Monday, September 10, 2007

Economics of Football - Players Wages

Why do the top footballers get paid Over £50,000 a week, when in all probability they would be willing to play football for £200 a week. The first thing to remember is that it is only a very small % of footballers who get these astronomical wages. The Wages are determined by the two basic factors of supply and demand. The supply of top strikers is very limited. If you want to get the best striker in the world. The supply curve for this commodity (best player) is perfectly inelastic. When you have a supply curve that is perfectly inelastic, the wage will be determined by the demand curve; any increase in demand for that player will result in an increase in price.

Note it is not just the supply curve that affects wages. The supply of the best lacrosse players is similarly inelastic, but you don't get £50,000 for playing lacrosse.

The theory of MRP suggests that demand for labour depends on two things. MR of the last good sold and MPP - the productivity of the worker.
The MR is basically the price people are willing to pay to consume the good. In the case of football this is the price people are willing to pay to watch the game, live or on TV. It is also includes sponsorship and prize money. In the past 2 decades the amount of money in football has increased significantly. Mainly due to factors such as cable TV paying a premium to broadcast live games. For all the money coming into a game, there is a relatively small number of workers (players) who need paying. Manchester United may generate £1 million per game, yet the number of people they have to employ is relatively low. Therefore, there is a high amount of money for players.

The MPP of players cannot be exactly measured. However, if a good player makes the difference between a team finishing 5th and 4th in the premiership, it can be worth several million pounds to the club (qualification to champions league) Even one kick can be worth upto £10 million. This gives footballers a potentially very high productivity. This is why clubs are willing to pay so much on transfer fees and wages. At the other end of the football league, the money in the game is lower and so effectively the MRP of lower division players is lower.

Furthermore the demand for the top players is very competitive. The market for the top players is wide open, British clubs face not only face competition from each other, but also Spanish and Italian clubs. The competitive nature of the bidding means that the clubs often have to bid the maximum that they are willing to pay in order to get the player.

See also

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