A previous article on this website (Why buy a football club?) focused on the issue of why people buy football clubs. This blog refers to the somewhat strange situation where people who have made large amounts of money from a very successful business career always seem to lose money when they invest in a football team.
The Deloitte’s report into football finance found that in the 2012/13 season only half the clubs in the English Premier League (EPL) made an operating profit – profits excluding net transfer expenditure. When the impact of transfer expenditure is included, even fewer clubs make any money. For example, the three teams battling it out for the EPL title this year, Chelsea, Liverpool and Manchester City, reported losses for 2012/13 of £49.4 million, £49.8 million and £51.6m respectively.
What makes the size of these losses even more astonishing is that they have occurred in a period when the revenues earned by the top clubs have increased rapidly. In 2004/05 the combined revenue of the 20 EPL clubs was £1.3billion. By 2011/12 this figure had increased to £2.36 billion.
Given these rapidly rising revenue streams, the main explanation for this poor profit performance is the growth in players’ salaries. It has been estimated that approximately 80% of the increase in revenues generated by the team in the EPL since it began in 1992 have gone to the players in higher wages. In 2011/12 the total wage bill in the EPL was a staggering £1.658 billion, with an average wage bill of £83 million per club. The average weekly wage of a player has doubled over the past six years and is now estimated to be between £25,000 and £30,000 per week.
One deal which recently hit the headlines was that of Wayne Rooney who signed a five-year contract with earnings of up to £300,000 a week or £15.6m annually. However, Mr Rooney is still a long way short of the highest paid sports star. When based on wages and win bonuses, Forbes reported this to be American footballer, Aaron Rodgers, who was paid £25.75m in 2012-13!!!
One major factor that can partly explain this rapid increase in players’ pay is the increased competition for their skills. The potential impact of the transfer system on players’ mobility and wages was discussed in an article on the website in December (Recent challenges to the football transfer system). The career of Tom Finney provides an interesting case study of the impact of the monopsony power that the transfer system and maximum wage used to give the clubs.
Finney was one of the most talented footballers of the 1940s/50s but he played at a time when there was still a maximum wage and a transfer system that was far more restrictive that it is today. He first played in the youth team for Preston North End in 1936 aged 14. Apart for a three-year period between 1942 and 1945 when he served in the army during the Second World War, he remained with Preston for his whole career. He finally retired in 1959 at the age of 38 having scored 210 goals in 473 appearances. He also played in three World Cup final tournaments and scored 30 goals in his 76 international appearances for England.
When he died in February of this year many people talked of his loyalty to Preston and the fact that he only earned £20/week when he retired (the maximum wage at the time) and had to supplement his income by working as a plumber. However, interestingly in 1952 an Italian club – Palermo – tried to sign Finney from Preston on a deal which would have paid him a basic weekly wage of £32.25, a bonus of up to £100 per week and a signing on fee of £10,000. At the time he earned the maximum wage of £14 per week with Preston and received a win bonus of up to £2 per week. Palermo also offered him a luxury Mediterranean villa, a brand new sports car and unlimited travel between England and Italy funded by the club. Unsurprisingly, Finney was tempted by the deal and commented that:
There was a genuine appeal about the prospect of trying my luck abroad, not to mention the money and the standard of living.
However, because of the transfer system in place at the time, Preston could block the move. The chairman explained to Finney:
Tom, I’m sorry, but the whole thing is out of the question, absolutely out of the question. We are not interested in selling you and that’s that. Listen to me, if tha’ doesn’t play for Preston then tha’ doesn’t play for anybody.
The club also announced that they would not consider selling Finney for any transfer fee below £50,000. Palermo had offered £30,000 and the transfer record at the time was less that £20,000.
It is highly unlikely that football will ever return to a type of transfer system and maximum wage that gives the clubs the sort of monopsony power they had in Finney’s days. However a new set of policies have been recently agreed and introduced to try to slow down the increase in players’ pay. Financial Fair Play rules set limits on the size of financial losses that clubs can incur over a three-year period. If these rules are broken, then UEFA could prevent the guilty team from entering lucrative competitions such as the Champions League. The EPL also has the power to award points deductions.
With the combined revenues of the 20 EPL clubs forecast to increase by 24% to £3.080 billion in the 2013/14 season, it will be interesting to see how much of this money improves the financial performance of the clubs and how much goes into players’ wages.
Draw a diagram to illustrate the impact of a maximum wage on a perfectly competitive labour market and explain your answer.
Analyse the impact of the maximum wage on worker surplus, firm surplus and deadweight welfare loss. Draw a diagram to illustrate your answer. Comment on the impact of the maximum price on economic efficiency.
Draw a diagram to illustrate the impact of a maximum wage on a monopsonistic labour market. Assess its impact on economic efficiency.
Some authors have argued that the Financial Fair Play regulations are a form of vertical restraint/agreement. What is a vertical restraint?
Find an example of a vertical restraint in a different industry. What impact will it have on economic welfare?
Most football fans will probably never have heard of an organisation called FIFPro but, if it is successful, the labour market for football players could change quite radically.
FIFPro represents over 65,000 players from around the world. It is effectively an international trade union whose main objective is to promote the interests and defend the rights of professional football players. Its president, Philippe Piat, has recently announced that the organisation will challenge the way the current transfer system operates and is prepared to take its case to the European Commission and the European Court of Justice.
FIFPro’s argument is that players are being exploited under the current system. This may seem difficult to believe in the week when Luis Suarez signed a new four-and-a-half-year contract at Liverpool with earnings of £200,000 per week. However, referring to the transfer system, Piat stated that:
These legal and monetary shackles binding footballers to their current clubs can no longer be accepted and upheld. Football players are workers and only when they are able to enjoy the rights enshrined in law and enjoyed by all other workers, will Fifpro be satisfied.
In order to understand this argument, it is important to understand how the transfer system has evolved and how it now operates.
When the Football Association (FA) first accepted professionalism in 1885 it introduced a registration system. Before this reform it was possible for players to play for different teams each week. The new system meant that players had to register with a club at the beginning of each season. If a player was not registered with a team he was not allowed to play. He could only change team mid-season if his current club and the FA agreed to the transfer of his registration details to a different team. However, a player was free at the beginning of each season to register with a different team. Therefore there were no constraints on his mobility between teams from one season to another.
Significant changes were made to the system in 1893 when the retain-and-transfer system was first introduced. The new scheme allowed teams to keep retaining players they had initially registered for another year. This effectively meant that when a player was signed by a team he was tied to that team for as long as they wanted him. The mobility between clubs from one season to another had been removed. This gave the clubs significant monopsony power in the labour market. If a player wanted to change teams, he had to make a transfer request but the team was under no obligation to put him on the transfer list and allow him to move. Teams could decide to put players on a transfer list and would only allow them to leave if an agreeable level of compensation (a transfer fee) was offered by another team. A maximum wage of £4 per week was also introduced in 1901.
The system was periodically challenged and a number of minor changes were made. In particular, the conditions under which a player could be retained by a club were gradually altered. Originally a player could be retained by a club even if his contract was not renewed. Effectively a team could stop a player moving to another club by holding onto his registration without having to pay him. This was changed so that a minimum wage had to be paid to a player if he was to be retained by the team that held his registration.
The first major change to the system came in 1963 from a player called George Eastham. In 1959 he failed to sign a new contract with Newcastle United and made a transfer request which the club promptly rejected. Although they did eventually allow him to leave and join Arsenal, he still took his case to the High Court and the judge concluded that the retain-and-transfer system was an unreasonable restraint of trade. Following this judgment the system was amended so that, in order to retain a player, a club would have to offer the player a new contract with terms and conditions which were at least as good as the previous one. If this was done, then a player could be retained by a club and his registration would only be released if an acceptable transfer fee was offered by another team.
Perhaps the biggest change to the system was made in 2001 following the famous Bosman ruling. Jean-Marc Bosman had wanted to move to the French side Dunkirk, but FC Liege, the club that held his registration, demanded a transfer fee that Dunkirk were unwilling to pay. Bosman took his case to the European Court of Justice and in 1995 a decision was made that the system was in breach of European Union law on the free movement of people. Following this ruling, an informal agreement was reached between the European Commission, FIFA and UEFA. From 2001 players over the age of 23 were free to leave their clubs once their contracts had expired. Transfer fees no longer needed to be paid for players who had reached the end of their contracts.
Although the ease with which players can change teams has significantly improved over the past 50 years, they still face constraints on their labour mobility that are unusual for employees. Most workers simply have to give a period of notice in order to change employer. These vary between jobs but are not usually longer than 3 months. FIFPro’s argument is that professional football players should have these same rights. This would allow Luis Suarez to leave Liverpool at any point in the next four and a half years without any transfer fee having to be agreed. He would simply have a serve out a short period
of notice and then he would be free to join any other club. Under the current system he would have to wait four and a half years until the
end of his contract before he could leave without a transfer fee having
to be paid.
Whenever the transfer system has been challenged the football authorities have always used the same defence – sport is different from other industries because of the importance of maintaining an appropriate level of competitive balance. It is argued that the ease with which players can change clubs needs to be restricted in order for this level to be maintained. Ultimately a judgment will have to be made between this argument and the principle of freedom of movement.
Explain why the marginal revenue product of footballers is so much higher than it is for people in most other jobs. What impact do you think technology has had on the marginal revenue product of footballers over the past 20 years?
Draw a diagram to illustrate how the wage rate for footballers would be determined if the labour market was perfectly competitive.
What is monopsony? Explain how the retain-and-transfer system could give football clubs monopsony power in the labour market.
Draw a diagram to illustrate the impact of monopsony on wages and employment in the labour market for professional footballers.
Explain how limiting the mobility of players might help to maintain the level of competitive balance in a league.
If the proposals by FIFPro were accepted, what impact do you think it will have on players’ wages?
The most common demands for trade unions are for higher wages and better working conditions. However, pensions have become an increasingly important issue that many public-sector workers in particular have raised concerns over. While actions by trade unions have been less frequent and public in recent months, the Public and Commercial Services Union (PCS) has voted to strike.
The labour market works like any other market – there is a demand for and supply of labour. The intersection of the demand and supply of labour give the equilibrium wage rate and equilibrium number of workers. Trade unions may aim to push up the wage rate above this equilibrium and the impact on the number of workers employed will depend on the type of labour market. If we have a competitive labour market, then the increase in wage will create an excess supply of labour: that is, unemployment. This is often a choice a trade union has to make. However, if the market is a monopsony, then it is possible for a trade union to force up wages and yet there may not be any fall in the number of workers employed.
Pay is just one of the issues being raised by the PCS. Public-sector pay was frozen for two years for those earning above £21,000. According to the Cabinet Office, this was necessary to ‘protect jobs in the public sector and support high quality public services.’ A 5% pay rise has been requested to counter an alleged 7% fall in earnings since 2008. 61% of those who voted in the ballot were in favour of strike action. Other concerns include job losses and pensions.
One concern of the PCS will be the low turn-out. Only 28% of the union’s members voted in this ballot and this is likely to weaken the union’s bargaining position. The government has monopsony power in employing civil servants and this is one of the reasons why a powerful trade union is likely to emerge: it acts to reduce the power of the monopsonist employer. Negotiations will typically take place between the employer and the trade union and with such a low turn-out, the power is certainly with the government. However, with the threat of strike action to occur around the time of the Budget, this does present something of a concern for the government, especially with growth remaining weak and the loss of the AAA rating.
Two separate pay offers have been made to 1.6 million public-sector workers, but Unison has suggested that members of PCS should reject them. If headway is not made in negotiations between PCS and the government, then strike action could be just around the corner. The following articles consider this looming industrial action.
Use a diagram to illustrate a competitive market for labour and show how a trade union will aim to push up the wage rate. Show why a trade-off exists between the higher wage and the number of workers employed.
Illustrate a diagram showing a monopsony and explain why the MC curve exceeds the AC curve. Why is it possible for a trade union to force up wages without creating a decline in the equilibrium number of workers employed?
What other actions, besides striking, are available for trade union members? What are the costs and benefits of each relative to striking?
Which factors, besides a low turn-out in the ballot, will reduce the trade union’s negotiating power?
Public-sector pay was frozen for two years. If the government accepted the trade union’s pay demands, what would be the impact on the budget deficit? Could the higher pay help boost economic growth by creating a multiplier effect?