Labor Market Theory: Inefficiencies In Professional Sports

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Economic Theory Labor market theory is one of the most integral economic theories needed to dissect the inefficiencies in professional sports. Looking first at the type of market these leagues function in, one can see that they do not necessarily meet all the criteria that a competitive market requires. The big four sports leagues in the US have a set number of teams which creates barriers for entry. Only when an expansion is agreed upon by the league, such as NHL has done for the upcoming season, are teams allowed to enter, and even then, it is limited to a maximum of a few teams in recent history. Additionally, the league makes it virtually impossible to exit, as selling of a team is the closest they come to exiting the market. Through As in typical labor markets, employees are valued by the marginal revenue of production they add to their firm, or in the case of professional sports, their team. Determining player’s MRP becomes an easier process than in the labor markets of other industries due to the availability of statistics of player’s and their contribution to their team’s success. The difficulty of this process lies in the determination of how revenues for a team are produced. As previously mentioned Paul DePodesta, an analyst from the Oakland Athletics was on the foreground of this type of analysis in the MLB. His discovery of the correlation of winning percentage and team revenues was just the starting point. His methodology of his model building was briefly touched on before, but it started with running regression analysis on a series of different typical baseball statistics, and continued with his finding of On Base Percentage and Slugging Percentage being the stats that correlated closest with winning percentage, and the implementation of the AVM systems models outputting player’s expected run values. MLB’s regression analysis on player’s MRP to a team is some of the most sophisticated in professional sports, with other leagues and teams starting to catch on and attempting to create their own models of MRP for their respective leagues. By taking the labor market theory and MRP of players and analyzing how they interact with wage determination and competitive balance mechanisms we can make an economic analysis of the labor market inefficiencies. Giving us the ability to make some determinations on why labor market inefficiencies exist in professional sports and how/if there are any ways to correct for

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