly process, and one wonders why so many folks support it when they would be appalled at such practices in any other industry.

Tags: , , , , , ,
Category: Economics, Regulation, Sports
  • chembot

    Academia does seem to have a rather unique relationship with the labor market, doesn't it? Although considerably less glamorous than sports, it is interesting that the graduate student market is run under an essentially identical business model. It is amazing what you can get away with when employment is reclassified as "education".

    As regards the times, I would argue this is entirely consistent with their views on fomenting class warfare in the name of ensuring equality of outcome. I'm sure they would be perfectly happy to see the George Steinbrenner types with their $200 million payrolls brought down a peg or two and salary capped so that marginal teams like the padres or the pirates can more effectively compete.

  • John David Galt

    You might want to start with a different example. Competition for the best workers implies that there is such a thing, that is, that the job involves some actual skill (and that that skill can easily be observed/measured). I can believe that for athletes. I can't believe it (much) for the bottom-rank employees at big-box stores.

    As for college sports, it suffers from much bigger problems than the no-pay rule (primarily the complete silliness of trying to enforce gender equality on them). It wouldn't surprise me if soon, every privately owned college/university in the country starts refusing federal funds as Hillsdale has done, so that they can manage their operations sanely again (and in many more areas than just sports).

    Once an institution accepts tax funds, we know what they are; all that's left to determine is the price.

  • rsm

    "You might want to start with a different example. Competition for the best workers implies that there is such a thing, that is, that the job involves some actual skill (and that that skill can easily be observed/measured). I can believe that for athletes. I can’t believe it (much) for the bottom-rank employees at big-box stores."

    Argument from personal incredulity, the fact that you can't imagine it from whatever position you have doesn't make it more or less true. There are better and worse laborers in any part of the labour pool, and retaining the good ones is not easy when the good ones want to move up in the world. Russ Roberts on his podcast had an interview on the topic of Wallmart labour practices a while back and it was interesting, and addressed the fact that Wallmart is interested in retaining their best workers and a cartel as described in this post would make it very, very difficult to do so.

  • Mark

    The problem with this argument is that the vast majority of the brand value belongs to the University in college basketball and football. People watch college sports to watch Ohio State and the University of Texas. They want those teams to win and will pay big money for those wins.

    However, if professional football and basketball did not use the colleges as their minor league system, and instead, every member of the Ohio State football team played for a minor league "Columbus Buckeyes" they would have ZERO television revenues and about 150 people at each game. The market wage of such a player is very low. Only when you brand them as "THE Ohio State University" football team does the millions of dollars in televion revenues and 100,000 people show up to the game.

    So, claiming that the individual players have significant market value in themselves is a very shallow viewpoint.

  • Not Sure

    "I can believe that for athletes. I can’t believe it (much) for the bottom-rank employees at big-box stores." - John David Galt

    I think you underestimate the benefit to a company of employing more competent vs. less competent employees, even at the entry level. If you have to more closely supervise workers as opposed to workers that are more self-directed, you will need more managers or employees (or both) to do the same amount of work.

  • http://neubranderinc.com/blog/ Nobrainer

    Some of these schools may make a fortune. Most are probably running budget deficits.

    The first data I found is a bit old, however. "The NCAA also reports that in 1999, 54 percent of Division I-A schools reported budget deficits."

  • N

    "So, claiming that the individual players have significant market value in themselves is a very shallow viewpoint."

    In fact, the NCAA system actually imparts market value to the individual players. When they come in, they are not employable at the professional level. After a few years in a college system, they can get a contract worth millions.

    That said, this critique seems to me to be better when applied to all the remaining players. They may not be worth multi-millions, but they keep the system constantly ticking over and the fans coming back.

  • John O.

    @John David Galt
    You probably have had zero experience in "big box" retail or any retail at all. I've been working it for 10 years and I have experienced it first hand. The managers that run the big box stores do their best to keep the great and brightest talent, but its difficult as many of the talent they get are there only for the short term, as the people they want have bigger and better career in sight. Also with the retail labor market saturated during the recession, the fact is hardly noticed. Nobody noticed much either that before the recession big box retailers were struggling to get good employees hired as many people were getting better jobs in other sectors.

    -- John O.

  • Mark

    The NCAA system imparts value to an individual football or basketball player only because the professional teams in these sports are too cheap to create their own minor league systems.

    In my view the universities should abandon college athletics as it is. The professional sports should host their own minor leagues and only true student-athletes should play college sports. The "quality" of the game might decline and the interest might decline even more.

    But, then the Universities will no longer lose their soul. The real "net" monetary loss is, in reality, trivial. No university really "gains" even if it is one of the few that is NOT supported by student activity fees and has a surplus in its revenue sports. All of that money is spent on lavish "non-revenue" sports and ever higher coaches salaries, stadium fantasies, and high level perks that surround the athletic department AND ONLY the athletic department.

  • Bob Smith

    Do NCAA rules have the force of law, or is it a mere sanctioning body? Fortunes have been made from defection by the major participants who then form their own sanctioning body. The CART-USAC war for one. While internal divisions and mismanagement eventually destroyed CART, it was in the top echelon of motorsport during its heyday. Fans don't come to games to watch "the NCAA", they come to watch "the USC Trojans". If the major colleges defected and formed their own league that allowed payments to players the NCAA would be screwed; the smaller schools would likely defect too, toppling whole house of cards.

  • http://www.grouchyconservativepundits.com Mike C.

    I believe "NoBrainer" is close to being on the mark. It's been some time since I last saw a study (in the form of a book by a UVA prof, IIRC), but I believe the overwhelming majority of university sports programs run in the red.

  • Jim Collins

    When I look at College sports, the term "indentured servitude" comes to mind.

  • Tim

    As I understand it; football, and men's basketball make up the bulk of the athletic department's income at most universities. The remaining sports are money losers.

    But there's the *other* factor -- the NCAA itself makes huge piles of money on college athletics; and the biggest single source is the television rights for the men's basketball tournament It's in the NCAA's interest to protect that. Which is one of the reasons that they've colluded with the NBA to set a minimum age on the draft -- to assure that the super high talent 18 year olds play at least one year in college.

  • DrTorch

    I agree w/ Jim Collins, that's precisely the phrase I use.

    I had the misfortune to listen to ESPN a few weeks ago. The commentators were saying that the NFL had to get involved w/ issues of these student athletes getting agents early and violating rules.

    Really? Now you're going to deny these people even more opportunity if they don't play by your rules?

    There have been a few players to come from a semi-pro league to the NFL. 15-20 years ago the Cards had a decent lineman do this. It's possible. I'm a bit surprised that more of these people don't go thru the CFL and then enter the NFL. That's got to be better than playing for the U of A.

  • perlhaqr

    Fans don’t come to games to watch “the NCAA”, they come to watch “the USC Trojans”.

    Is that completely true, though? I personally don't pay any attention to basketball (I've got a 300 horsepower per competitor minimum for sports I find interesting) so I don't really know, but it seems like I see a lot of advertising for "NCAA Basketball" just like I see for "NFL Sundays" or whatever.

    So, especially in today's brand heavy world, it seems like any startup league would be at a severe disadvantage for name recognition. On the other hand, with the internet being what it is, I suppose the word could be gotten out.

    Presumably these colleges have thought of that, though. Something has to be keeping them in line. Fear of being the first over the top?

  • A Friend

    Um, guys, if people are willing to pay the athletes money, they have market value by definition, regardless of the franchise value of their team. The way the value is split between the employer and employee is determined, in a free market, by supply and demand. Coyote is pointing out that this is not the case in college athletics.

  • ElamBend

    What really gets to me is all the sanctimonious talk from commentators and those in the NCAA about preserving the purity of the student athlete system.

  • Quints

    Excellent post and several excellent comments. It is true that the university's name adds most of the value and draw to these college sports. You can get 80000 people to an Ohio State game. People are not flocking to see minor league football, they are there for the University.
    BUT, it is something of a perversion of college sport to take a bunch of semi-professionals, and bribe them to play for the school on a full athletic scholarship and then expect anyone to think these are representative students. The spirit of college sport has gotten clouded here. A perspective student should choose the colleges he wants to get into, and then enroll. Once enrolled, he or she should try out for sports teams, then, if that person makes the team he or she is a student athelete. That is very different from the highly recruited kids who are there only because of the deal they got from the football program a priori.
    That said, this will not change.

  • smurfy

    Without college sports, few of us would be aware that Arkansas even has a state university. Every degree that say, Duke has ever printed is made much more valuable by their basketball team (debatable whether lacrosse adds or subtracts).

  • sabril

    Does the NBA require that its athletes have college degrees? If not, then what's to stop a good player from skipping the college system altoegther and cashing in right away? Actually, given the risk of injury this seems like the prudent thing to do.

  • http://stopthebreathing.blogtownhall.com/ astonerii

    And yet, the law of supply and demand shows that the pay rate of 0 is appropriate for the job. If I was a super rich person who got rich doing a very specific thing, and I offered pay free work studies under myself to people who then had a 10% likelyhood to earn millions like I do after the end of tutelage, would your extremist anarchist libertarian mind say it is wrong?

  • Tim

    @Sabril: There is a clause in the collective bargining agreement a player must be at least 19 years old; and any player that played *any* US high school basketball must wait at least one year after their graduating class to be eligible for the draft. Dwight Howard was the last high school senior drafted before the adoption of this rule.

  • markm

    astoneri: If you were also in collusion with all similar work-study programs to hold the pay rate at zero, I'd say you were in the wrong.

  • sabril

    "There is a clause in the collective bargining agreement a player must be at least 19 years old; and any player that played *any* US high school basketball must wait at least one year after their graduating class to be eligible for the draft"

    @Tim

    Thank you for your response. This strikes me as anticompetitive. Actually the entire concept of an athletic draft strikes me as anticompetitive, but putting that aside, it occurs to me that 18 year olds should be free to play in the NBA if anyone is willing to hire them.

  • http://stopthebreathing.blogtownhall.com/ astonerii

    markm: So, groups of people have no freedom? If I grouped up with a bunch of other people and chose not to pay others for the education I offer, it is wrong, but i solely do so, it is ok. Libertarian anarchist hogwash. You have no true values, you just think anything you privately want to do should be ok, but everyone else is supposed to be corralled into your limited choice of freedoms.

    Hell yes, Drugs should be legal. Hell no, not for kids. (says the over 18 libertarian.) Hell no, not crack cocaine! (says the marijuana user.) No, not LSD either.

    People should be able to cross the border freely. No, you cannot just come into my home and use it like your own! (Arbitrary borders mean nothing, but your arbitrary front door border should?)

    People have the RIGHT to work. Hell no I will not pay you for services I have not asked you to tender!

    Yeah, libertarians, all for peoples freedoms, except when those freedoms impose upon the "me". That is why we have laws, as a group (United States of America, State of '?', County of '?' and City of '?') we chose what laws we want. We also have the freedom make other types of groups, such as the NCAA, and if you want to be recognized as NCAA approved, you follow the rules that the group establishes. Feel free to try and join the NCAA board and change the rules, but it is very un libertarian for you to tell them that they cannot do what they chose to do.

  • Bill

    I agree that college athletes are being screwed and probably should get some compensation, like a big work study stipend or something. But, as to your hypothetical:

    I do not think there would be much incentive to cheat under your scenario. Everyone would be ensured equally crappy workers, meaning you would not have to really compete on service, but instead compete on price. Cheating would be easily detected in employee defections to the cheater and the raised prices of the cheater. Also, the savy large retailer can collude in less than explict ways. Almost like airlines today who try to muscle each other out of terminals at airports and take over their own hubs. Check out this paper regarding how price match guarantees can allow for wide-sread tacit collusion:

    http://faculty-staff.ou.edu/B/Suman.Basuroy-1/files/8.pdf

    Currently in retail, instead of outright collusison, I think there is more the business model of employing low skilled workers and/or workers in transition, like the recently laid off, students, poor people with no private transportation or professional family connections, etc., paying them market wages, that happen to be very low, and competing on price and store location. I would wager the wages paid in some retail markets mimic would you would expect in a collusive market, despite being actual market wages.

  • RRR

    "Now imagine the NY Times rooting the enforcement body on, cheering it when it adopts a new get-tough stance on organizations that pay its workers too much."

    Something your own organization will never be in danger of being charged with eh?

    Sorry your post was about collegiate athletes.