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.