The NFL Lockout And Monopoly Power

One might think from some of my writing that I’m opposed to unions. In actuality, I think unions are a very complex subject. A labor union is, at its core, a monopoly. Just like corporate monopolies are often undesirable and even abusive toward consumers, labor monopolies can also create very undesirable results. But that doesn’t mean that labor unions are always bad. The NFL referee lockout is a classic case of why labor unions are sometimes necessary.

Labor unions are necessary when there’s some economic distortion that weakens the power of workers. Indeed, this was often the case in the United States in the late 19th and early 20th Century. While a lot of historians inaccurately label that era as “laissez-faire”; in actuality, nothing could be further from the truth.

The U.S. government of that time heavily intervened in the markets in order to protect American exporting companies. But by doing so, it fattened the profits of capitalists in these industries, while weakening the purchasing power of the broader American public via trade protections that kept lower cost goods from elsewhere from entering the U.S. The end result: capitalists get richer while workers get poorer. In this context, it made sense to form unions in order to force companies that were protected by the government to pay their fair share to employees.

The Shift To Free Trade And The Obsolescence Of Unions
Fast forward a few decades, and America begins a shift towards free trade. Suddenly, the big premise underlying labor unions is undermined. With free trade, goods become cheaper in the U.S. and the average American workers becomes better off as a result. With a competitive market and no state-intervention favoring the owners of exporting industries, labor unions become rather unnecessary and even burdensome.

Since these unions had developed an adversarial culture, they often view the corporations they work for as treasure chests to be raided for maximum gain. And of course, the problem with that is that with free trade and increased competition, these corporations simply could not compete with the rest of the world in this environment. This more than anything explains the death of the American labor union.

We, of course, still have some labor unions, but very few of them are necessary or useful. Rather, most private sector unions are ancient relics of a protectionist past. Meanwhile, public sector unions are nothing more than an attempt by union leaders to maintain their power base by expanding their operations to a new and completely unnecessary front. Indeed, public sector unions are extremely egregious, because there was never an economic distortion that ever justified their existence to begin with. Back in the 1930′s, nearly all major labor leaders and President Franklin Roosevelt all opposed public sector unions as harmful to the taxpaying public. Interesting how times have changed.

Due to the changes in trade, coupled with the rise of harmful public sector unions, I would say that I more often than not see unions as a destructive force in American economics and one that we are normally better off without.

There are exceptions, however, and the NFL referees show this.

Monopoly vs. Monopoly
So why are the NFL referees different than steelworkers or autoworkers? Because the NFL is a monopoly. As I’ve said, unions are typically only justified when there is an economic distortion that makes them necessary. The NFL’s state-protected monopoly is a great example of one such distortion.

There’s been a trend over the past several decades for American corporations to switch over from defined benefit pension plans to defined contribution plans like 401(k)s. There’s a great reason for this: defined benefit plans are risky for someone. In the case of a private sector union with a defined benefit plan, the underlying company must absorb a significant amount of interest rate and market risk. This risk has often lead to bankruptcy.

The same is true in the public sector, though, it’s slightly different. Public employee unions that have defined benefit plans pass on massive interest rate and market risk to the taxpaying public. And the question becomes, why should the taxpaying public absorb this risk, rather than simply giving public employees 401(k)s?

The NFL, too, is now trying to switch over to 401(k)s for their referees. And they are right to do so. The risks and uncertainties associate with defined benefit plans are detrimental to companies, so I think every corporation should switch over.

The Devil Is Always In The Details
The problem isn’t the NFL’s shift to 401(k)s, so much as it’s the way they are trying to do this. The NFL has said, “we’re going to shift you over to 401(k)s, but we’re not going to compensate you for this, or make any attempts to delay implementation so that it only affects new employees.” In essence, they are trying to lower the salaries of the refs in a very stealthy way. And the reason the NFL is doing this is because it’s monopoly power. It believes that by virtue of having a monopoly over professional football, it can dictate its own terms.

It’s not as if the NFL is in economic dire straits. It’s the wealthiest sports league in America and this clearly seems to be an abuse of monopoly power. Unlike a lot of the private sector companies that have switched over, there appears to be almost no economic reason whatsoever that the NFL must immediately switch over. Indeed, the refs’ benefits are probably pretty minor in the grand scheme of things. This is just an ill-advised power play by the NFL and it goes to show that how government protection of sports monopolies can often have detrimental results.

It’s very clear from everything that has happened over the past few weeks that NFL referees are a highly skilled bunch. There are only so many people that can do the job that they do, and the replacement refs may take a few years to even become semi-competent at what they do. They don’t make a ton of money for what they do and the NFL clearly seems to be in the wrong here.

What Should The NFL Do?
There are two reasonable solutions to the labor impasse. The first is that the NFL decides that only new referees are switched over to 401(k)s. This seems simple enough, and it’s unclear why the NFL didn’t offer this to begin with. As I said, the salaries of the refs are probably minor enough so that there’s no major economic rationale as to why the NFL can’t continue to pay the defined benefit plans for the current refs.

The other solution would be to completely eliminate the defined benefit plans, by offer payoffs for the old plan, or salary increases to compensate. Indeed, the NFL could even offer this as an option. For example, either a ref:

(a) Makes $50K and gets defined benefit, or

(b) Makes $54K and gets a 401(k)

This seems like a very simple solution and the NFL is being hard-headed in not offering something like this.

Conclusion
I’m a firm believer in free markets, but the NFL does not compete in a “free market.” Rather, it’s a government-protected monopoly and the NFL referees have to create a labor monopoly in order to counteract this economic distortion. While the NFL is right to try to switch over to defined contribution plans, the refs are also in the right to demand compensation for a switch over.