Sportsgeekonomics

Musings on Sports Economics

My Reply to the House Committee on Education and the Workforce

Earlier this month I received a few questions from Congressman Kenny Marchant as follow-up to my testimony to Congress in May.  You can see the questions I was asked here: http://sportsgeekonomics.tumblr.com/post/93891963718/questions-from-congress, though they are also embedded within my response, which appears below.

I write in response to questions forwarded to me from Congressman Kenny Marchant.  I would like to begin by thanking Chairman Kline, Ranking Member Miller, Congressman Marchant, and the full Committee, for the opportunity to provide further input into the Committee’s deliberations on these very important subjects.  It is completely appropriate, and encouraging, that a House Committee dedicated to education and to the workforce bring its full attention to a class of Americans who are both college students and members of the American workforce.  These are important issues and the country stands at a crossroads, where we may finally see the production of one of our greatest American products, college sports, brought into the orbit of one of our other great American institutions, the free enterprise system.

I hope that my answers are helpful, both in addressing the specific questions asked, but also in helping to explain that the current collegiate system is based on a foundational disbelief in the forces that have so successfully shaped our capitalist economy.  The NCAA’s rejection of the market system works to the detriment of the American workforce, American taxpayers, and to the American people as a whole.  The recent ruling in O’Bannon v. NCAA that current NCAA limits on athlete compensation “unreasonably restrain trade in violation of §1 of the Sherman Act” serves as a clear signal that the largest problem facing colleges sports today is that it is organized around an anti-competitive (and now, per the Court decision, illegal) premise that makes price-fixing the unnecessary foundation of college athletics.

The NCAA and its member institutions have been extremely successful at diverting attention away from the fact that their sports business operations operate at odds with this nation’s great economic and founding principles.  Some of the questions Congressman Marchant has asked below are likely, and understandably, prompted by the NCAA’s influence on all our thinking. 

In contrast with a system based on an unreasonable restraint of trade, I have faith in the ability of Division 1 athletic programs to thrive in a less restrictive, more competitive market.  The schools that make up NCAA Division 1 have already demonstrated they are excellent at navigating the competitive business of higher education.   They all know how to withhold taxes from their employees paychecks, to negotiate salaries (and many do so via unions in addition to individual negotiations), and generally to function as non-profit but competitive firms in a very important sector of our economy.  With a few exceptions, most schools’ athletic budgets account for 5% or less of the total institutional budget.  I have no doubt that the same schools capable of winning Nobel prizes and securing valuable and innovative patents can also figure out how to balance an athletic budget while complying with Title IX and – going forward – the U.S. antitrust laws.

In addition to my own comments, I have pointed the Committee to some useful resources below.  I hope my answers prove useful to the Committee, and as you recognize the NCAA’s conduct is contrary to the American value of honest competition, I hope that the Committee urges the NCAA to conduct itself more like the rest of the American economy, not less. 

Question:

  • If student-athletes are employees, does that mean that all of their aid is taxable?
  • Will it be subject to taxation in every state they play in other than Texas?
  • Are we required to withhold taxes?
  • If so, their aid won’t cover either tuition, fees, room, board and books, or cost of attendance.

Summary Answer:

  • No.
  • No.
  • No.
  • False Statement.

Full Answer:

Federal Tax law is the province of Congress, and tax law implementation is the charge of the IRS. The equivalent state entities have their own defined responsibilities. Clearly those are the best sources to find a definitive answer to your very important question.  My understanding is that when an issue in need of clarification arises, the IRS has a process known as a “revenue ruling” where they decide their interpretation of the tax law with respect to certain benefits.  For example, in 1977, the IRS issued a Revenue Ruling to clarify that athletic scholarships are not considered taxable income.[1] 

However, with the recognition that I am an economist and not a lawyer, my understanding is that currently, the IRS does exempt the tuition portion of an athletic scholarship from taxation, but that the remainder, while currently liable for taxation, has often gone unenforced.  In addition, I understand that the tax code also exempts from taxation tuition remissions paid to university employees,[2] and so to the extent that provision would now apply to student-employee-athletes, it would seem to prevent the potential consequences that you lay out in your question.

Because tax law is outside of my primary area of expertise I consulted the opinion of professors of tax law and based on my question, I was referred to an excellent, detailed analysis entitled “Why the Northwestern Football Players Union Decision Isn’t Going to Affect the Tax Treatment of Athletic Scholarships Any Time Soon”[3] by Professor John Colombo.  Professor Colombo is the Albert E. Jenner Jr. Professor of Law at the University of Illinois and is currently serving as the interim Dean of the Illinois College of Law.  Among his other credentials, he has testified before Congress and he has written an extremely influential article entitled “The NCAA, Tax-Exemption and College Athletics” that was presented to the Knight Commission on Intercollegiate Athletics.[4]  Professor Colombo wrote the following in April 2014, which I quote in some detail below (the bolded emphasis is my own):

  •  “ …  I still get a number of phone calls every week from reporters asking whether this decision will affect the tax treatment of athletic scholarships.  My answer is “no.”“
  • “… Section 117 of the Code provides an exclusion from gross income for “qualified scholarships” which essentially means scholarships that cover the cost of tuition, books and supplies.  Room and board is NOT included in this provision; hence scholarships for room and board already are included in gross income.  So room and board scholarships are already taxable….”
  • “First, in 1977, the IRS ruled that athletic scholarships qualified for the exclusion under 117 because the scholarship did not, in fact, represent compensation for services.  Rev. Rul. 77-263, 1977-2 C.B. 47.   The IRS decision was based upon the underlying structure and terms of the scholarship arrangement, NOT the status of the players as “students” vs. “employees.”  
  • “The NLRB decision changes nothing about the underlying nature of the scholarship (the terms of athletic scholarships are set by NCAA rules); accordingly, there is no legal connection between the NLRB view of athletes as “employees” and the exclusion for athletic scholarships.  If the terms of the scholarship haven’t changed materially, and the terms were the basis of the IRS’s 1977 ruling, there is no reason for the IRS to revisit that ruling.”
  • “Second, the fact that one is an employee does not make one ineligible for a scholarship.  Indeed, section 117(d), which deals with “qualified tuition reductions” (a fancy name for a scholarship) explicitly contemplates that employees may be offered “tuition reductions” that are excluded from gross income.  In fact, colleges and universities routinely provide scholarships to employees: nearly all graduate research assistants and teaching assistants, many of whom are unionized, receive tuition waivers as part of their “package” with the university.  This package normally includes a (very small!) stipend.   The universities take the position that the stipend is compensation for services, and that the tuition waiver is an excludable “tuition reduction” under Section 117(d), a position that the IRS seems to be quite comfortable with. In effect, the NLRB ruling that football players are “employees” places them in essentially the same position as grad RA’s and TA’s.  …”
  • “Finally, there is no necessary connection between the tax law interpretation of a particular legal relationship and the interpretation of that relationship by other bodies of law.  Tax law is a specialized body of law unto itself.  … .  The fact that labor law might characterize a particular item as “compensation for services” does not control the tax definition of that item.”
  • “… In the past, every time the IRS has taken tentative steps to tax certain items relating to college athletics, Congress has slapped the agency hard across the cheek.  Witness the sequence of events dealing with the IRS’s private letter rulings that corporate bowl sponsorships were taxable advertising; Congress moved with almost lightning speed to enact a new corporate-sponsorship exclusion to the UBIT, Section 513(i).  Similarly, when the IRS took steps to tax payments for seating premiums by ruling that these items were not donations, Congress responded with Section 170(l) to provide that 80% of these payments were, in fact, deductible - allowing athletic boosters to deduct 80% of their payments for what are essentially “personal seat licenses” at athletic events.”
  • “So, is it possible that the NLRB action will influence the IRS to change its ruling on athletic scholarships?  Sure, it’s possible - just as it is possible that the United States will mount a manned mission to Mars next year.  Just don’t bet the house on it.”  

As for the rest of your question, if by “we” you mean “we, the American people, complying with regulations enforced by our government such as via the IRS,” I think the answer is no.  Just as the IRS does not appear to believe that the currently taxable portions of scholarships (e.g., the room and board component) triggers the need for withholding, I would not imagine that a non-cash award in the form of tuition remission would do so.

However, if Congress has an interest in learning the IRS’s definitive position on these issues, my understanding is that it could request the IRS make a specific administrative ruling such as the 1977 Revenue Ruling I discussed above, which was issued to clarify that athletic scholarships are not considered taxable income.  Conversely, as Congress is authorized to pass legislation specifically related to taxation, Congress could be proactive and take action to ensure that these scholarships not be subject to additional taxation and/or withholding provisions simply due to the employee status of athletes under the NLRA.  My surmise is that a (rare) bipartisan agreement could be reached to pass a law ensuring tuition grants to college athletes remain untaxed if there is any doubt that that is already the case.

The last portion of your question touches on economics rather than law, and here I feel I can venture an opinion with some level of direct expertise.  A private employer always has the option to provide compensation that includes a tax gross-up designed to leave the employee whole, even if a specific form of taxation becomes taxable.  My understanding is that gross-up is itself taxable,[5] but with a little bit of arithmetic it is possible to set the gross-up so that that the net payment to the employee is the same as the original gross payment, less applicable taxes.  The formula is basically Grossed-up Pay = Desired Net Pay / (100% - Effective Tax Rate)

As a simple example, if the employee received a $5,000 stipend that became taxed after a change in the law and was in the 10% tax bracket, a payment of $5,000/(100%-10%) or $5,555.56 would result in payment of $555.56 in taxes and leave the recipient with the original $5,000.

My understanding of NCAA rules is that payments unrelated to athletic aid are allowed up to a higher limit than those that can be made for athletic talent, and moreover, under the injunction issued by the Court in O’Bannon, even athletic aid can no longer be capped below that higher cost-of-attendance level.  Given these options, I would imagine that complying with the tax code could easily be categorized as consistent with what will remain of NCAA compensation caps.  To the extent that is incorrect, nothing about the NLRB decision would prevent the NCAA from changing that to ensure that its cap allows the gross payment needed to ensure the net receipt of after-tax funds sufficient to cover the cost of attendance.  And moreover, to the extent it did not, this would serve only to highlight that NCAA rules are generally more about collusion to lower University costs than any pro-student or pro-competitive benefit.

In addition, schools have access to a Student Assistance Fund, which in the recent past they have used to assist athletes to purchase income insurance.[6]  This would seem a readily available pool of money to use for any tax gross-up consequences.

On top of that, the NCAA has a provision, through bylaw 12.02.8, whereby it can declare the receipt of any specific type of fund not to be “pay” by their definitions and thus have no impact on amateur status as the NCAA defines it.[7]

Of course, all of the above discussion of how NCAA rules currently, or could be made to, accommodate any change in the tax status of student-employee-athletes presupposes some baseline appropriateness in complying with NCAA collusive rules on compensation.  The current rules have been found to violate the antitrust laws and starting in 2015, the NCAA has been enjoined from enforcing them as currently written.  Congress should applaud that move towards a market-based system rather than heed calls for an ill-conceived NCAA antitrust exemption. 

Prior to the recent O’Bannon ruling, the primary impediment to covering the full costs of FBS athletes’ attendance in college, whether to not they are subject to taxation, was the nation-wide, price-fixing cartel that has operated in the open and which limits compensation to these athletes.   When the Court’s injunction goes into effect, that specific cap will be raised and quickly it will become apparent that the cap was responsible for lower payments to the athletes in question.  That new, higher level of compensation, whether taxed or not, will exceed their current payments and athletes will be better off.  They would be better off still if there were no limits at all, and the market were able to reach a natural equilibrium free of all price fixing.

I very much share your stated commitment to “greater economic certainty, more jobs, and bigger paychecks for hardworking Americans.”[8] I would urge you to oppose efforts by institutions, especially those who themselves pay no taxes and receive a large amount of tax-payer funded payments, to collude to suppress the market forces that would result in better pay for those who have developed valuable talents into marketable skills.  Collusion is the antithesis of the American values of hard-work, self-reliance, and reward for excellence. 

Your inquiry seems to assume that this collusion is appropriate and here to stay.  I disagree with the first half and I am hopeful that with the recent Court injunction, the second has become an incorrect prediction of the future.  I would ask you, and all members of Congress, especially those who consider themselves as exponents of the benefits of market-based capitalism, to work to end any and all collusion that prevents athletes from recognizing their full earning potential. 

Congress, especially those members of Congress committed to the benefits of free enterprise and market-based capitalism, should be extremely suspicious of any claim that the best answer for America is less, rather than more, economic competition within an industry.  The Supreme Court has made clear, on numerous occasions, that the antitrust laws are the bedrock principle of our free enterprise society:

Antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the freedom to compete – to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster. Implicit in such freedom is the notion that it cannot be foreclosed with respect to one sector of the economy because certain private citizens or groups believe that such foreclosure might promote greater competition in a more important sector of the economy. Cf. United States v. Philadelphia National Bank,374 U. S. 321, 374 U. S. 371 (1963).[9]

The Court elsewhere explained:

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conductive to the preservation of our democratic political and social institutions. But even were that premise open to question, the policy unequivocally laid down by the Act is competition.[10]

Other courts have specifically applied this logic to efforts by the NCAA to collude to stifle the market level of compensation paid to coaches:

… As the Supreme Court reiterated in Superior Court Trial Lawyers, 493 U.S. at 423, “the Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services… This judgment recognizes that all elements of a bargain—quality, service, safety, and durability—and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers.”[11]

These sentiments were also echoed by President Ronald Reagan, who explained:

“We who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success – only then can societies remain economically alive, dynamic, progressive, and free.”[12]

Collusion among firms to fix prices, wages, maximum scholarships limits, or any replacement of a market outcome with the pronouncement of a committee of supposedly superior wisdom, saps the essential commercial engine of the United States.  Given that this Committee is concerned with the best interests of the American Workforce, it should welcome an opportunity for young men with talent to earn a living – paying Federal taxes is happy side effect of earning one’s keep, especially in contrast with earning no income.  Under the current system, many athletes are kept sufficiently disempowered and low in income that the qualify for Federal assistance such as Pell Grants and sometimes even food stamps.  As I explained in my testimony to this committee:

Approximately 40 to 45% of all FBS football athletes come from families with low enough means that they receive Pell Grants. As one example, in 2006, 65% of UCLA’s Football Athletes received these government grants. In other cases, athletes qualify for food stamps. If collusion among major colleges were ended, economic competition would turn those Pell Grant recipients into skilled earners. As pay rose, these hard-working young men would pay taxes on the portion of their earnings above and beyond the athletic scholarship instead of being recipients of taxpayer-funded welfare.[13]

 

As I recently wrote in an article discussing the benefits of market competition:

 “In America, we’re supposed to value hard work and money well-earned. Corruption is what you get from violating the law, not from earning what you’re worth in the marketplace.”[14]

Elsewhere, I’ve described the likely result of the nation embracing a free-market solution for the ills of college football:

In our dynamic economy, markets adapt flexibly to new circumstances. In 1988, the Berlin Wall seemed a permanent feature of global geopolitics. A year later, it was gone, and the free market spread east, but slowly at first. Once the market took root, some looked back fondly to when economic competition wasn’t quite as fierce. But almost 25 years later, most would agree that the change was for the better.

For college football and basketball, when the price-fixing wall finally falls, tomorrow will be much like today. Over time, America will absorb its collegiate version of East Germany, bringing college sports into a market-based economy, keeping the best of those games but jettisoning the anticompetitive conduct. But for now the wall is still in place, and it’s time we chip away at the myths that have kept it standing.[15]

Congress and this Committee should help tear down that wall by embracing the belief that markets know best. I would urge the Committee to focus its concern on the real problem – nationwide collusion – rather than creating a tempest in a teapot about the low-likelihood scenario that tax policy will change based on the efforts by athletes to push back against the harmful, collusive practices of the NCAA and its member schools to stifle economic freedom.

 

 

Question:

  • If they are employees, can they be “fired” (their scholarship taken away) for poor performance on the field (like any other employee)?
  • Current NCAA rules do not allow for aid to be withdrawn for poor on-field performance.

Summary Answer:

  • No more (and perhaps less) than currently.  
  • False statement.

Full Answer:

You second sentence is false. At most FBS schools, the current contract (whether you consider it an employment contract or not) states that a player’s athletic aid cannot be cut during the school year that it covers, but that it is renewable at the discretion of the school.  In fact, even the initial offer can be withdrawn (at the school’s unilateral discretion) prior to enrollment, so that an athlete can commit to a school and sign a letter of intent, but upon arrival will be informed there is no scholarship for him.  Thus, the vast majority of current FBS football players can be, as you put it: “fired” at the discretion of a coach or the school.  I would argue this is actually a harsher set of firing conditions that those faced by “any other employee.”

In 2011, in a rare nod to a slightly more competitive environment, the NCAA ended a 37-year period of collusion on the length of allowable athlete contracts.  From 1973 to 2010, no school was allowed (under threat of being boycotted by all of NCAA members) to provide an athletic scholarship that lasted more than one year.  This restriction was driven by a concern by coaches that players might not try hard enough at football if they knew they would continue to receive an education without devoting themselves fully to football; the ban on multi-year scholarships had no academic justification.  Over the decades, many players were “fired” for their poor performance on the field.  With this change in the rules, we are seeing the initial workings of the competitive process.  At first, a few schools changed their policies (notably, Illinois and Fresno State were early adopters of the four-year model[16]) and began to compete in the marketplace with guaranteed 4-year deals.  Slowly momentum has built and recently Pac-12 and Big Ten schools have begun to do the same. 

As one example of how competition can serve as the engine for improved academic integrity, originally Indiana University resisted providing multi-year scholarships; their head coach (Kevin Wilson) stated “he didn’t want to give his athletes the ‘carte blanche’ he believes would come with a four-year scholarship.”[17] However, within a year, as other schools began adopting more educationally-focused four-year offers, Indiana made a bold, competitive move, announcing what they described as a “bill of rights” where every scholarship is guaranteed for life, namely the athlete will continue to have his education paid for, for as long as required for him to graduate.[18]  It took the NCAA 37 years to allow this competition to occur.  It took only one year for market competition to turn Indiana from a professed doubter of the benefits of multi-year scholarships to a competitive trailblazer.  Within a month, Maryland (despite other claims of financial distress) announced it would match Indiana’s lifetime scholarship offer in order to become “the best intercollegiate athletic program while producing graduates who are prepared to serve as leaders in the local, state and global communities.”[19]

This is how competition tends to work, especially when the supply of talent (of sufficiently high quality to play FBS football) is scarce compared to the hundred-plus of schools in search of dozens of new players each year.

However, as of 2014, the one-year renewable contract remains more common among FBS football schools than multi-year scholarships (though fortunately this is changing rapidly).  Because one-year contracts remain common, many teams are well known for bringing in 25 (or more[20]) scholarship athletes a year and yet managing to stay under the 85 scholarship total limit imposed by the NCAA.  Given the 4 or 5 years of scholarship duration, this means between 100 and 125 athletes come into the system as scholarship athletes and yet only 85 per year receive scholarships.  Without a high level of attrition, this process cannot be sustained, as a simple matter of arithmetic.  This high level of attrition is only possible because schools “fire” many athletes each year. 

As I am sure the Congressman is aware, when private businesses contract with employees, it is possible to enshrine all sorts of employment terms into those contracts.  In a market where players were employees with all of the economic rights of any other American seeking to earn a living in a free market, those contracts could take on a variety of forms. If schools and athletes see preventing firings as a valid goal, they can enshrine that in a contract, whether individually or collectively bargained.  Economically, often employees are willing to agree to lower total compensation in exchange for greater job security.

We are fortunate to have many other sports employment contracts to look at for analogies of how the process might work. A college athlete contract might resemble either the contracts of NFL players (arrived at through collective bargaining) or of FBS coaches (individually negotiated).  To use FBS coaches as an example, they are employees and they often are fired for poor performance, but because there is high demand for them when are hired, they are able to negotiate terms of severance, such that they receive one or more years of additional compensation even though they no longer are employees.  In return, schools often receive a guarantee that should the coach leave voluntarily prior to the end of his contract, he will pay them a “buy out,” which often is then covered by the coach’s next employer.

I would envision that the competitive process for FBS athlete talent would be similar – terms of severance would be negotiated such that (as one possible example) a player who did not live up to his potential would be offered a choice of (a) a termination payment, (b) the right to continue his academics at his school under similar scholarship terms but without being a member of the football team (or using up a roster slot) or (c) the right to transfer to the school of the athlete’s choosing to play football without his original team exercising any veto power over his new school or the terms of that school’s contract. 

While this is just one example of a possible market-based outcome, it points out that giving athletes the power to negotiate the terms of their termination in conjunction with giving them the right of access to a competitive market is almost certainly going to improve their lot over that of the “fired” athletes today.

Similarly, while NFL players are often cut, they continued to be paid any guaranteed amounts in their contracts.  And they are paid for the duration of their contract if they are unable to play due to injury.  I think almost any player would prefer to be fired under the terms of a typical rookie contract in the NFL, with an upfront signing bonus and some level of guaranteed money, than to be “fired” by Alabama after a season or two at the coach’s discretion.

 

Question:

  • 3. Are all student-athletes equal employees?
  • Are all within a certain institution required to have the same “salary”?
  • What about Title IX issues?

Summary Answer:

  • It depends on what you mean by “equal,” but generally No.
  • No.
  • Title IX isn’t a mandate to pay individuals identically.

Full Answer:

I know of no business in America that would say all of their employees were “equal” in terms of their job performance, their market value, their personal experience, their strengths and weaknesses, etc.  I suspect this belief may have provided some of the motivation for Congressman Marchant, Chairman, Kline’s and several other committee members votes against the Lilly Ledbetter Fair Pay Act of 2009.[21]  Nevertheless, as American citizens, we are all equal in the eyes of the law, which is one reason why it pains me to see a small class of highly talented Americans denied the right of access to the same open, competitive market forces that benefit the rest of us, by an organization whose bedrock principle is a legally recognized form of price fixing.

In an article I recently published entitled “What’s Karl Marx Doing In These Arguments Against College Athlete Pay?”[22] I explained how the concept that everyone working an identical amount of time is owed an identical amount of pay has its roots in the “Labor Theory of Value,” which today is most closely associated with Marxism.  Generally speaking, market-based capitalism argues that compensation should be tied more to supply and demand conditions (with scarcer talent that has more revenue generation potential tending to receive higher compensation than less scarce talent with lower revenue generation potential).[23]

I was not exaggerating when I suggested that Big 12 Commissioner Bob Bolwsby’s views on the economics of college sports were founded on this form of Marxist labor theory, as he himself confirmed on a panel in New York on August 6, 2014: 

“… If you apply any form of the labor theory of value, that is to say the work that goes into something is determinant of the cost, football and basketball players don’t work any harder than any other athletes. They don’t work harder than swimmers. They don’t work harder than field hockey players. They don’t work harder than wrestlers. They just happen to have the blessing of an adoring public.[24]

Currently, universities do not follow a one-paycheck-fits-all method of compensation, either with respect to athletic coaches or to athletes.  As an example from Congressman Marchant’s neighboring state of Louisiana, Les Miles, the head football coach of LSU, earned over $4 million per year in 2011-12, while the head men’s swimming coach at LSU, earned only $119,200 that same year.  Nor should it surprise us that the average scholarship athlete on LSU’s football team received a reported $34,000 in athletic aid, while the average men’s swimmer on scholarship received only $17,443.    

Congressman Marchant’s home state’s flagship school, the University of Texas, shows a similar disparity; as I wrote in my recent article:

“[In] Austin, … the men’s swimming coach—of a very successful program that won a national championship in 2010—made something around 5 percent of what the football coach made. Put it this way–if Mack Brown belongs to a church that encourages tithing, and he tithed that year, his contribution could have purchased two men’s swimming coaches.”[25]

So no, to my knowledge, no college or university in the country is required to pay (or does pay) identical salaries to all professors or to all coaches, nor do they pay equal scholarship amounts to all athletes.[26]  I would not expect that to change if athletes had the right to bargain collectively or if athletes had access to a non-collusive marketplace for individual negotiations.  However, because each college would have the right to bargain for what it thought was best, if a school decided that it wanted to impose a common “salary” structure on its athletic department, I know of no legal impediment to that being their offer in a collective bargaining process, and indeed the recent Court decision in O’Bannon recognized equal pay as a possible outcome under the pending injunction.  If the players’ union agreed with this premise, it could be enshrined into a CBA, but it would not be a legal requirement imposed from without; it would be the result of arm’s length negotiations. 

Please recognize that if this did occur, it would be a dramatic change from every FBS school’s current practice; not a single FBS school pays all coaches identically nor does any school give all scholarship athletes identical levels of aid.  Some have suggested that equal pay might be more consistent with a form of amateurism (such that pay is not based on performance, a taboo in NCAA circles), so if that egalitarian urge ran strong at a given school or in a given conference, a common pay structure among all athletes would be a possible outcome (though currently prohibited by NCAA rules[27], which effectively require athletes in some sports to receive less than athletes in other sports), though not one I would think would emerge for purely economic reasons.

As for Title IX, I have written somewhat extensively on this, especially on my own economics web site, sportsgeekonomics.com. Below I provide links to some of those posts as well as a summary of my conclusions.  In the amicus brief submitted to the NLRB that I helped write, my co-authors and I summarized our economic understanding of how Title IX would work in a less-collusive environment in which some level of individual or collective bargaining were possible for FBS football athletes.  We wrote:

“Title IX (as applied to college sports) is primarily about equality of opportunity[28] for athletic participation, but also contains provisions on financial aid and other equitable treatment.

 Title IX offers three ways to comply with respect to participation, [29]

  • Substantial proportionality with the male/female ratio on campus;
  • Continued progress in offering opportunities to women;
  • Meeting the demand for opportunities of all interested women on campus.

With respect to Financial Aid:

  • Title IX does not require that individual men’s and women’s scholarships be equal.[30]
  • Title IX does not require equal overall funding to men and women’s sports.[31]
  • Title IX does require scholarships/financial aid be substantially proportional to participation. [32]
  • Title IX has been ruled not to require equality of pay if based on “a business decision to allocate… resources to the team that generates the most revenue.” [33]

Finally, Title IX also covers a wide variety of additional topics, generally stating male and female teams must be treated equitably on what’s called the “laundry list” of issues, such as equity in the provision of locker rooms and training space, supplies, coaching, etc.[34]

Most relevantly, “Title IX does not require that individual men’s and women’s scholarships be equal.”[35]  So the very clear language from the Department of Education flatly contradicts the premise that Title IX would somehow mandate equality of payment across each athlete. 

However, the financial proportionality rules of Title IX like may require that some portion of additional financial benefits negotiated by male athletes result in “substantially proportional” increases in financial benefits to female athletes.  The amicus brief of some of the private universities presented this as if the potential for higher aid to female athletes was a problem:

“If scholarship football student-athletes are determined to be employees for purposes of the Act, and through collective bargaining receive greater benefits for themselves, the proportionality mandate of Title IX will require that colleges either increase the benefits to female student-athletes proportionately, or decrease the benefits provided to male student-athletes in other sports. Depending on the extent of the additional benefits obtained by the unionized football student-athlete “employees,” universities may be required to do both: decrease the number of scholarships in other male sports and increase the benefits provided to female student-athletes.” [36]

However, to my eyes, this is actually a feature of the law.  To the extent that male athletes are able to use their economic value to bargain (again, whether collectively under the NLRA or individually in the absence of collusion among schools) and they receive improved compensation that is subject to gender proportionality under Title IX, then schools will bargain knowing that the aggregate increase in compensation to male athletes will require a “substantially proportional” increase in compensation to female athletes as well.  The result will be that the bargained-for male compensation will be somewhat less than it would absent Title IX, and the difference would go towards additional funding for female athletes.  To my mind, this seems entirely consistent with the goals of Title IX and likely to result in increased funding for female athletes.

For more detail on the economics of Title IX, I would point the Committee to some of my writings.  One is a Deadspin article: “Don’t Let Anyone Tell You The O’Bannon Ruling Conflicts With Title IX” available at http://deadspin.com/don-t-let-anyone-tell-you-the-o-bannon-ruling-conflicts-1620712195

The rest can be found here: http://sportsgeekonomics.tumblr.com/title9, but I recommend the following in particular to dispel some of the more egregiously false myths associated with Title IX:

For an empirical demonstration (based on 2011-12 data) that Title IX didn’t prevent the schools in the then-six major conferences from spending between $2 and $5 on men’s sports for every $1 in women’s sports spending, see http://sportsgeekonomics.tumblr.com/post/14676890068/title-ix-doesnt-work-like-you-think-it-does-2010-11

As one simple example from 2009-10, “Alabama spent $43mm on men’s sports and $13mm on women’s.  Of course, Auburn matched them in inequality: $42mm spent on men’s sports, $13mm on women’s.”  See http://sportsgeekonomics.tumblr.com/post/8410434598/title-ix-doesnt-work-like-you-think

And for the basic idea implicit in your question, that Title IX requires all athletes to receive identical compensation, please see http://sportsgeekonomics.tumblr.com/post/7809806793/title-ix-what-it-does-and-doesnt-require, where I show that in 2009-10, the average women’s scholarship at Georgia was 52% the size of the maximum football scholarship (and Georgia is actually among the best schools in terms of Title IX compliance).

Question

  • If their “job” is being an athlete, does that render their performance as a student irrelevant?
  • Can we still require good academic standing as a prerequisite for continued “employment”?

Summary Answer:

  • No.
  • Yes.

Full Answer:

Underlying your question is a more fundamental economic question, which is whether college football needs its participants to be college students to generate comparable levels of consumer demand as they do today.  In other words, it is an economic question as to what drives consumer demand for college football.  Based on my study of the issue, I think it is driven by two primary (and perhaps obvious) factors – college and football.  Americans love football and we particularly love seeing football played as a competition between college students.  So with that as a basic understanding, it would seem that the rational outcome among colleges wishing to produce successful football programs would be to continue making full-time enrollment in a college be a prerequisite for participation.  Failing to do so would threaten one key component of what makes the product desirable to consumers.

So I don’t see any impetus from schools to suddenly drop the requirement that its college athletes attend college.  I also do not see any likely impetus from a union to prevent its membership from receiving a college education as part of the compensation they receive in exchange for playing football at FBS universities.  Thus, this seems to be a concern in search of a problem.

Many industries have conditions that must be made prior to employment.  For example, my understanding is that Members of Congress are employees of the Federal Government, but that nevertheless, a requirement of that employment is that they be residents of the Congressional District (for the House) or State (for the Senate) they represent.  Other jobs may require some minimum level of education – my understanding is some school districts require their teachers to have a master’s degree to teach, even in the case of unionized teachers.  These are examples of requirements imposed on an employee as a condition of employment.  With the continued caveat that I am not a lawyer, I know of no legal impediment to an employer insisting, as a condition of employment, that its employees meet certain educational standards.

Many schools currently employ students in work-study jobs and my understanding is that being a student in good-standing at the university in question is a requirement for holding those jobs.

Economically, because I believe it is demand-enhancing to bundle together the college and football aspects of college football, I think it would be unlikely for the employers (schools) in a collective bargaining situation to agree to any agreement that allowed less than full-time student participation with sufficient grades to pass some minimum threshold, as exists today.  To my understanding, the current union effort seeks to increase, rather than decrease, the educational component of being a college athlete.  So it seems a fairly remote concern, and one that schools could prevent through the bargaining process simply by refusing to agree to anything that would jeopardize the “college” element of college football.

One real benefit of a more free-market approach to the sport would be that, if freed from NCAA restrictions on the types of financial packages they could offer, schools could provide strong incentives for high academic achievement, including graduation bonuses, and that athletes would have much more to lose if their poor academic performance (or off-field conduct) caused them to be dismissed for cause and to lose access to their contractual benefits. 

In my experience, when people are paid well for specific targets, like high grades, graduation, etc., it tends to act as an incentive and to result in more favorable outcomes.  The stronger the benefits of doing well in school, the more likely a student will take pains to do well in school.  I would love to see schools in a position where they can put their money where their professed focus is, and to use compensation and incentives as a tool for increasing graduation rates among FBS athletes, rather than simply relying on punishments for the schools with the most egregious non-graduation rates.  As I stated before, neither money nor the pursuit of money is corrupt.  Corruption comes from violating laws and from efforts to extract ill-gotten gains from a system filled with profit.  In contrast, well-chosen financial incentives can provide excellent tools for schools to improve the nexus between education and athletics, far better than efforts to “integrate” athletes into the campus through denial of market forces (and athlete rights). 

I thank the Committee for this chance to address your questions, and I look forward to any additional assistance I can provide.

Sincerely,

 

Andy Schwarz

Partner, OSKR LLC



[1] Rev. Rul. 77-263, 1977-2 C.B. 47, at *2 (1977).

[2] 26 U.S.C. § 117(d)(2)

[5] i received such a gross-up when I received a signing bonus from Hewlett-Packard in 1994, and I paid income taxes on the bonus and the gross up.

[6] Two recent examples include an athlete in your state: Cedric Ogbuehi of Texas A&M (http://profootballtalk.nbcsports.com/2014/07/17/cedric-ogbuehi-passed-on-the-draft-texas-am-bought-his-insurance/), as well as Heisman Trophy winner, Jameis Winston of Florida State (http://espn.go.com/college-football/story/_/id/11310051/jameis-winston-insurance-policy-paid-part-florida-state).

[7] “12.02.8 Pay. Pay is the receipt of funds, awards or benefits not permitted by the governing legislation of the Association for participation in athletics.”

[10] Northern Pacific. Ry. Co. v. United States, 356 U.S. 1, 4-5 (1958) (citations omitted). http://www.law.cornell.edu/supremecourt/text/356/1

[13] See my written testimony before this committee, available at http://edworkforce.house.gov/uploadedfiles/schwarz_written_testimony_final_.pdf

[20] This process is known as “oversigning” and has resulted in many recruits not getting their promised scholarships despite being called “‘reprehensible,’ ‘disgusting,’ and ‘nefarious.’ “ by the President of the University of Florida: http://online.wsj.com/news/articles/SB10001424052748704444604576172954187357370?mg=reno64-wsj

[23] Of course, as you mention, Title IX is a federal law which moderates the pure working of the market, but as I discuss below, Title IX is not an absolute impediment to adoption of a market-based system.

[26] One important thing to note is that almost every FBS football scholarship at a given school is identical.  This is not because of a requirement, but rather because the price is fixed below true market value.   As a result, virtually every athlete receives the maximum market cap because it is the closest the collusive market can get to his higher open-market value of each athlete.

[27] See for example Bylaws 15.5.3.1.1 and 15.5.3.1.2 which limit the total aid to some sports to levels below 1 full scholarship per scholarship recipient.  http://www.ncaapublications.com/p-4355-2014-2015-ncaa-division-i-manual-august-version.aspx

[33] Stanley v. University of Southern California, No. 93-56185,http://www.leagle.com/decision/1994132613F3d1313_11121: “Coach Stanley contends that the failure to allocate funds in the promotion of women’s basketball team demonstrated gender discrimination. She appears to argue that USC’s failure to pay her a salary equal to that of Coach Raveling was the result of USC’s “failure to market and promote the women’s basketball team.” The only evidence Coach Stanley presented in support of this argument is that USC failed to provide the women’s team with a poster containing the schedule of games, but had done so for the men’s team. This single bit of evidence does not demonstrate that Coach Stanley was denied equal pay for equal work. Instead, it demonstrates, at best, a business decision to allocate USC resources to the team that generates the most revenue.”

[36] See http://mynlrb.nlrb.gov/link/document.aspx/09031d45817cd706 which is an Amicus Brief submitted by Baylor, Rice, SMU, Stanford, Tulane, USC, Vanderbilt, and Wake Forest). (emphasis added)

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Andy Schwarz

Worth your time: Legal Summary of the O’Bannon decision

Prof.John Wolohan of Syracuse University has written a detailed but accessible summary of the recent O’Bannon v.NCAA decision. You can find it here: http://www.lawinsport.com/articles/intellectual-property-law/item/your-full-review-of-the-o-bannon-v-ncaa-judgment?category_id=124.

I have quibbles on the edges with some of his interpretations, but if you are looking for a quick way to digest the decision, I highly recommend this as a starting point.

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Andy Schwarz

Worth your time: John Infante on the so-called “autonomy”

John Infante is my favorite “I often disagree but always respect him” college sports analyst.  In this case, I think he has captured the essence of the economics of the market in which there is lots of demand for football of varying quality and lots of supply of players of varying quality.  Namely, that tiers of quality will emerge and that talent will sort out broadly by the value of that talent to generating revenue.  In other words, Infante’s analysis is consistent with the Invariance Principle[1] (from a paper published by Simon Rottenberg in 1956), which was the first sports economics paper and considered by many as the the foundation of the discipline.

I don’t agree with every point in Infante’s analysis, but I strongly agree with the idea that expecting schools to quit playing football if they can’t match the market price for a 5-star athlete is wrong.  Instead, as Infante explains they will stay in the market and acquire fewer stars worth of talent at lower prices.  (again,like they do now)

I recommend it and you can find it here:

http://www.sportingnews.com/ncaa-football/story/2014-08-19/autonomy-will-save-more-football-programs-than-it-kills-hawaii-mid-major-programs



[1] The paper itself is available at http://www.vanderbilt.edu/econ/faculty/Vrooman/rottenberg.pdf

For more on this, see http://www.vanderbilt.edu/econ/faculty/Vrooman/vrooman-econsport-intro.pdf

 ”The economics of sport is celebrating the golden anniversary of its origin in a seminal paper by Rottenberg [1956], where he presages the Coase theorem [1960] in a cogent argument about the impact of free agency on the baseball players’ labor market. According to Rottenberg’s invariance proposition, free agency would yield the same talent distribution as the reserve system in American baseball. The difference was that free agency would weaken monopsonistic exploitation of players trapped in the reserve system, and allow them to be paid their marginal revenue product. The theoretical foundations of the economics of sport are found in the elegant mathematical proofs of El Hodiri and Quirk [1971], in public policy awareness of Noll [1974], and for Europe, in Sloane’s [1969] early discussion of the European football market. The modern awakening of sports economics came when Quirk and Fort [1992] published a popular version of Quirk’s early models, followed by two separate adaptations of the model to the new realities of the rapidly changing American sport-scape [Fort and Quirk, 1995; Vrooman, 1995].”

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Andy Schwarz

We are not in the Wild West

Having just returned from a father-and-son road trip that included a trip to Deadwood, SD, I just wanted to clarify one thing.  In the *actual* Wild West, what made things so scary was the absence of law enforcement.  People had to take the law into their own hands, and violations of the law were plentiful. 

In contrast, in a world in which the NCAA as well as  “… its respective officers, servants, employees, agents, and licensees, and all persons in active concert or participation with it, including its member schools and conferences,” (plus anyone who receives the injunction via service) is prohibited from fixing prices, what’s scary is not that lawlessness will run rampant, but actually the opposite — that violations of the law will now be punished.

To continue the metaphor, the people who are worried now are those who for years have thrived in the wild west — those who have violated the law with impunity, and in taken the law in their own hands.  They are now scared because their natural lawless habits are going to be punished if they don’t change their ways.  In other words, it is the gunslingers, not the peaceful citizens of Deadwood, for whom the new era is scary.

[I’ll note that according to School Bus Dave who took us on the Kevin Costner Bus Tour of Deadwood, one of the theories for why Wild Bill Hickok was shot was for this very reason — the town of Deadwood was afraid he might bring with him an enforcement of the law and so many of them made their living through illegal activities (gambling, prostitution, claim jumping) that they wanted to make sure that the West *stayed* wild so they could continue their non-law-abiding ways]

I’d recommend pushing back on people when they say enforcement of federal law is ushering an era akin to the Wild West.  I think the concern people are expressing is an actually a worry that the New Sheriff in Town is actually a sheriff, and the new rules being imposed are actually the law.

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Andy Schwarz

Team Reform spotted in the wild

"Nearly everyone recognizes the corrupting effect of money on college sports" — Tom McMillen.

This quote comes from commentary written by former Congressman and Maryland basketball star, Tom McMillen.  McMillen also explained:

"There has been no real effort to curb the massive spending in college sports, which is financially and morally bankrupting our institutions of higher learning."

"…big money sports will go on corroding the core educational purposes and values of our colleges…"

I try very hard in my writing not to create straw men, or caricatures of other’s arguments, but I think I captured McMillen’s view of money and of the goals of NCAA reform when I described “Team Reform” in a recent piece I wrote for Deadspin:

I think the theory behind de-commercialization is that if the product isn’t selling quite as well, there will be less incentive for schools to provide the product at any cost, and as a result the economic pressure to pay more for coaching, facilities, and even players will decline. As will, goes the theory, the incentive to invite in athletes unable to perform academically or to provide them with phony educations designed to keep them eligible just so they can continue to generate revenue through athletics. At core, it is rooted in the idea that money itself is a corrupting force to academia and that absent the lure of filthy lucre, the administrators of college campus would return to their quasi-parental role of educating young men, independent of their ability to generate revenue as athletes. It is rooted in paternalism, in that assumes the problem is that the men and women who run campuses are letting money divert them from their duty to serve in loco parentis for these young, unmolded, uncorrupted men.

But as I explained, this focus on money as the root of all evil misses the real problem:

In America, we’re supposed to value hard work and money well-earned. Corruption is what you get from violating the law, not from earning what you’re worth in the marketplace.

Tom McMillen is classic Team Reform.  I hope his proposed Presidential Committee has some representation from Team Market.

And yes, I  hereby volunteer.  :-)

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Andy Schwarz

Judge’s Ruling & Injunction in O’Bannon case

Here are the three rulings issued today, along with a 2000 Paper that I co-authored explain 14 years in advance, why today’s ruling was correct. 

Timing being everything in life, I was sitting in a chain Mexican restaurant in Elko, Nevada on day 2 of a 9-day roadtrip with my son when my email buzzed that there was an entry in the O’Bannon case docket.  I grabbed it and saw it was a holding in favor of the plaintiffs.  My son and I hit the road and he had the duty of reading it to me as we drove towards Salt Lake City, where we now are.  I plan to read these in detail, but in case you want to do so as well, they are presented below.

Enjoy!

Ruling: https://drive.google.com/file/d/0BxM4wdtZ5uI-dTR0akNjTlRhTlU/edit?usp=sharing

Injunction: https://drive.google.com/file/d/0BxM4wdtZ5uI-VlVXdXNWRXhxdHM/edit?usp=sharing

Clerk’s Order: https://drive.google.com/file/d/0BxM4wdtZ5uI-WHNtMjNTd2dIQkE/edit?usp=sharing

Rascher & Schwarz Article explaining why this should have happened, published in 2000:

https://drive.google.com/file/d/0BxM4wdtZ5uI-TFhyZFdCOXNlekE/edit?usp=sharing

(Yes, this is a bit of a gloat link here, please forgive me my exuberance!)

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Andy Schwarz

Preparing my new hashtag

In the fabulous movie “This is Spinal Tap,” Fran Drescher plays a character named Bobbi Flekman, self-nicknamed “the hostess with the mostest”

At one point she goes from being all fake smiles to trying to explain a business decision and she says “Money talks and Bullshit walks

I’m going to start using #MTBSW as my new short-hand for whenever I see someone claim something economically irrational or, conversely,do something economically rational after claiming they would not do it.  If a school says they are too poor, and then spends large amounts of money, or if a school claims it would join division iii if forced to do x, but then doesn’t, they will get the #MTBSW hashtag.

I say this because over the next couple of years, as rules changes and (possibly) Court injunctions change the landscape, it feels like we’re going to need a short way to quote the insighful wisdom of Bobbi Flekman.

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Andy Schwarz

Short sports economics test

Imagine tomorrow the NFL CBA changed so that instead of getting approximately 50% of revenue, athletes got 25%. What would happen to ticket revenues, tv licensing fees, and cable bills to consumers. Extra credit for mentioning David Ricardo in context.

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Andy Schwarz

Questions from Congress

I received the following questions from Congressman Kenny Marchant (R-TX) with a due date of Aug 18.

[UPDATE!  Chairman Kline’s office was kind enough to give me an extra week to accommodate my family vacation plans, for which I am grateful]

image

Feel free to tweet me or add a comment below as to how I should respond.  Please don’t be hurt if I don’t reply to every comment on this one — I have a lot of other obligations between now and the 18th and so I am mostly just going to bang this out quickly, but I will look to see if any of the suggested comments are helpful.

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Andy Schwarz

Antitrust and Labor Law, Bookends of the Social Compact

Perhaps there is no more oxymoronic expression than “a thoughtful comment to an online article” but it actually happened in response to my recently published How Not To Reform The NCAA.  A few commenters said they did not share my Pollyannaish view of market outcomes.  It made me realize that much of what I said in that article, and in general about the suppressed labor market in college sports is very context dependent.  I do not think laissez faire approaches work best in all labor markets.  As an example, I strongly support the minimum wage and I think one of the worst symptoms of the income inequality that is emerging in 21st-century America is driven by the ways in which labor is forced to work at very low (or zero or even negative) wages at entry-level jobs, even though that is often a purely market outcome that can emerge when supply outstrips demand.

One of my friends and mentors as an economist, Doug Zona, once told me a simple way to explain how prices get set in an economy.  Price and quantity are set by three things: demand, costs, and strategic interaction among firms.  As demand goes up, price tends to rise as well (and likely quantity as well, all else equal). As costs go up, prices rise but quantity demand will tend to drop as price increases. And depending on how vigorously or not firms compete (and whether they are buyers or sellers in the market), price will rise or fall accordingly.  And that’s basically it.  So when I look at a labor market and I see low wages, there are basically three categories of symptoms:  demand/supply issues, cost issues, or collusion issues. 

The first and the last of these are salient here.  When labor supply outstrips demand, price (wages) will tend to go down, even under vigorous competition among employers.   And on the other end of the spectrum, where demand outstrips supply, really only collusion among employers can serve to keep wages from rising.

That’s not confined to labor or sports markets, but it does help explain why I think Labor law and Antitrust law are the equivalent of the out-of-bounds lines on the sports-economic playing field, one designed to prevent wage suppression when sports labor supply is too high for demand and one where it is too low.  Examples will help make this clear.

The case of demand for sports-labor exceeding supply is all around us, especially as college football season is gearing up for another late summer and fall of fabulous Saturdays.  Starting-quality FBS-level football talent is fairly scarce and so even though there is no minimum required athletic scholarship (I’ll use the NCAA term “grant-in-aid” or “GIA” throughout this article to mean athletic scholarship) in FBS per NCAA rules, it is extremely rare to see anyone who plays FBS football get anything less than the maximum-allowed GIA. And similarly, even though FBS rules only require a team to have 70 players receiving a GIA, it is rare to see fewer than 80 full GIAs given and more common to see all allowed (85) GIAs given by almost every team, year after year.  As a matter of economics, this is strong evidence that demand for talent outstrips supply.  if this were not the case, we would see a lot of schools making 70 full GIA offers and then skimping on the other 15 players — using walk-ons, offering 10% scholarships, etc.  but they don’t and this is because the cost to the team of replacing one highly-rated full GIA-worthy player with a less-qualified athlete is higher than the cost of that scholarship, and competition (such as it is) from other teams drives up the price.

Anyone (and I’m thinking of you in particular, Seth Davis, but there are plenty of others who share this view) who tells you that most athletes on an FBS football roster who get “paid” more than they are worth to a team is ignoring these basic economic facts - in essence they are saying they believe that teams are persistently acting irrationally, and I just don’t think that’s how thriving profitable industries work.  Put it this way — if the last 15 full GIA players are a cost-burden to a school, but somehow they feel compelled, irrationally, to make full GIA offers, why are schools so concerned with avoiding a 3 or 5 or even 10-GIA penalty.  If the last 10 recruits on a team aren’t worth a full GIA, the Reggie Bush sanctions that USC experienced ought to have given them a leg-up on their competition. No one thinks that’s true.  And the fact that it is not true is further evidence that even the last guy getting a GIA is worth every penny, and likely more.

Ok, but I’ve written tons about this over the last three or four years, and if I haven’t convinced you yet, nothing short of the market emerging and proving me right is likely to convince you.

Today’s new insight is to think about what happens when firms don’t *need* to collude to keep down prices, because the interplay if supply and demand allow employers, acting unilaterally, to suppress wages. Lots of examples have been in the news lately — unpaid interns, underpaid cheerleaders, and even minor league baseball players.  But it’s not a new phenomenon to anyone who has read John Steinbeck  or even Patrick Hruby.  When labor and talent isn’t scarce, relative to demand, wages will tend to go down and when people are desperate for work, either because they will literally starve without it, or because they see that work as a shot at a better career in the long-run, and  working for free has a higher long-run payoff than refusing to do so.

This is a sufficiently common phenomenon that we have laws against it.  The Minimum Wage exists, primarily, because of a recognition that the equilibrium wage in many professions will be below the societally acceptable minimum we want a worker to receive for a hard day’s work.  It’s a recognition that under certain supply & demand conditions, pay will be pushed down below what we think the baseline should be.

Minimum Wage laws do distort the market outcome, at least on the margins.  Probably our labor markets are a little less efficient (in the economic sense) than it would be without them.  But social-economic-political policy is not solely informed by efficiency and when we as a nation pass laws to better emphasize other goals, like a statement that working a full day should be sufficient to stay out of poverty, that’s a valid exercise of collective political will to shape economic policy.  We are a republic, and we capture (generally) the will of the people through legislation.

And thus back to the bookends. We have laws to protect labor when demand exceeds supply and we want those coveted workers to reap the fruits of their effort and skill— the antitrust laws.  (See, as just one example of this, the recent high-tech worker cases settled by the DOJ). This is the case where the market would be the friend of labor but (absent law enforcement) collusion among employers prevents that outcome.   And on the other end of the demand/supply spectrum, we have laws to protect labor from the market itself, when market conditions so favor employers that the equilibrium wage is below what we consider the proper floor.

So it’s not that I am Pollyannaish about ALL market outcomes.   It’s just that when I see excess demand for labor, I am confident that trust in the market is sufficient to do the heavy lifting of getting us to a fair allocation of the profits of the labor.  When there is excess supply, different prescriptions are needed to solve the resulting ills.  Markets aren’t panaceas, but  not every problem requires a cure-all if a cure-it exists.

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Andy Schwarz