Deck 9: Labor Market Imperfections

Question 1

Free agency came to MLB and the NFL in different ways because

A) the football owners practiced collusion while the baseball owners did not.
B) the MLBPA had to rely on the courts.
C) the NFLPA had to rely on the courts.
D) the NFL had a limited exemption from antitrust laws, and baseball did not.

Answer 1

C

Question 2

Why does the monopsonist's marginal expenditure curve lie above the supply curve of labor?

Answer 2

A monopsonist in general cannot tell exactly which seller is willing to sell for how much. Thus the cost of purchasing a little more labor is to raise the wage rate for all workers. The cost of buying a little more (marginal expenditure) is thus higher than the cost of the additional purchases because the monopsonist must spend more on all previous workers as well as the new workers hired. Thus the marginal expenditure curve lies above the labor supply curve at any given quantity of labor.

Question 3

How do unions help to combat monopsony wages?

Answer 3

In the absence of a players' union, leagues pay their players a monoposony wage which is below the competitive wage. Professional sports leagues such as the NBA can do this because they are one among a few employers for professional basketball players. Unionization turns the many players who compete against each other as sellers of player talent into a single entity. The situation becomes one where a single buyer (the league) faces a single seller (the players union). Such a situation is called a bilateral monopoly with the wage being determined between the monopsony wage and the union wage. The exact wage and working conditions will depend on the negotiating power of both sides.

Question 4

Owners have objected that free agency would ruin competitive balance (i.e. the Yankees and Dodgers would get all the best players). Present two arguments against this point of view.

Question 5

A friend tells you, "I know why the NBA players went on strike in 1998. It's because both sides are so greedy." What do you tell your friend in response?

Question 6

Distinguish between a strike and a lockout.

Question 7

In November 1989, the NFL Players Association, the union for NFL players, disbanded. Why?

A) The union was bankrupt due to failed strikes in 1982 and 1987.
B) The players were upset with the union's lack of ability to gain full free agency for its member and wanted to bring in new leadership.
C) The union wanted to remove the NFL's nonstatutory labor exemption and pursue an antitrust claim against the league. This could only be done by decertifying the union.
D) The court had declared in Powell v. NFL 1987) that union was guilty of conspiring against the NFL in order to raise wages.

Question 8

In 1998 Congress passed the "Curt Flood Act of 1998" guaranteeing Major League Baseball players protection under the federal antitrust statutes in their labor dealings with baseball owners, repealing baseball's antitrust exemption with respect to labor negotiations. Given the fact that MLB players are unionized, what one specific power does this law grant to MLB players that they did not have before?

Question 9

Explain how reserve-order entry drafts and the reserve clause create monopsony power for teams within a league.

Question 10

Classify unions into their two major categories. Briefly explain each category.

Question 11

Why could professional baseball not use the courts as a mechanism to end the reserve clause?

Question 12

What was the most contentious issue of the 2002 baseball agreement?

Question 13

The ruling that NBA teams did not have to pay guaranteed contracts during the NBA lockout probably

A) caused the settlement to come quicker and more favorable to the union.
B) caused the settlement to come slower and more favorable to the owners.
C) had no effect on the settlement's timing but made it more favorable to the union.
D) had no effect on the settlement's timing but made it more favorable to the owners.

Question 14

In final offer arbitration players and owners submit positions to an arbitrator

A) who then chooses a wage they think is appropriate.
B) who must choose one position or the other.
C) who sees that the decision is binding on both parties.
D) who tries to get both parties to agree.

Question 15

In a world of perfect information, why do economists view the existence of strikes and lockouts as errors?

Question 16

European soccer players are free to sell their services to any team in any league. How would it affect the profitability of these teams if instead players were bound by a reserve clause? Use a graph to show how wage rates would differ under the two scenarios.

Question 17

"The salary cap of the early 1980s saved professional basketball" Agree or disagree. Explain.

Question 18

In Wood v. NBA (1987), the court ruled that the NBA's salary cap and draft rules did not violate antitrust laws because:

A) The salary cap and draft did not significantly restrain trade.
B) The NBA did not have a monopoly on the purchase of basketball talent as other leagues existed where players could be compensated for playing basketball including European professional leagues and American colleges and universities.
C) The NBA was not subject to antitrust laws due to the nonstatutory labor exemption.
D) All of the above.

Question 19

Name the first professional sports strike to affect regular season games.

Question 20

Free agency in the NFL has

A) increased average incomes but caused the Gini coefficient to rise.
B) increased average incomes but caused the Gini coefficient to fall.
C) increased average incomes but left the Gini coefficient unchanged.
D) increased median incomes but caused average incomes to fall.

Question 21

What happens to the magnitude of the deadweight loss in Figure 9.2 if after the wage is agreed upon, demand for the sport falls.

Question 22

What effect might the dramatic increase in players from European countries have on the NHLPA's ability to negotiate a collective bargaining agreement?

Question 23

Why do unions advertise the sports (not just the players) that they represent?

Question 24

Is it likely that professional golfers will unionize? Why or why not?

Question 25

Under what circumstances would a union favor the once-proposed contraction of Major League Baseball?

Question 26

The set of possible points that are agreeable to both sides in known as the:

A) Agreement zone.
B) Contract zone.
C) Play zone.
D) Strike zone.

Question 27

In a bilateral monopoly, wages will be:

A) Equal to what would be paid by a monopsonist
B) Equal to what a union would demand.
C) Equal to what would be paid in a perfectly-competitive labor market.
D) Between the wages paid by a monopsonist firm and the wages demanded by a union.

Question 28

Strikes generally occur as a result of:

A) A need for consistency across contracts.
B) Uncertainty.
C) The threat of a new league.
D) An attempt to damage the other side.

Question 29

The Association of Tennis Professionals (ATP) is similar to a(n):

A) Industrial union.
B) Worker Co-op.
C) Company union.
D) Craft union.

Question 30

Draw a graph similar to Figure 9.1 to show the effect of a union advertising campaign designed to increase demand for the product.